Fed Could Talk About QE3, But Refrain from Action
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Fed Could Talk About QE3, But Refrain from Action

The Swiss National Bank has left their target range for the three month LIBOR rate unchanged at 0.0-0.25%.  It also stated that they are leaving the minimum exchange rate unchanged at CHF 1.20 per EUR.  They stated they will “continue to enforce it with the utmost determination”.  It also stated that it will buy foreign currency in “unlimited quantities” for this purpose.

The SNB also reiterated that given the serious impact an appreciation of the CHF would have on the economy, it will not permit any appreciation of the CHF.  Due to the unfavorable prospects of the global economy, the SNB also lowered its inflation forecast.  The SNB is calling for an inflation rate of -0.6% for 2012, 0.2% for 2013 and 0.4% for 2014. Following the SNB announcement, the EUR/CHF rate has moved to its overnight highs as the EUR is trading near the top of its overnight range in early European trading.

Guest post by  Matthew Lifson, Foreign Exchange Trader,  Market Analyst of  Cambridge Mercantile Group.

With the SNB decision out of the way, markets are clear to focus on the conclusion of the FOMC meeting this afternoon and the subsequent rate announcement, economic preview, and the press conference of FED Chairman Ben Bernanke.  So what will happen today?  Every analyst seems to have a different opinion as to how much, if any further easing will be announced today.  The USD selloff this week is not only due to the expected FED announcement but also based on optimism that the Eurozone may be finally solving their debt crisis.  So if that is the case, the FED announcement this afternoon may not have a much of an impact as expected.  Initially, it would be USD negative, but “how far is up”, for the EUR. The rhetoric from the Eurozone is positive, but I was always told actions speak louder than words so further EUR strength could be harder as we move forward.

As for the FOMC, one thing for certain is rates would change when they announce that this afternoon.  The FOMC will make some adjustments to their economic assessment and analysts will look closely at the language of the statement.  Given his comments at Jackson Hole, the markets expect some sort of easing.  The August employment numbers added to that.  Most observers already expect the FED to move any rate hikes back to 2015.  So the questions remains will the FED ease and if so by how much?  I still believe the FED will not push for easing today but rather make a statement that quantitative easing could be implemented soon if necessary.

As for the currencies, the EUR has remained rather bid so far today and that should remain until this afternoon.  Once the announcement is made and all the “event risk” is done, the currencies once again must act “on their own”.  To that end, the latest ECB monthly report expects continued weak economic activity for the remainder of 2012.  So, moving forward one can argue it will be a battle of the economies as to which currency gains strength, the EUR or the USD.

But that discussion is for another day.  Today should see the EUR remain well bid into the North American trading afternoon and the FED announcements.  If there are no surprises, we could see further EUR strength and a move towards 1.3000.  The EUR is overbought at these levels so any surprises by the FED could see the EUR move lower faster than expected.  We shall see.

Asian and European equity markets are mostly lower, as are the DOW Futures, so expect a negative start to the US equity markets this morning.

Matthew Lifson

Matthew Lifson

Matthew Lifson is a Foreign Exchange Trader and a Market Analyst. with Cambridge Mercantile Group.