Everyone’s getting psyched for tomorrow’s big Bernanke-palooza.
Here’s Citi’s FX guru Steve Englander, wondering if perhaps he’ll be “too boring”:
There isn’t much that is expected from the Fed tomorrow. Our economists write: “The outcome of next week’s meeting has been well telegraphed on many counts. The large-scale asset purchases are due to end on schedule this month…Officials have also signaled that reinvestment of runoffs and redemptions will continue beyond June and policymakers are unlikely to have a timetable for ending that. … The hurdles to expanding the balance sheet further are very high.” With that FX investors are looking forward to the FOMC statement and upcoming press conference with something approaching ennui.
One risk is that investors have become to complacent on the rates view, and by implication, on FX. Consider that as late as April 5 the fed funds rate was expected to be above 50bps by January 2012. Now the expected break of 50bps is in Nov 2012. So in two and a half month expectations of the Fed hike have been pushed 10 months into the future. Keep in mind that the data have been soft but, broadly speaking, even the pessimists see mediocrity rather than disaster. While we do not see the outcome any brighter than our economists do, in terms of rates and FI, investors already appear to have built the soft US economy story into their calculations. While we do not go into the meet and press conference expecting any palpable degree of hawkishness, in FX terms anything less than ‘zero rates forever” may disappoint the pricing that is in the market. USDJPY would be the obvious point of sensitivity, but EURUSD has also been sensitive to rate differentials and benefitted from perceptions of fed dovishness and ECB hawkishness.
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