FOMC to Play It Safe

Investors are content to sit on the sidelines, waiting for the Federal Reserve to wrap up its two-day Federal Open Market Committee (FOMC) meet. The dollar is mostly unchanged against the major pairs in a narrow overnight trading range. For many, there is no incentive to trade aggressively ahead of FOMC rate decision later this afternoon — the risk/reward is not appealing. Investors would prefer to take their cue from policymakers, rather than from speculative punts so late in the game.

The majority is anticipating that U.S. policymakers will err on the side of caution with their statement. The impact of the FOMC’s statement on the currency market could be muted as the Fed is not likely to mention a specific timeline for a return to normal interest rates. The Fed is expected to finally exit the stage in terms of asset purchases, ending its third quantitative easing program. More importantly, the language from the statement will be the closely scrutinized as there will be no post-meeting press conference with Chair Janet Yellen providing further insights. The market will naturally want to know when rates will rise, but with global growth looking vulnerable and volatility again on the rise, the Fed’s message will likely be a dovish one. This would imply that the “considerable time” language is likely to remain.

No doubt U.S. policymakers will keep a close eye on economic data before making that decision, but don’t expect them to overtly focus on Europe and its growth concerns either. Equally important to financial markets will be any shift in the Fed’s language on inflation.

EUR Shorts Apply a Strategy

With so much on the line it’s not a surprise that the forex market prefers its current holding pattern, unlike global equities and bonds. Stocks have managed to reclaim a lot of lost ground over the past couple of trading sessions, helped somewhat by yesterday’s seven-year-high U.S. consumer confidence print (94.5), while the fixed-income market (specifically Bunds +0.85% and Treasurys +2.26%) remains rather resilient. Investors probably feel more confident that central banks are still willing to lend support — just listen to some of the recent rhetoric from the European Central Bank (ECB) and Fed members of late.

For the 18-member single currency, it continues to gyrate within its current range (€1.2715-40), at least until this afternoon’s announcement. Any dovish tweak to the Fed’s message and the majority of the short-EUR positions will be vulnerable to further short-covering trading (EUR higher). If the Fed’s statement is unchanged, the market could be exposed to the EUR coming under pressure again. Nevertheless, a plethora of option strikes (€4B) located between the psychological €1.2700 handle and early €1.2720’s coming off in the next 24-hours could be capable of bullying the EUR toward strike prices.

BoJ Action on the Horizon

In Asia, the JPY initially started out as the better bid across the board, mostly on the back of some risk being applied following equity gains on the various global bourses. Nevertheless, yen gains have been limited ahead of the FOMC policy announcement and, to an extent, the Bank of Japan’s (BoJ) policy announcement due Friday. Japanese retail sales out yesterday (+2.3%, year-over-year) and output data released overnight (+2.7%, month-over-month) have mostly beat expectations and will certainly dampen the market’s expectations of an imminent ease by the BoJ.

The BoJ is expected to cut both near-term growth and inflation forecasts. For now, USD/JPY offers are located in the high 20’s at ¥108.25, with more seen trailing higher toward ¥108.50. While on the downside, Japanese importer bids are located atop of the recent lows, just shy of the ¥108 handle. Once the FOMC is out of the way and the market digests the outcome, there will be no let up from central banks over the coming seven trading days with the Reserve Bank of New Zealand (Oct. 29), BoJ (Oct. 30), Reserve Bank of Australia (Nov. 3), and the Bank of England and ECB (Nov. 6) all scheduled to make policy statements.

The Rouble Continues to Bleed

A slight recovery in oil prices over the last 24-hours is not helping the Russian rouble (RUB) — it has managed to fall to new record lows outright and against the EUR. Despite the European and American sanctions, and an already sluggish Russian domestic economy, speculators are again applying outright pressure to the currency. Already this morning the RUB has managed to print new lows against the EUR/USD basket (47.89) and against the dollar outright at 42.72. Year-to-date, the RUB has lost -23% against the dollar, while depreciating only -17% versus the EUR (54.39). All the Central Bank of Russia can do is continue to shift its trading bands — so far this month it has moved the bands a whopping 70 times!

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