Fed Leaves Door Open For Further Easing

Market Brief

The Usd was significantly weaker in the Asian session, as regional equity markets rallied and risk aversion eased. The EurUsd rallied from 1.2820 to 1.3297, while the UsdJpy traded up from 96.45 to 99.13.

The broad Jpy selling carried over into carry trades, with AudJpy (currently our favorite carry trade) surging to 67.98 from 63.81 and EurJpy now trading above the break out lvl of 127.50. Pressure on Emerging markets eased slightly, with UsdMxn falling to 12.79 as assorted rescue packages by the IMF and news the Fed is providing a short term swap facility of $120bn to Singapore, Korea, Mexico and Brazil has further helped sentiment. Commodity prices crept higher, with crude wti up 3.30% and gold 2.43%. Yesterday's Wall Street session failed to rally on the back of the Fed 50bp cut, but Asia took the cut as a positive sign and has been rallying since the open. While interest rate differentials are not the primary driver of FX pricing, there is a growing feeling that the currencies low yield is undesirable and may look for opportunities to hold higher yielders.

While the other major central banks are expected to cut rates starting next week, lessening the differentials, we should see the Usd come under selling pressure near term. In addition, with the Fed accompanying statement clearly not ending speculation that rates could settle at 0.50.% in Q1, the lack of competitive rates could have longer lasting effect on the greenback.

Markets are still debating the effect of yesterday's Fed rate announcement. The FOMC eased interest rates by 50bp to a 4-year low of 1.00% which was widely expected. Additionally, in highlighting that 'downside risks to growth remained' the Fed's change to an overt loosening bias keeps the door open to further easing. Market are expecting for the Fed to lower rates to a 40-year low of 0.50% by Q1 (in two 25bp cuts). It seems that any lingering concerns over inflation have now completely vanished, with even the most hawkish members worried over deflation. The Fed focus is firmly on the economic slowdown and evolving slack in consumption.

ACM FOREX

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