Greenback slides ahead of FOMC, $A takes up the slack

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By Chris Gore | December 12, 2012 10:42 AM EST

GoMarkets

Greenback slides ahead of FOMC

The dominate theme overnight was that of US dollar weakness, with markets taking the greenback deeper into negative territory ahead of tonight's FOMC policy decision. US equities recorded solid gains and risk currencies followed suit as markets suitably priced in the chances of the Fed unleashing another round of quantitative easing in place of the soon-to-expire 'operation twist.'

With the Fed running low of short-term securities needed to maintain operation twist, markets will be watching for any new asset purchase plans and many believe a case is strong for the Fed to establish new outright easing initiatives in the form of quantitative easing. "A number of participants indicated that additional asset purchases would likely be appropriate next year after the conclusion of the maturity-extension program," according to November meeting minutes. Expectations for additional easing - for the most part - seem to be ranging between $US25 and $US45-billion per month in addition to the existing stimulus program (QE3) which buys US$40 billion in asset purchases per month.

Earlier in Europe, stronger than anticipated economic feedback kept the Euro in favour despite continued political uncertainty in Italy lurking in the background. The closely watched German ZEW survey of economic sentiment outpaced expectations with the index rising to a level of 6.9 in December, from -15.7 in November. Economists expected a reading of 11.5. Similarly, the Euro-Zone ZEW survey also rose above estimates with a print of 7.6 from a previous -2.6.

After appearing somewhat vulnerable to downside earlier in the week, the euro resumed a northbound trajectory in defiance of some of the more negative themes floating around, namely Italy. Price action rose above $US1.30-figure once again, for the most part helped by broad based US dollar weakness and the strong ZEW print earlier in the session.

The kiwi led the commodity bloc higher with key resistance of 83.55 US cents before forging 9-month highs of 83.88 US cents. We also saw the kiwi forge gains against the out-of-form Yen, with the pair rising to highs not seen since May of 2010.

A$ breaks key resistance on Fed easing expectations

After a series of fruitless attempts in recent weeks, the Aussie dollar broke key resistance just above 105 US cents before running into another barrier around the 105.3 US cent region. While we expect regional equity activity to provide direction during the local session, the focus will be squarely on this evenings Fed policy decision. It would now be reasonable to expect a period of consolidation ahead of the FOMC decision given the increased risk of disappointment. While we expect the Fed to maintain their 'weak US dollar policy' by unleashing further stimulus, the degree of movement from the greenback (and by default high-beta currencies such as the Aussie) will depend on the size and scale of any new Fed stimulus. Given overnight moves, one could argue the risk currencies have overstepped the line between value and potential disappointment, suggesting anything short of expectations will see a swift repricing to the downside for risk currencies such as the Aussie dollar.

It's another quite day on the local calendar with Westpac Consumer Confidence data on the docket at 10.30 AEDT. Mid-tier releases from Japan include machine orders and tertiary industry index at 10.50 AEDT. Markets will also be watching a speech by RBA Governor Glenn Stevens who is scheduled to speak in Thailand at 15.30 AEDT.  At the time of writing the Aussie dollar is buying 105.25 US cents.

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