Risk Willingness Limited after US Rate Cut

Mixed figures ahead of the FOMC yesterday made it a bumpy ride to trade the USD. After the 50bp rate cut, the USD sold off. Markets now looking into more heavy data and eyeing Friday's US job report.

MAJOR HEADLINES – PREVIOUS SESSION

• NO Retail Sales MoM/YoY (DEC) out at -0.7%/5.6% vs. 0.3%/7.2% expected vs. 1.0%/7.5% prior read.
• UK Mortgage Approvals (DEC) out at 73K vs. 79K expected vs. 83K prior read (revised lower to 81K)
• SZ KOF Swiss Leading Indicator (JAN) out at 1.70 vs. 1.95 expected vs. 1.99 prior read (revised lower to 1.84)
• US Mortgage Applications (JAN) out at 7.5% vs. 8.3% prior read
• US ADP Employment Change (JAN) out at 130K vs. 40K expected vs. 40K prior read (revised lower to 37K)
• US GDP (4Q) Annualized (4Q) out at 0.6% vs. 1.2% expected vs. 4.9% prior read.
• US Personal Consumption (4Q) out at 2.0% vs. 2.6% expected vs. 2.8% prior read.
• US GDP Price Index (4Q) out at 2.6% vs. 2.6% expected vs. 1.0% prior read.
• US Core PCE QoQ (4Q) out at 2.7% vs. 2.5% expected vs. 2.0% prior read.
• US FOMC Rate Decision (JAN) cut interest rates by 50 bps to 3.00% as expected.
• NZ Trade Balance (DEC) out at 33.0M vs. -190.0M expected vs. -646.0M prior read.
• JN Housing Starts YoY (DEC) out at -19.2% as expected vs. -27.0% prior read.
• JN Annualized Housing Starts (DEC) out at 1.1050 vs. 1.051M expected vs. 0.971M prior read.
• JN Construction Orders YoY (DEC) out at 4.7% vs. -9.4% expected vs. -3.8% prior read.

THEMES TO WATCH – UPCOMING SESSION
Key Data (in GMT):

• 13:30 US Personal Income (DEC) 0.4%
• 13:30 US Personal Spending (DEC) 0.1%
• 13:30 US PCE Deflator YoY (DEC) 3.5%
• 13:30 US PCE Core MoM/YoY (DEC) 0.2% / 2.2%
• 13:30 US Initial Jobless Claims (JAN) 320K
• 13:30 US Continuing Claims (JAN) 2675K
• 13:30 US Employment Cost Index (4Q) 0.8%
• 13:30 CA GDP MoM (NOV) 0.2%
• 14:45 US Chigago Purchasing Manager (JAN) 52.0

Choppy currencies post FOMC

As most of the market analysts expected, the FOMC cut rates 50 bp to 3.00% and maintained room for further rate cuts in the statement by stating that the "downside risks to growth remain". Only FOMC-member not to support the decision was Richard W. Fisher, who voted for no change. The cut gives scope for inflation to pick up, but the FOMC expects inflation to "moderate in coming quarters, but it will be necessary to continue to monitor inflation developments carefully." We saw yesterday the release of a disappointing Q4 GDP along with the GDP Price Index and quarterly Core PCE coming out in line with expectations, sp evidently a rate cut cycle has been needed to ignite growth once again.

The initial market reaction was a rally in stocks and carry trades and the USD went immediately on the offer, sending EURUSD as high as 1.4914, where profit taking was observed. Also USDCHF took a pounding and went to new lows just below 1.08. Carry trades sold off as equities reversed due to headlines that changed investor sentiment. 

Heavy US data coming up.

From a macro perspective we have very interesting data coming up today and tomorrow. Today, the weekly intial and continuing claims will draw extra attention as we have the release of the US January Job Report where focus will be on the change in Nonfarm Payrolls, especially after the strong ADP report yesterday. Combined with the surprise in the consumer confidence, this indicates that the US labor market seems to be stronger than expected. However, the market reaction to recent US figures has been brutal.

We expect some short term profit taking and consolidation in EURUSD after testing resistance below the December highs, but expect the pair to be bid around 1.4820. If we see figures that would confirm more USD weakness, we expect a re-test of the all-time highs from late November 2007 to be very likely, giving scope for a test of 1.50 within the short term.