Euro dithers as FOMC anticipation grows

The Euro managed a reasonable bounce today despite the latest batch of negative developments as the hot seat for the next couple of days is reserved for the greenback due to tomorrow’s pivotal FOMC meeting.

The Italian downgrade and Chinese bellyaching on the Euro and apparent withdrawal of FX business with select European banks by a China state bank hit the Euro relatively hard in Asia, but much of the European session today saw the Euro more or less in rally mode, though the 1.3700/20 resistance area appears to be a hard nut to crack and it certainly makes sense that market participants may not want to over-commit until the outcome of tomorrow’s US FOMC meeting is known. European debt fear levels appeared more or less unchanged on the day after edging a bit worse in earlier trading. Spain managed to auction off about EUR 4.5 billion in shorter dated treasuries, and the auction fared better than last time around for 12-month bills and somewhat worse than the last time around for 18-month bills.

Riksbank – “forecasts, not promises”
Underlining the hopeless inability of any central bank to forecast the economic environment down the road, the Riksbank minutes for the latest meeting released today showed Governor Ingves saying that the “rate path now more than ever before be seen as a forecast rather than a promise.” Indeed –  as recently as July the Riksbank was projected to raise rates by as much as another 50 basis points, but since then, expectations have shifted some -130 bps to around -75 bps for the year forward currently, even as the Riksbank “forecasts” suggest they see the rate some 40 bps higher by a year from now.

Obviously, the weakness in the EuroZone economy and potentially in Asia are the primary concerns for the export-dependent Swedish economy. The wild card multiplier for any potential economic downturn in Sweden, however, is the Swedish housing bubble, which has not shown any signs of imploding just yet (hasn’t even shown signs of definitively topping out either from a price perspective, though with supply at a record high, there’s some cause for concern), but is still out there acting like the sword of Damocles over Swedish financial system. Meanwhile, there is still talk circulating of the SEK as a potential safe haven currency. Good luck taking that very far into the future, positive looking sovereign balance sheet or no.

Looking ahead

Chart: USDCAD
As we await tomorrow’s FOMC meeting, we have USDCAD biding its time in a range for the last several weeks after rushing up from sub-0.9500 levels in early August. The 200-day moving average has provided important support and an interesting upside down head and shoulders formation (okay, a double headed or large pointy-eared head...) has developed with the obvious massive neckline at parity close by as we await further developments. Note that the 55-day moving average has not crossed above the 200-day moving average since about a year ago.



There seem to be two elements for tomorrow’s FOMC expectations. I’ve somewhat thrown together the idea of “Operation Twist” and QE3 as being the same thing, but some are discussing them as two different quantities, with everyone fully expecting a launch of Operation Twist while discussing QE3 as a separate entity that would involve more direct asset purchases a la QE2 (versus the “twist” of simultaneously selling the short end and buying the long end of the curve). QE3 is not priced in by that more narrow measure. Based on yesterday’s WSJ Hilsenrath article, we should also expect more efforts at “Fed transparency”. That may be a non-development, but it also may provide a framework for the market to react to in the future, if the Fed puts out more explicit unemployment or inflation levels that it considers unacceptable.

EURCHF is on the move again on nothing more than rumors that the SNB will raise the floor on EURCHF to perhaps 1.25. We won’t know whether the rumor is worth anything until we get official confirmation. It’s interesting to note that on September 6, EURCHF rose about two figures (from 1.1050 to 1.1250) ahead of the actual announcement of the EURCHF floor that saw it move the next 750 pips to 1.20 within about ten minutes.