Likely Winners/Losers from Today’s FOMC

<p>Does the Fed have to dangle the QE carrot when there is a growing Apple? Apple jumps $40 on strong earnings, after testing its 55-day […]</p>

Does the Fed have to dangle the QE carrot when there is a growing Apple?

Apple jumps $40 on strong earnings, after testing its 55-day moving average for the first time since Dec 20, the day when the ECB announced its LTRO-1. Will today’s jump coincide with more dovish central bank action, such as today’s FOMC statement?

The two most important items drawing immediate market scrutiny in today’s FOMC statement/projections are (in this order):

1. (12:30 EST, 17:30 BST) Final paragraph of the statement revealing any additional members joining Mr. Lacker in disagreeing with the notion that conditions warrant low “Fed Fund rate through late 2014.”

2. (14:00 EST, 19:00 BST) Figure two of the FOMC projections, showing the number of FOMC members projecting the year most appropriate for policy firming.

At its January projections, the Fed revealed the number of FOMC members expecting the year most “appropriate timing of policy firming

3 members said in 2012
3 members said in 2013
5 members said in 2014
4 members said in 2015
2 members said in 2016

Markets will start reading the FOMC statement from the last sentence of the last paragraph for any members disagreeing with the “low rates til 2014” notion.

The most Likely winners from today’s FOMC Statement/projections.

In the event that Lacker is joined by one more dissenting member, we would expect a sharp rise in USD, at the expense of metals (specifically gold), GBP (especially after today’s recession confirmation), AUD (after yesterday’s weak CPI figures opening the door for a May rate cut) and EUR. The Japanese yen is also likely to join the USD’s ascent in the event that stocks deepen in the red. Note that the yen is the highest performing G10 currency month-to-date despite vocal warnings of its collapse by pundits. Seasonal losses in April are among the culprits.

In the event that Lacker remains the sole dissenter, markets will likely trigger a reflexive decline in USD, with EUR, gold, oil and the Canadian dollar being the most likely beneficiaries, especially after last week’s tightening hints from the Bank of Canada. Other potential likely winners from no-change in the number of dissenters are likely to be the NZD as long as the RBNZ does not lean into a dovish commentary at today’s policy statement (due at 5:00pm EST). EUR/USD could well extend gains towards 1.3300, especially if there is no change in the distribution of the members’ view for the most appropriate target-year for policy tightening.

These scenario analysis are likely to be reinforced by any shifts in the distribution of FOMC members’ views. A highly probable outcome would be an increase in the number of FOMC members to four from three deeming 2013 as appropriate time for policy firming, with 2014 shifting to four from five members.

Meanwhile, ECB’s Draghi continues to appease the hawks without the risking growth concerns by saying (earlier today)he would not pre-commit for another round of LTRO. He noted inflation is likely to remain above the 2% target in 2012 before retreating back in early 2013. Draghi reiterated that the Securities Markets Programme (bond purchases) is not eternal. Such commentary will likely favour the EUR/USD in the case that the FOMC makes no hawkish shift in its Fed Funds projections.

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