Dovish FOMC puts more downward pressure on the USD

- "The FOMC’s hint that more QE may be coming in November sent the USD into a renewed decline against all the traditionally more risky currencies, with the EUR, AUD and Scandis leading the way. It is hard to oppose this trend short term even though the USD is reaching very cheap levels. The USD made a new historic low against the CHF this week, but it seems likely that more risk positive currencies will perform better next week as a more positive risk tone emerged at the end of the week. The AUD is in focus as parity approaches, but there is better value in the NOK and SEK. GBP should also be a strong performer as EU related payments are expected to push EUR/GBP lower. The US ISM on Friday will be the main data focus, with some chance of a USD recovery both on a weak and a strong number."
- "The USD fell against all of its G10 counterparts after a more dovish Fed FOMC statement and decent global macro data boosted demand for high yielders and commodity currencies. Along with the NOK and AUD, the SEK and EUR were the best performers, logging gains of between 2% and 3.5% vs the greenback. Sterling strengthened vs the CAD and USD but dropped 2.3% vs the EUR. GBP has now dropped 3.3% since the start of the month and now trades at levels last seen right after the general election in May (0.8550). The BoJ declined to comment whether it intervened but a spike up to 85.30 in USD/JPY on Friday left little to the imagination. Chinese premier Wen met with US president Obama but resisted pressure on country’s slow progress on strengthening the yuan."
- "The FOMC kept policy unchanged but subtle shifts in the accompanying statement revealed greater concern over the present suboptimal level of inflation, giving the market fresh ammunition to believe that a new and potentially more far reaching asset purchase initiative is unavoidable. UK data were fairly thin on the ground, with lower house prices and falls in mortgage lending underlining the soft path in housing market activity. The public finances showed a marked £15.3bln rise in August borrowing as a result of higher interest payments. The MPC minutes revealed no change and showed member Sentance repeating his preference for an immediate rise in Bank rate."
- "Core bonds staged a turnaround from last week with the FOMC statement triggering a buying spree in the long end, resulting in flatter 2y/10y and 10y/30y yield curves. Failing to establish a foothold near one-moth highs, yields and swaps plunged on Wednesday on speculation of Fed easing down the road. Profit taking in risk assets and record spreads for Ireland and Portugal over bunds also stirred demand for G3 paper. 5y swaps closed below 2.10%, having traded as high as 2.29% on Monday. The 2y/10y swap curve flattened back below 180bp. The 3mth libor/Ois spread held steady at 23bp. Telefonica issued £400mln 2029 at 170bp and GdF sold £700mln of 2060 at 115bp over. Coventry Building Society and GE Capital also issued £400mln in 2022 and 2017 maturities."

LloydsTSB FX Strategy Weekly 20100924

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