30 dubna 2009

30/4 Commentary on the FOMC statement

Less dovish fed than was expected as the statement was mostly a discussion of existing policy . This is somewhat supportive of the USD all else being equal – though it was easy for the Fed to look relatively hawkish considering the shock March FOMC statement and move to outright debt monetization. The Fed is noting some positive signs of stabilization for the first time in a long time and is obviously hoping that it can now begin the process of sitting back and waiting for all of its stimulus to take hold in the economy. (we think any recovery will be extremely anemic if it materializes at all) Still, the Fed is still clearly cautious and gives itself plenty of leeway with the part of the statement that said the FOMC will “continue to carefully monitor the size and composition of the Federal Reserve's balance sheet in light of financial and economic developments.”

Looking at the other key markets that impinge on the USD, we see that the strong equity market rally is making it tough going for USD bulls, while interest rate differentials are much more supportive of the USD. It appears in the shortest term that USD direction will hinge on the direction of risk appetite. We’ll also have to see how EUR fares at next week’s key ECB meeting, for which it has promised to deliver on new non-traditional monetary policy measures.

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