Summary Outlook: On Wednesday, June 23, the US FOMC is widely expected to hold rates steady at between 0.00-0.25% and will also likely repeat the pledge to maintain exceptionally low rates "for an extended period." The focus will then fall to the economic outlook and the prospect for an upgrade to the Fed's outlook seems most unlikely (see below). To the extent that a steady Fed policy could be considered supportive for risk assets, markets may respond by buying risky assets (stocks, commodities, and JPY-crosses) in the short run. But if the Fed emphasizes a potentially stalling recovery or some backsliding in the data, the potential is for a risk adverse reaction. Overall, given the short-lived euphoria following China's revaluation announcement and the impending adoption of austerity measures in several key economies, we prefer to be sellers of risk assets on strength.
Trading Strategy: If the Fed statement emphasizes a potential stalling in the pace of US recovery, we think there could be a significant downside reaction in risk assets. Using AUD/JPY as a proxy for JPY-crosses, we would look to enter short positions on remaining strength in the 79.80/80.30 area; stop over 81.00; take profit objective 77.50/78.00 area. In USD pairs, a more negative outlook on the US recovery could see USD/JPY move lower and we would look for selling opportunities in the 91.00/50 area; stop 92.10; target 90.00/50. In EUR/USD, selling strength in the 1.2350/1.2400 area is our preferred approach; stop 1.2480; target 1.2050/2100.
Economic Analysis: In its last statement, the FOMC noted three areas of modest improvement over the March period. The first of those, labor markets, have shown minimal signs of further improvement since the April 28 statement noted labor markets are 'beginning to improve' vs. the March comment that they're 'stabilizing.' Weekly US jobless claims remain stuck at elevated levels above 450K and the paltry private sector job growth in the May NFP report suggests firms are still unwilling to hire in a meaningful way. A second area cited for improvement was consumer spending, which was upgraded from 'expanding at a moderate pace' to 'growth...has picked up...." In the interim, household spending actually declined as seen in flat April personal spending and the May retail sales ex-autos report (-1.1%), though there was a negligible gain (+0.2%) in retail sales ex-autos, gasoline and building materials, which feeds into GDP calculations. As such, it would be a stretch for the Fed to cite additional improvement in household spending. The last area in which the Fed saw improvement was in housing starts, which were seen to have 'edged up' from a prior view of 'flat.' In May, housing starts missed the mark and fell -10.0% MoM, suggesting significant backsliding in housing data. As well, Fed officials have noted the likely deterioration in housing data in the months ahead, as the impact of home buyer tax credits vanishes. On balance, then, we see few areas for the Fed to cite as improving, with considerable potential for the Fed to note some plateauing in signs of the recovery, more than justifying a steady policy outlook for the foreseeable future.
Disclaimer: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.
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