The FX market remains the most anxious post-FOMC with USD strength across the board but we note that JPY crosses (e.g. EURJPY) are largely in line with equity's movements for now. Citi's FX Strategist, Steven Englander, is a little more concerned in his post-FOMC view that while "it is possible that there will be a revisionist view of the statement that puts a more positive interpretation on it", he adds that "investors may also be pulling back a bit from ECB expectations on the view that coordinated easing is out of the picture (keeping in mind that such coordinated easing is far from common). The misread of the fed may also worry investors that they have misread Draghi" which we explicitly said NOT to expect without Germany's buy-in - which remains absent for now.
Citi: Something But Not Enough
The Fed clearly disappointed by not going as far as investors had hoped in promising ease around the corner. They downgraded the economic outlook: “economic activity has decelerated somewhat” vs “the economy has been expanding moderately”; “Growth in employment has been slow” vs “growth in employment has slowed” ; “will closely monitor incoming information on economic and financial developments and will provide additional accommodation” vs “ is prepared to take further action”. It looks like there is a signal that private payrolls below 100k is not acceptable; less clear how high employment growth can be before it becomes tolerable.
While the statement is clearly more dovish than its predecessor and more explicit on the easing bias, it is not as dovish as we and the market expected. In particular there was no shifting of the expected duration of zero rates to mid-2015 and the nod to a September move is more conditional and less open than many would have expected. Today’s currency reaction is stronger than what would have been expected based on recent relations with the S&P (i.e. if you run a regression of EUR, GBP or AUD changes on the S&P change, EUR and AUD have moved a bit more than would have been expected – this is not true for CAD, NOK or SEK). So there may be a bit of recovery if the S&P holds it’s ground.
It is possible that there will be a revisionist view of the statement that puts a more positive interpretation on it, and that shift will be prodded by any weakness in incoming data. The FX market time horizon will likely be shortened with softness in any data being interpreted as pointing to a September move, so we could have erratic trading for a few weeks.
Investors may also be pulling back a bit from ECB expectations on the view that coordinated easing is out of the picture (keeping in mind that such coordinated easing is far from common). The misread of the fed may also worry investors that they have misread Draghi. That said, we still see the EUR as having considerable upside if there is a concrete indication of immediate or forthcoming SMP buying, and considerable downside if the ECB Statement is as disappointing as the Fed Statement, because FX investors are more invested in the ECB policy move than in the Fed’s right now.