Citi On Possible USD Surprises From Today's Overhyped FOMC Conference

Citi's Steven Englander looks at today's so overblown FOMC statement it is getting ridiculous now, and gives some hypotheticals that could result in some strength (lol) or further weakness for the dollar.

From Citigroup:

Today's FOMC meeting breaks new ground with the formal FOMC policy decision and statement at 12:30 followed by the Bernanke press conference at 14:15. Our economists expect that the Fed: "will complete the purchases of Treasury securities by the end of June … trim growth forecasts and raise projected inflation estimates slightly. …. a key goal of the Chairman may be to reassure the public that rising energy and commodity prices will not prove the leading edge of a persistent surge in inflation. …the Committee is not expected to alter its rate guidance or tinker with reinvestment of MBS principal repayments."

There is expected to be no enthusiasm for QE3 and no commitment on what will be done with maturing securities. This is pretty much what is priced into the market.

The somewhat more elaborate FOMC statement (vis-à-vis say the ECB policy rate announcement) and the 1 3/4 hour gap between statement and press conference may lead to somewhat more active FX price action in the interim. However, as investors have discovered with the ECB press conference, the answer to many questions may be "I have nothing to add beyond what I have already said" so those who expect a catharsis may be disappointed.

The potential USD negative surprise:

1) focus on the disappointing performance of the US economy, the downward pressure on real wages and weak levels of core inflation
2) reiteration of the view that global imbalances and inflation reflect misguided currency policies in EM
3) opening a door to QE3 if the outlook disappoints further

The potential for USD positive surprises:

1) a hard line on the fiscal situation and strong commitment to opposing any further monetization of the debt
2) any substantive concern that  commodity price increases may persist  and lead to second round inflation
3) concern on upward drift in long-term inflation expectations
4) any hint that the Fed is beginning to focus on tightening as the most likely next significant policy move
5) repetition of Treasury Secretary Geithner's strong dollar declaration (although as with the Treasury Secretary's declaration, the impact is likely to be limited at this stage).

Our CitiFX PAIN reading for EUR positioning is now at 65.82, pointing to the longest EUR positioning since early December 2010. US 2-yr yields are close to the bottom of the February-April range so it is hard to argue that investors expect anything but a somewhat dovish approach. Nevertheless, unless there is a real signal that some turn in policy is approaching, any USD buying is likely to be temporary.