As we expected yesterday, the Fed was unwilling to end the liquidity-fueled party just yet and that’s just what happened. The FOMC members voted unanimously at the meeting to hold rates steady and indicated its ultra loose monetary policy would remain excessively low for “an extended period.” The recent sell-off in risk correlated trades has been driven primarily by the worries that the Fed would subtly signal a timetable for its exit strategy. We doubt that with the recovery still fragile and extended weakness in the US labor markets (reinforced by yesterdays ADP and ISM data) that the Fed would risk prematurely popping any asset bubble. The initial price reaction was one of uncertainty as the central bank also reduced the target agency debt purchases from $200bn to $175bn. Participants seemed to be confused whether this was the exit signal they were searching for. However within the accompanying statement was a clear & rational explanation that a lack of demand was simply the culprit. EURUSD initially chopped between 1.4830 – 1.4860 before climbing to 1.4900 as traders came to the realization that liquidity would stay plentiful and risk correlated assets were back in play. In the Asian session we have seen a slight reversal of risk taking as the USD clawed back gains and equity markets were broadly lower. Now the markets’ attention turns to the BoE and ECB. We expect the central bank will hold rates and at the often hyped ECB press conference, Trichet will stick to the company line (that it’s currently premature to implement an exist strategy). Overall we believe the ECB meeting will be a non-event and energy would be better spent monitoring the BoE rate decision. The BoE meeting has provided participants with a much greater quandary; the first issue is the massive disconnect between UK GDP and PMI survey. Usually a reliable indicator of domestic economic activity, PMI data currently has the UK performing relatively well (or at least better then the Eurozone) and definitely better then the -5.2 y/y GDP implies. In addition, PMI is used by the MPC to forecast short term economic performance. So the second question will be how much weight members will place on which economic data in deciding on QE expansion (GDP vs. PMI). We are aligned with the market in expecting a £25bn expansion; however there are some who are calling for £50bn. While generally, the sterling has fallen before the announcement of QE, we expect £25bn to have been already priced-in, while anything higher should lead to GBP weakness. Earlier Swiss CPI printed lower then expected at y/y -0.8% vs. 0.7% exp. With the SNBs Jordan recently reiterating that inflation would define the bank’s exit strategy, we would expect the SNB to stick with its FX intervention policy. EURCHF below 1.5100 creates buying opportunities.

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