Risk currencies rally as Fed takes the ‘QE3’ plunge

GO Markets - FX Commentary

 
on September 13 2012 7:15 PM
Chairman of the Federal Reserve Ben Bernanke holds a news conference in Washington
Chairman of the Federal Reserve Ben Bernanke. Economically inclined Twitter users flocked to the hashtag #FedValentines on Friday, pairing references to the Federal Reserve with the romantic holiday, which arrives on Tuesday. REUTERS

In a move largely predicted (or directed) by investors, overnight Ben Bernanke's Federal Reserve finally gave markets the psychological boost they've have been craving. Commodities, equities, and risk currencies rallied in unison as the Federal Open Market Committee announced they will purchase additional mortgage-backed securities to the tune of $40 billion per month, in an effort to kick-start economic growth and employment. In addition, the Fed will maintain its existing program known as operation twist, while extending policy to reinvest maturing debt and mortgage-backed securities. The Fed's forward guidance was also extended with the statement showing the committee believes "exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015." In previous correspondence, the Fed had forecast exceptionally low rates through mid-2014. The Fed noted the reboot of its asset purchases should put "downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative."

Although the decision was warmly received by markets, the committee failed to provide finite details on the purchases such as the duration and total purchase targets, simply noting "determining the size, pace, and composition of its asset purchases, the Committee will, as always, take appropriate account of the likely efficacy and costs of such purchases. "If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability." As anticipated, Richmond Fed President Jeffrey Lacker opposed additional asset purchases while preferring to omit the forward guidance.

The US dollar was a resounding loser from the Fed's latest effort, given its innate aversion to what market's see as an unsterilized dilution of its core value. Whether the Fed's third round of easing will translate to faster job creation remains to be seen, however its psychological merits are abundantly clear with equities, commodities, and risk currencies responding in kind. Given market's had broadly anticipated Fed action in today's meeting which took some the sheen of the ensuing rally, nevertheless, it's a clear win for those long risk ahead of the decision.

The kiwi led the commodity bloc offensive against the greenback peaking at 83.24 US cents, while the Aussie once again crossed the 105 US cents barrier but has since consolidated gains around the 105.4 US cent region. The euro's winning streak continued which forged fresh 4-months highs against the greenback but failed to make a convincing break through the key psychological barrier at 1.30-figure. Although we're likely to see a degree of residual support throughout the domestic session, markets are still in the digestion phase and prone to short-term consolidation as investors ponder the merits of QE3, in-turn, making a case for near-term profit taking.

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