The USD traded range bound against most major currencies yesterday, as traders will likely remain cautious ahead of the FOMC decision later today. Risk trades continued to come under pressure as traders continue to reduce risks ahead of the FOMC. US Treasuries continued to trade higher, with 10yr yields falling back to pre NFP levels-11bps at 3.668%. Equities in the US dropped most in a month, with Standard and Poor's 500 falling 1.3% to close below the 1,000 support level at 994, after JP Morgan Chase & Co. said credit losses may overwhelm capital at the biggest bond issuer 'MBIA', and CIT Group delaying its earnings report.
Commodity currencies dropped most against the US Dollar. The CAD dropped for the 5th consecutive day, as crude oil fell below $70 and the figures in Canadian housing starts were disappointing. The Australian Dollar also had a bad performance yesterday. Despite the National Australian Bank report, which showed improvement in business confidence and RBA's favorate measure of wages, the ABS Wage Price Index, increasing by 0.8% QoQ in the June quarter, the AUD/USD pair broke below the 0.83 level.
The EURUSD kept hovering around 1.4150 level against the USD even though Germany's CPI had the first annual drop in 22 years. The pound also traded in a tight range against the Dollar, awaiting today's Bank of England inflation report that could possibly threaten the economy with a prolonged period of deflation. We expect the tone of the MPC's Inflation Report to be downbeat and GDP forecast to be downgraded, reflecting weaker outturns in H1 and the effects of the stronger exchange rate.
The Yen was the best performer yesterday, rising against all major currencies, as risk aversion improved, with stocks falling worldwide and China released worse than expected reports regarding exports and industrial production. Also out of China, some disturbing comments for the growth bulls. The Ministry of Commerce says domestic demand can't offset export drop Aug 12 (Reuters).
Trader's eyes today will be on the FOMC meeting. Last week, nonfarm payrolls showed better than expected figures, which reignited the market's speculation that the Fed will tighten its monetary policy earlier than previously anticipated. Even though interest rates are expected to stay at their current levels, focus will be on a couple of points: Will the Fed extend the $300 asset purchase program? Will there be any discussion about raising interest rates in the near future? Will the Fed change upgrade their outlook on the economy? We expect the FOMC to leave rates unchanged with the accompanying statement staying that rates will remain low 'for an extended period'. We also expect that the members will not expand their asset purchase programs, considering progress in credit conditions. The assessment of incoming economic data will be the key market mover. A signal of more confidence should be USD positive (given the USD reaction to last week's NFP).