We expect the drop of the euro and the pound sterling irrespective of the Fed’s decision.
Today at 22:00 UTC+4 FOMC Interest Rate Announcement is scheduled. After the government shutdown there are no doubts that QE3 ($85 billion a month) will stay unchanged. However, we may doubt it. Moreover, we consider that due to the shutdown the Fed may start QE3 trimming earlier than it is planned and announced December and supposed April, i.e. now.
The investors’ idea to continue bond buying programme is based on two incorrect principles: the purchases of bonds promote injection of liquidity into stock market and the fact that the budget needs to continue to be financed by the Fed.
Virtually there is not a shred of the funds from bond buying transferred into open market indirectly. The scheme of bond buying is the following one; the Fed purchases securities from the mortgage companies, but approximately at that sum the mortgage companies are obliged to buy government stocks issued by the Treasury. Thus, it is barely the psychological factor of support for the investors.
Does the budget need the continuation of financing? Yes, it does. However, it should not be from the Fed. The Federal Reserve System has fulfilled its obligations. We have discussed that in May 2013 during the meeting of the Fed’s Federal Advisory Council, the major banks asked the Fed to reduce the purchases of mortgage bonds and they would have more possibilities to invest into low-risk assets. However, then the Fed did not regard their requests. The other situation was observed when the budget was not financed; it needs the massive purchases of Treasurys, however, the investors do not hurry to invest into US debt securities.
From the moment the debt ceiling was cancelled the US Treasury borrowed $330 billion from the pension funds and up to February 7, when there will be time to implement the restrictions on national debt, the Treasury needs to attract the same sum at least (but it needs more taking into account the necessity to pay the previous issuance. The US managed to attract sums of $200 billion a month only during the crises; the investors do not have such spare means when the market is calm. On the contrary, if the Fed announces the QE3 cut, which will not influence the purchases of mortgage bonds, as there will be extra purchases made the banks, then the psychological peace of the investors will be disturbed; they will start move off the stock market and invest into the Treasurys.
If today there will be announcement about QE3 trimming for at least $5 billion, the Fed will not face the panic rush from the stock market and the bond buying will be completely regulated.
However, we do not expect the US dollar will decline even if the volumes of bond buying are the same. After the Fed’s meeting which took place on September, the US dollar was dropping speculatively and now there is no sense to repeat such a scenario, as the situation has changed. According to a traditional fundamental idea, the price has to reverse to the level where the speculations have started. If the QE3 programme is not observed, it means the Fed and the Treasury has worked out the alternative mechanism of attraction of the investors to buy the Treasurys and the purchases will promote the US dollar consolidation.
Today at 16:15 UTC+4 data on US Non-Farm Employment Change (ADP) in October is published, forecast 151K vs. 166K in September, the correction for the euro and the pound sterling to the upside is possible.
USD/CHF
Despite the strict attachment of the Swiss franc to the euro, that was made by the Swiss National Bank, the correlation with the single currency is the indicator of the investors attitude to the risk. For the last five days the euro has declined 0.46%, the Swiss franc lost 0.88%, meanwhile, the investors started to move off the Franc the day before such an exit was seen for the euro (October 24). That means that the major investors working with the Swiss franc, which include Russian government companies and Ministry of Finance switch to the US dollars for further investment into the US assets.
Correspondingly, we expect more dynamics from the USD/CHF pair, than on the EUR/USD pair. As it happens for the euro, amid the US data on Non-Farm Employment Change (ADP), the correction of the Swiss franc is possible.
Bullish targets: 0.9065, 0.9090, 0.9110, and 0.9175.
AUD/USD
Yesterday the Australian dollar dropped 93 points. Thus, we have to correct the bearish targets: 0.9400, 0.9352 (the high of September 12), 0.9280, and 0.9220.