Intraday Market Thoughts

Fed Twists, Equities Shout, USD Soars

by Ashraf Laidi
Sep 21, 2011 22:54

The Fed implemented an aggressive $400 billion Operation Twist but it wasnt enough to satisfy the nervous market. NZD and AUD fell badly after the decision while USD and JPY led. The second quarter report on NZ GDP is up next. Ashraf's Premium calls produced 4/4 in EURUSD & 2/2 in EURUSD. New Trades were added later in the day. See below.

The Federal Reserve unveiled a plan to sell maturities out to three years and invest the proceeds in 6-30yr Treasuries at Wednesdays FOMC meeting. The Fed will also re-invest expiring Agencies (and MBS) in an effort to lower home-lending costs.

This so-called Operation Twist was slightly more aggressive than the $250-$300 billion consensus but the failure to hint at QE3 left the market wanting more. A warning that the Fed sees significant downside risks to the economic outlook compounded the negative sentiment.

The dollar rallied immediately and strongly. EUR/USD fell below 1.36 from nearly 1.38 prior to the statement. Similar dollar gains came against AUD, GBP, CAD and NZD.

Technically, the moves in EUR/USD, USD/CAD and AUD/USD look convincing.

Stocks appear to be falling into their familiar pattern of kicking and screaming when they dont get what they want (QE3, in this case). The S&P 500 fell 2.9% to 1167. Downward pressure also came from downgrades to Bank of America, Wells Fargo and several Italian banks.

The rumor mill was busy in the hours before the FOMC decision including talk of a French government bank recapitalization, an Austrian downgrade and the resignation of Italian PM Berlusconi. None of which came to pass.

Asia-Pacific Preview

Early in the session, at 2245 GMT, New Zealand will release Q2 GDP. The consensus is for a 0.5% q/q rise. Bollard was hawkish earlier, saying rates will need to rise but that didnt stop the 150 pip post-FOMC crash in NZD/USD. A break below 0.7969 in the pair and things will start to get ugly. Soft GDP could be the trigger.

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Otherwise the calendar is quiet but with the market digesting ratings cuts, rumours and the FOMC decision, there should be plenty of movement in Asia.


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