Fed Into Focus

Choppy USD trade ensues ahead of today's highly anticipated Fed announcement, Yellen conference and dot plot forecats. The antipodean currencies dominate trading, led by a soaring kiwi as NZ's ruling National party pushes wirg a 9-pt lead ahead of Saturday's elections. UK retail sales beat expectations and US existing home sales fell by more than expected. New trade actions and videos will be posted this afternoon ahead of the Fed's announcement.

Trump was at the UN and ramped up rhetoric against North Korea and Iran but there is little international consensus in favour of near-term action, especially on Iran where France immediately said it was against abandoning the nuclear deal. At the moment, the dollar is less-sensitive to geopolitical headlines than it was a month ago. That's in part due to higher liquidity but there is also a newfound sense that a rash move is unlikely.

Balance Sheet to Overshadow Dots

Expect the focus to center on the balance sheet reduction program, which is anticipated to begin next month. What will be the planned reduction amount in 2017? $30 bn, $40bn or more? And how would the amount be distributed in 2018 and thereafter? Ashraf tells me to get ready for a potentially "faster & earlier than expected" balance sheet reduction schedule, which could prop USD higher.

The FOMC decision may prove to be more hawkish than many believe. The dot plot will be downgraded to some degree but 12 of the 16 dots in June pointed to more hikes this year and it would be a tremendous shift to eliminate that.

Yellen will also want to keep her options open, especially if Republicans can find a way to deliver a tax cut. The market overall is net short the US dollar but Yellen and the Fed are optimistic about the economy. All it would take to restart the US dollar rally is a fresh hint at a December hike and a reiteration that policymakers are confident inflation will return to 2% in 2018.