Archived IMT (2009.12.16)

FED's DILEMMA IN REVERSE; Unlike in 2007 when Fed funds futures were forcing the inflation-centric Bernanke to cut interest rate, markets today are demanding the Fed to raise interest rates. But Bernanke is TOO CAREFUL NOT to allow markets to force the Fed into a premature tightening of credit conditions. Separately, theres talk in the central bank arena that the Federal Reserve is under pressure to halt (or slow) the USD-based carry trades, which have been responsible for prompting excessive strengthening in the currencies of Eurozone, Canada, Australia and New Zealand. But with the USD Index entering its 3rd weekly gain (longest winning streak since March), the Fed may be under less pressure to talk up the currency or/and issue hawkish statement. We expect the FOMC statement to issue a brigther economic outlook (in the 1st paragraph of the FOMC statement) but to leave the inflation language unchanged. This may prompt some further knee-jerk selling in USD, followed by retracement later in the US session. The escalating credit/banking issues of the Eurozone and their sudden concentration in less than 10 days are too great to be ignored by FX traders.