Intraday Market Thoughts

Fed Twists Again, China Manufacturing PMI Upcoming

by Ashraf Laidi
Jun 21, 2012 1:30

The Fed unveiled a second Operation Twist, setting off a flurry of volatility but no firm direction. On the day, the euro was the top performer while the yen lagged. The highlight of Asia-Pacific trading is the China HSBC manufacturing PMI. USDJPY and EURJPY were added to today's Premium Insights. See more below.

The Fed downgraded growth forecasts and unveiled another round of Operation Twist at Wednesdays meeting. The market was simultaneously pleased by the easing but frightened by the growth downgrade. The FOMC extended Twist by $267 billion using its remaining short-term notes to buy maturities longer than 6 years. The program is now slated to wrap up in June.

At the same time, the Fed slashed its growth estimate for 2012 to 1.9-2.4%, far below the 2.4-2.9% forecast released in April. Unemploymet estimates were hiked and the 2013 and 2014 growth forecasts were also cut.

Bernanke clearly left the door open for QE3 as soon as August 1 in his press conference. "We still do have considerable scope to do more and we are prepared to do more, he said.

The market was left in a whipsaw as EUR/USD dropped to 1.2640 and then jumped a full cent. Afterwards, the gyrations continued before the euro settled near 1.2680. Other currencies were similarly volatile but eventually settled at near-unchanged levels.

Going forward, its clear that the Fed is one or two soft employment reports from QE3. This should put a floor under risk assets and gold.

Early in Asia-Pacific trading, the New Zealand dollar surged above 0.8000 for the first time since early May after a tremendously strong Q1 GDP report. The economy grew 2.4% y/y, blowing away the 1.3% consensus. The report means a rate cut this year is unlikely.

At 0230 GMT, HSBC releases the flash estimate for the June China manufacturing PMI. This is a key data point but there is no consensus forecast. The previous reading was 48.4 and the market is likely positioned for something similar.

Today's PREMIUM INTERMARKET INSIGHTS were issued 20 mins before the Fed decision and are in progress. USDJPY & EURJPY are brought back. Click here for direct access to today's trades. Non subscribers can click here:


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