News of Forex

Summary Outlook: (December 15, 2008) We expect the Fed will cut its target rate for Fed Funds by 50 bps from 1.00% to 0.50%, in line with market expectations, when they announce their decision on Tuesday, December 16, at 1415ET. (A Fed Funds target rate of 0.50% would be an all-time low.) The fundamental case for another rate cut is indisputable as US economic data has accelerated its deterioration since the last Fed meeting, leaving the risk that the Fed cuts even more aggressively than markets are expecting. But with Fed Funds already trading around 0.15%, the question is will a ceremonial rate cut have any impact? We think the market has effectively priced-in near-zero US base rates, so the market reaction may instead be based on the Fed's statement, which is likely to be extremely bleak. We look for the USD to weaken further on a downbeat assessment. Trading Strategy: The USD is currently undergoing a rapid reversal of strength seen in recent months and we think there is more downside potential in the short-term. As such, we look to sell USD on any rebounds post-FOMC, which may materialize if the Fed cuts by only 0.25%. In particular, we are looking at the following price levels to sell USD/buy others: EUR/USD: We look to buy EUR/USD on weakness back to the 1.3480/3530 area (stop below 1.3410/20) or on strength over 1.3750/60 on a stop loss entry basis (stop loss exit if below 1.3670/75). USD/JPY: We look to sell USD/JPY on strength in the 92.00/92.50 area (stop over 93.00). GBP/USD: We look to buy GBP/USD on weakness back to 1.5120/70 area (stop below 1.5050) or on strength over 1.5400/50 on stop loss entry basis (stop exit if below 1.5350). USD/CHF: We look to sell USD/CHF on strength to 1.1730/80 area (stop over 1.1850) or on weakness below 1.1500/50 on a stop loss entry basis (stop exit if above 1.1630). Commodity currencies AUD, CAD and NZD: We'll stand aside on these pairs because USD weakness may be offset by a weaker growth outlook undermining commodities generally. Statement Analysis: Tomorrow's Fed statement may be similar to the Oct. 29 statement, except the Fed may find it difficult to characterize the rapidly deteriorating US outlook without sounding like 'Chicken Little'. The Fed will likely acknowledge that US economic data has deteriorated at an accelerating rate since their last meeting, noting the surge in job losses, declines in manufacturing activity and continued weak consumer sentiment and falling consumer/ business spending. Rapidly falling inflation will likely receive only a token mention. On the brighter side, the Fed may again point to the series of governmental actions taken to date (FOMC easing, TARP, bank capital infusions, liquidity provisions) and note that credit markets have stabilized. The Fed may also point to anticipated fiscal stimulus in the New Year as a basis for some mild optimism, but will certainly continue to highlight the downside risks to growth. We think they will also keep further rate cuts as an option, suggesting rates may fall to zero. Of interest will be if the Fed decides to openly declare its nascent policy of quantitative easing (buying assets and increasing money supply to offset economic weakness/deflation), but such a policy initiative seems more likely be announced in a separate release. Disclaimer: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.