Notes From Underground

Wednesday brings the news of the FED‘s newest intentions. There is no press conference so the FED‘s FOMC statement is released at 1:15 CST. The consensus is for no change in the current FED policy as the recent economic data has been somewhat mixed. Housing data has a positive tone to it but consumer confidence is tepid and even the durable goods data was weaker than the headlines suggested. It seems that some defense orders were brought forward into December to circumvent the possibility of budget sequestration. The VOTE of the FOMC will be of interest as the new year rotation of FED presidents brings a list of new voters. Gone will be Jeffrey Lacker, the dissenter, and the perma dove John Williams from San Fran Fed is a non-voter.

However, semi-hawkish Presidents James Bullard and Esther George will be tested. Chicago Fed’s Charles Evans, a supreme dove, has a vote and could be a nay vote as he will favor doing more QE than the present policy. The VOTE COULD BE 9-3 with the dissenters coming from totally different agendas. Policy, however, will remain unchanged–0.25% rate and no new QE. Remember that the FED has dedicated itself to bringing down the unemployment to a threshold of 6.5% so all this talk of exiting QE and large-scale asset purchases is just hyperbole from the media.

****The Reserve Bank of New Zealand announces it s rate decision at 2:00 CST, 45 minutes after the FED. The market is projecting the RBNZ to hold its rate at 2.5%, though after hearing all the recent concern over the strength of the Kiwi currency it would not surprise me if the Kiwis lowered the overnight rate to soften its currency. The KIWI is hovering near 12-month highs and is very strong versus the YEN and AUSTRALIAN DOLLAR so a lowering of the interest rate would surprise the market and also gain support from the N.Z. manufacturers and the labor unions. Those wanting a punt may look at the  Aussie/Kiwi cross as a safe punt on the RBNZ. Remember to have a very small risk parameter in on a short punt.

***An article in yesterday’s FINANCIAL TIMES shed more light on the unintended outcomes of the Swiss National Bank’s intervention policy. It brings into focus that the negative interest rates that are needed to support its EUR/CHF floor of 1.20. The ultra low interest rates are driving property prices higher as all the Swiss francs in circulation are looking for assets to buy. The powerful Swiss bank, UBS, notes that the real estate bubble index … “entered its ‘risk zone’ for the first time since the 1980’s.”

The question for the SNB is how to counter a housing bubble while it is trying to weaken the Swiss Franc. Fritz Zurbrugg, one of the three members on the SNB governing board “ruled out addressing the problem by raising interest rates, as this would undermine the SNB’s fight against the overvaluation of the Franc.” This is another reason why the theme of “currency wars” results in so many possibility outcomes. Attempting a massive program of FRANC DEPRECIATION opens up an economy to all  types of problems. When will we hear about the need for foreign exchange controls? This would be a difficult path for Switzerland to take because of its vast global banking industry, but we know that the SNB can not sit on its models forever.

Tags: Australian dollar, Fed, FOMC, Kiwi, QE, RBNZ, SNB, Yen

This entry was posted on January 30, 2013 at 4:21 am and is filed under Currency, Fed, RBNZ, SNB. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.