FX Primus Ltd.

FX Primus Ltd.

June 17, 2014 00:48 ET

FXPRIMUS Market Brief of the Week: Key Points on FOMC Meeting This Week and China Updates

SINGAPORE, SINGAPORE--(Marketwired - June 17, 2014) - In FXPRIMUS' Market Brief of The Week for 16 June, the brokerage firm's Senior Economist, Jimmy Zhu talks about FOMC meeting and China Updates.

New "guidance" we may get from the Fed Chief tonight, regarding the "new normal" pace of the monetary policy

  • Fresh air to breathe tonight. Still, no "Bank of England Style" hawkish message, due to different housing markets landscape

  • "Super woman" could start exercising a "trade-off" to balance the Doves and Hawks. A firmer rate hike determination with balance sheet to keep at a record level for longer than market expects.

  • Not yet to offer a clean line on the specific timing of the hiking, but "this time next year" will be the rough guideline of the first rate hike.

What are the possible key adjustments in the FOMC statements and Economic forecasts could reveal the "true face" from the Fed in H2 besides the policy rhetoric?

  • Inflation-related comments need to be scrutinised in the statement. "Inflation persistently well below 2% could pose risk to the economy" may be adjusted to "recent inflation shows that it moves toward the Fed's objective though still well below the target".

  • This clearly shows the Fed is willing to move toward more "neutral bias".

  • Unemployment rate and growth targets may be adjusted lower to 6% and 2.5%, but no change on inflation target expected.

In the middle cycle of the economy, prolonged zero interest rate policy threats to the financial stability and economic growth, when it has limited positive impact to the entire financial system

  • No single policy can achieve the different goals in different economic cycle.

  • Fed Bullard said that we are very closing to the Fed's long term objective by using a simple formula, so ZIRP is not consistent to today's macro condition.

  • Wall Street concern - Fed needs to return some volatility into the market to avoid the assets "misallocations" and "mispricing" due to the moral hazard.

  • Main Street concern - In the main street, persistent low rates suppress the level of savings, lowering the consumption level as money is locked in the high-yield assets.

Who is right, who is wrong? - As bonds and equities seem to tell a different economic outlook

  • Fixed-income market tells a relatively more accurate view on the perspective of rates guidance and economic condition. Recovery will carry on, but the pace may not that optimism as some market participants expected

  • 10-year yield stands 100 bps higher than the time when the Fed announced the QE3 two years ago on higher rates expectation, 40 bps drop of the 10-year yield YTD reflects pricing out the incorrect taper tantrum last year. Nothing wrong here.

  • Yield should continue creeping to 3% in 2H in a gradual pace, leading to a higher USD as well.

"Most Clean FX trade" in H2- "AUD-NZD in 2013" is a great benchmark

  • EUR-USD could be one of most clean G7 FX trades, motivated by the policy divergence play as RBA & RBNZ's common efforts drove the AUD-NZD around 2,000 pips lower last year.

  • A new start of the ECB balance sheet's expansion while the Fed's may reach its peak soon, supporting the view that a 2-year uptrend of the EUR-USD has been peaked followed by a reversal move.

  • If market questions the effectiveness of the new measures deployed 2 weeks ago, weak policy leading to a fragile economy should support for a lower euro, not higher. We are looking at 1.3350 toward the year end.
1) China June flash manufacturing PMI next Monday is likely to offer a stabilisation sign
  • Putting aside the criticism on its reform agenda, "pro-growth" measures were kicked off much earlier comparing to past few years, which may lead to a higher 2Q GDP growth (possible at 7.5%) comparing to 1Q, also partly due to a relatively low base this quarter last year.

  • June flash PMI next week could pose a upside risk toward the benchmark 50 level, supported by the sound recoveries of its major export partners and ongoing mini stimulus to offset the properties sales' drop

China Growth will be slightly cooling off later this year as pro- growth measures might be gradually removed

  • Government is pretty clear that the current "mini-stimulus" is to halt the systematic risk instead providing with a major growth

  • Pro- Growth measures might be gradually removed by the policymaker in late 3Q to catch up with its reform agenda

  • A higher growth base in 2H last year challenges the growth numbers later on this year, while the government has limited spaces to accelerate the current easing pace

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