MIG Forex Research

In what is traditionally a busy week for data, we are a quarter of the way through the key central bank meetings that are forthcoming. After the RBA's decision to hike the Australian cash rate to 3.50% we now look towards this evening's FOMC decision ahead of both the Bank of England's MPC and ECB decisions tomorrow.

The rake hike from the RBA was well flagged, but disappointed a market set up for a potential 50bps and the subsequent noises from the RBA were much less hawkish is suggested by the Australian yield curve. This continues to weigh on the Aussie dollar in the short-term and, though further rises are expected during the period of rate normalisation, I remain concerned that the expected rate hikes won't be delivered as aggressively as the market believes. Whether this means we have already posted a medium-term high in AUDUSD remains to be seen and this will still be governed by the overall market risk appetite. In this instance it is interesting to see how stock markets have struggled over the last few sessions, though the key technical support from a DeMark aspect remains below here in the Dow at 9599. Until this level is broken, the risk trade remains on and pullbacks in the AUDUSD remains corrective rather than a change in trend.

For the FOMC tonight, there is an outside chance we will see alterations in the wording to suggest the end to easy policy will happen sooner rather than later. However, my view is such a change in the policy statement is very unlikely. The markets remain very edgy as was noticed when the cessation of parts of the under utilised TAF and TSLF policies was announced recently and I expect the FOMC members will view today as too early to attempt to rock the boat. I expect a very similar policy statement tonight to the last meeting which at the margin would be USD negative, but it will be worth focussing on the ability of the dollar to sustain recent gains should it suffer any post FOMC jitters. With the negative Dollar/Equity correlation remaining pretty much in place, the direction taken over the remainder of this week may wekk drive sentiment into the end of 2009. The key phrase to watch for regarding rates is 'exceptionally low for an extended period'.

The Bank of England remains caught between a rock and a hard place. Though there has been talk from certain MPC members of the end of the now spent QE program, the bare economic statistics suggest the market is right in looking for at least another £25bn expansion in this APF strategy. Credit passthrough remains minimal and I would actually err on a rise by £50bn, purely so they have enough leeway to keep the purchases ongoing until the next quarterly inflation report in February. Of all the meetings this looks to have the biggest binary risk in the currency space. GBP has been extremely volatile recently with money markets flying all over the place. Should QE not be expanded there is a risk that Sterling flies considerably higher - remember there are still some entrenched GBP shorts in the market even though the speculative shorts on the CMA have dropped from a all time high of 75,000 contracts to around 53,000 at the last report. Should my view of a £50bn QE extension be seen, sterling should remain under pressure on a braod basis. The UK remains the only G7 nation still in recession.

The ECB is likely to be the least interesting of the remaining meetings. I expect an unchanged policy decision. Of note would be any alterations to the wording regarding growth and lending. The former may be highlighted a little more favourably than the tentative comments from October but lending data remains unimpressive. Staff forecasts are not available until December, so the ECB meeting has, of the three, the lowest risk of casuing a significant market reaction.