In an aggressive easing step, the Fed this week promised to expand its balance sheet continuously until the labour market shows substantial improvement and committed itself to keep the Fed funds rate at exceptionally low levels until at least mid-2015. In Danske’s view, the Fed is taking a big step towards an Evans-style rule and the statement marks an important shift in Fed communication. EUR/USD has already moved above 1.30 on the Fed announcement. Considering that Danske view the move by the Fed as a true game-changer, we think that further dollar weakness is in the pipeline – not only versus the euro but also versus cyclical, commodity and EM currencies, which are going to be the big beneficiaries of this move. Basically, we are now in a very supportive environment for carry strategies: low and falling volatility and Fed adding cheap dollars on the funding side. In that respect, note that 3M G7 implied volatility is now below 8% and hence at the lowest level since 2007.
Next week in the US market kicks off with early releases of regional PMI surveys, starting with the New York Fed’s manufacturing index on Monday. Danske expect the figure to improve somewhat, though it remains weak, at a sub-zero level. The same story holds for the Philadelphia Fed PMI index, which has been hovering below zero since May. Danske expect this to continue, as they expect to see only a very muted improvement next Thursday. Markit flash PMI could prove a positive surprise, as Danske expect to see a healthy gain here, indicating that we could be in for a rebound in the ISM following the weakness of the last few months.
Danske expect housing market data to continue its uneven recovery. Danske expect to see a considerable gain in housing starts, rebounding 6% m/m, in line with our belief in an improvement in existing home sales as well. In contrast, building permits should fall back somewhat, following last month’s strong figure. Overall, Danske expect the improvement in the housing market to remain intact, though the pace of recovery remains slow.
The most interesting of the large number of scheduled Fed speeches are likely to be Dudley’s speech on Tuesday, Lockhart’s on Thursday and Lacker’s on Wednesday. All three are voting members of the FOMC this year and can use their speeches to clarify the reasoning behind the Fed’s decision this week.
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