Daily Report: Yen Recovers on Risk Aversion, BoE & ECB Watched

Yen recovers some ground today as Asians stocks dip after late selloff in US equities. Dollar follows by paring some of this week's losses as crude oil is back below 80 level while gold trades below 1090. Risk aversion would probably give the Japanese yen some further support as Japanese Nikkei closed below head and shoulder neckline support which should confirm medium term reversal. However, dollar's fate will continue to be tied between risk aversion and strength in gold.

FOMC statement overnight was largely inline with markets' expectations. Fed decided to leave the Fed funds rate unchanged at 0-0.25% and reiterated to keep it low for 'an extended period'. The Fed also listed conditions that warranted an unprecedentedly low level of interest rates: low rates of resource utilization, subdued inflation trends, and stable inflation expectations. In the meeting, policymakers also modestly upgraded its assessment of current conditions and reduced the amount of agency debt it purchased. These mildly positive factors partly offset the dovish tone of the post-meeting statement. More in FOMC Review: The Fed Disclosed Parameters For Making Rate Decisions

No Surprise from FOMC, Stocks Higher, Dollar Lower

Fed left rates unchanged at 0-0.25% as widely expected. The wordings that rates will be kept at exceptionally low level for an "extended period" of time was practically unchanged. After all, there was nothing special from the FOMC statement. Markets struggled to find directional initially after the release but dollar bears won the battle as markets digested the statement. The greenback is sharply lower against European majors as well as commodity currencies while stocks managed to climb again after some retreats.

Intraday bias in the dollar index remains on the downside for the moment and fall from 76.82 might still extend further even though 61.8% retracement of 74.94 to 76.82 at 75.65 is already met. Persistent strength in Gold and crude oil would likely continue to pressure the greenback in general. Nevertheless, we'd continue to expect strong support above 74.94 low to conclude the pull back from 76.82 in the dollar index. That could be translated into a retest of recent high in EUR/USD, GBP/USD and AUD/USD though.

Mid-Day Report: Dollar Remains Pressured ahead of FOMC

Dollar weaken sharply across the board today as Gold makes another record high of 1096 and is marching to 1100 level. Crude oil also follows by breaking 80 level too whole stocks rebounds strongly in general. ADP report showed the job market in private sector contracted -203k in October, slightly higher than expectation of -187k. Nevertheless, prior months' data was revised up from -254k to -227k. Challenger report also showed strong improvement of -50.7% fall in planned layoffs in October. Nevertheless, ISM non-manufacturing index missed expectation and fell slightly to 50.6 in October. Main focus now turns to FOMC rate decision and statement.

ECB Preview: Trichet's Comments a Prelude for New Economic Projections in December

As there's only one month to go for the release of a new set of staff projection in December, we will probably not get much new information from the ECB at November's meeting. Policymakers should leave the main refinancing rate unchanged at 1%. In the accompanying statement, it will be reiterated that growth and inflation risks are ‘broadly balanced' and interest rates are ‘appropriate'.

ECB President Trichet's tone may turn more optimistic in the press conference given stronger-than-expected economic data in 3Q09. Eurozone's manufacturing PMI rose to 50.7 In September from 49.3a month ago, indicating the first expansion in 17 months. Consumer and business confidence also improved in the second half of the year. Germany's Ifo business climate index surged to 91.9 in October from 91.3 a month ago. That's the highest reading in 13 months. Although the new set of staff projections (with 2011 projection included for the first time) will be given in December, we look to see if the President would prepare the market for potential change at this meeting. In fact, the ECB will probably have big upward revisions on economic growth given strength in economic activities. The central bank's growth projection for 2010, which stands at +0.2%, seems to be too conservative.

FOMC Preview - No Change in Policy Rate, Upgrade in Economic Outlook

The Fed is expected to leave the Fed funds rate unchanged at 0-0.25%. What the market interested in the most is whether the Fed will change the statement, '... economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period', that appeared in September. Concerning economic forecasts, the Fed should have upgraded its outlook on growth given strong economic data released since last meeting.

We anticipate policymakers to keep the above-mentioned statement with the phrase 'an extended period' retained. The Fed prefer to see the job market stabilize and recovery more sustainable before exiting from the current ultra-expansionary monetary policy.

Concerning asset purchases, the $300B Treasury purchase program was completed in the final week of October. In the September meeting, the Committee announced extension of the MBS and agency debt program through 1Q10. We believe not much new information will be given in November.

RBA Raised Cash Rate By 25 Bps. Further Tightening Will Be Implemented 'Gradually'

Inline with expectations, the RBA raised cash rate by +25 bps to 3.5% in November. While acknowledging solid economic growth, the central bank highlighted this month that appreciation in AUD would dampen price pressure and the trade sector. Other comments were similar to what appeared in October's statement.

The RBA increased its policy rate for the second time in 4 months, making it the first central bank to hike interest rate twice in this year. Policymakers' views on economic outlook were broadly unchanged from the prior month. RBA believed that 'the recovery is likely to continue during 2010 and forecasts have been revised higher'. Expansion in major economies is modest while growth in Australia will be boosted by the nation's trading partners. For instance, strong growth in China 'is having a significant impact on other economies in the region and on commodity markets'. Moreover, the job market has shown signs of improvement and the rate of unemployment is now likely to peak at a considerably lower level than earlier expected'.

Concerning general price level, the central bank forecast 'inflation should continue to moderate in the near-term, but now will probably not fall as far as earlier thought … Both CPI and underlying inflation are expected to be consistent with the target in 2010'. We believe the RBA might have underestimated inflationary outlook given recent surge in hose prices.

Attention should be paid on the RBA's warning that 'the rise in the exchange rate is likely to constrain output in the tradable sector and dampen price pressures'. AUDUSD has risen almost +3% since the last meeting and rallied +29% year-to-date. Strength in AUD is probably a reason for the RBA to restrain rate hike.