FX Update: USD rolls over post FOMC, UK election on tap

The FOMC statement and accompanying materials released last night were short on surprises, with most interest any way on the Press Conference and Powell’s signaling on the balance sheet. We have discussed the widespread coverage over the last couple of days on Credit Suisse’s Zoltan Pozsar and his assertion that the Fed will have to start “real QE” (buying longer term US treasuries) and very soon to avoid a mishap over year-end USD liquidity issues. One of the journalists specifically referred to this research in a question, to which Powell made clear that, while they see no issues over year-end, they will respond if necessary with purchases of coupon treasuries as well as the current T-bill purchases.

Overall, Powell’s signaling in the press conference  is that for now, the Fed will respond to any and all disruptions in money market liquidity issues with balance sheet expansion, meaning that only a sudden shift in animal spirits can reverse the very positive mood across markets and there are three potential sources of a negative mood shift – the most pressing of which is the current round of US-China trade negotiations and whether the December 15 US tariff schedule on Chinese goods will go forward or if a phase one trade deal (likely the best we can ever hope for) can get done here. Second, the market is poorly positioned here for any weak economic data and finally, the end-of-year USD liquidity issue, where risks could worsen on any budget

The UK election results are set to roll in this evening, with excellent coverage from Bloomberg on the timing of the results and what to look for from key districts as the night wears on. The reaction may be priced in very quickly if the exit poll available at 2200 GMT when polls close gives an unambiguous sign of a strong Tory victory – say north of 350 seats (326 is needed for a majority in the 650-seat House of Commons). Last time around the exit poll was out showing 314 to the Conservatives and 266 to Labor, with the final result showing 317 to 262. Otherwise, sterling might be all over the map from minute to minute as results roll in all night. I lean for high probability of a clear majority with an ensuing quick reaction and assume (with very low confidence) that something on the order of 1.3500 is possible in GBPUSD and perhaps 0.8250 in EURGBP  if the result is clear.

Chart: AUDUSD
One of the most enthusiastic moves both before and after the FOMC meeting last night was in the Aussie, which galloped higher against the US dollar on USD weakness, but also as hopes seem to be reviving that policymakers have turned the tide quickly enough to avoid a recession. Copper has pulled sharply higher to new highs for the cycle over the last few sessions, for example. Regardless, the last news item this pair needs is an indication that the US and China are headed for détente in their ongoing trade row and technically, to break out of this persistent descending channel that has dominated the price action for so long – starting at around 0.6900. If we are headed for a relief rally in all things Aussie – this pair could have potential into 0.7200+, which would merely take it back to the 38.2% retracement of the early 2018 top.