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USD/JPY Could Spike If FOMC Disappoints the Market

Last updated 9/21/2011 2:48 AM ET (GMT -5) 0 Comments - Add your comment

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Boris Schlossberg

Director of Currency Research, GFT

The dollar dropped to a one month low against the yen ahead of the FOMC meeting that ends today as traders speculated that the Federal Reserve would announce further monetary policy easing measures to stimulate the US economy.  The market anticipates that the Fed will shift its balance sheet from the short end to the long end of the curve extending the maturity of its assets. Operation Twists, as it is known, is  intended to drive long term US rate lower in an effort to lower long term borrowing costs and stimulate business activity.

The market however is looking for the Fed  to go beyond Twist by lowering  the rate on its deposits, all in an effort to stimulate lending. Many analysts have questioned the wisdom of such a move given the fact that loan growth is presently dampened  by lack of demand rather than cost of funds. Additionally the latest core CPI data released last week showed a rise to the 2.0% level suggesting that Fed persistent easing may be starting to exert upward pressures on prices.  

Given this background we believe that the Fed may not be more cautious in its approach then the market believes announcing only a limited Twist operation as its additional easing measure. If that were to occur, the dollar could strengthen markedly as the market gets caught off guard.   USD/JPY tumbled to a low of 76.16 in early morning Asian trade on the assumption that the Fed will make another dramatic announcement, but the pair could quickly verticalize to 77.00 or perhaps even 78.00 if Dr. Bernanke and company disappoint the market later today.  

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About The Author

Boris Schlossberg began his Wall Street trading career more than 20 years ago at Drexel Burhnam Lambert. There, he traded nearly every type of financial product on the market in the U.S., from equities and options to stock index futures and foreign exchange. His innate ability to analyze market information and use it to trade has helped him become an industry-recognized, “go to” trading professional.

These days, whenever the markets move, many organizations turn to Schlossberg for his take on the situation. He is a weekly contributor to CNBC's Squawk Box and a regular commentator for Bloomberg radio and television. His daily currency research is widely quoted by Reuters, Dow Jones and Agence France Presse newswires and appears in numerous newspapers worldwide. Schlossberg has written for publications like SFO magazine, Active Trader and Technical Analysis of Stocks and Commodities. He is also the author of Technical Analysis of the Currency Market and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Kathy Lien. He joined GFT in 2008.