While all eyes remain focused firmly on the FOMC decision as we head into US trading, there have been significant developments overnight that have been moving markets in other regions and may continue to have an impact on certain contracts even after the Fed has come and gone. It has already been a busy day for news from central banks. India surprised the market by holding off on an expected 0.25% interest rate hike. AUD has finally started to attract some support once again after RBA Governor Stevens remained ambiguous in testimony on FX intervention, suggesting he remains open to it but doesn’t have a plan or any triggers in mind. He also noted that an intervention would need to be supported by fundamentals as going against them would be a waste of time and resources. The street has taken this to indicate that even though the RBA remains open to interest rate cuts and thinks that a dollar above par or even in the $0.90s appears unsustainable the risk of an immediate intervention has subsided. As with NZD following last spring’s intervention though, the threat of an intervention could rise if the dollar rebounds too fast, somewhat limiting its upside in rallies. Meanwhile, GBP has been rallying as the Bank of England increasingly finds itself stuck between a rock and a hard place. While voting 9-0 to maintain current levels of interest rates and QE, the Bank indicated that the gains made by Sterling could undermine the recovery. Today’s stronger than expected employment growth and fall in the unemployment rate to within 0.4% of its 7.0% threshold for action may increase speculation that tightening in the UK may come sooner than currently thought, which may keep a bid under GBP. Today brings the long-awaited FOMC decision with tapering likely to be a big topic of discussion. There are strong cases for both sides but I remain in the no-taper until March camp given the upcoming leadership handover at the Fed and the risk of a battle over the US debt ceiling around the time of the January meeting. If I’m wrong and they do taper, it’s likely to be relatively small, just enough to test the waters and perhaps appease some of the central bank’s critics. The member projections could be just as important as the decision and statement. Back in September when the Fed held off on tapering, several members had actually cut their economic forecasts. If the economy has improved enough to justify tapering any time in the next few months, FOMC members should be upping their forecasts now. If not, QE could be here to stay for a while. Recall that in recent months, speculation that tapering may come sooner has historically boosted USD at the expense of stocks, precious metals and paper money. Indications that QE could remain at higher levels for longer has boosted stocks and gold while undermining USD. Note though that as the US economy improves, like other central banks, eventually the Fed will need to shut down QE3 or risk creating asset bubbles (if it hasn’t done so already) and inflation. If it does not taper now, it may need to taper soon which means that any reaction to a no-taper decision may only last for a few weeks. After all, once the holidays are over, the January and March meetings won’t be that far away. Corporate News Lennar $0.73 vs street $0.62 FedEx $1.57 vs street $1.64, raised growth outlook to 8-14% from 7-13% Economic News Significant economic announcements released yesterday afternoon and overnight include: US housing starts street 954K US building permits street 990K India repurchase rate 7.75% unchanged, a 0.25% increase to 8.00% had been expected UK jobless claims (36K) vs street (35K) vs previous (41K) UK unemployment rate 7.4% vs street 7.6% UK 3M employment change 250K vs street 165K vs previous 177K Germany IFO bus climate 109.5 as expected Germany IFO current 111.6 vs street 112.5 Germany IFO expectations 107.4 vs street 106.5 Japan trade balance (¥1292B) vs street (¥1351B) NZ ANZ bus confidence 64.1 vs previous 60.5 NZ ANZ outlook 53.5 vs previous 47.1 Economic reports due later today include: 10:30 am EST US crude oil inventories street (3.0 mmbbls) 10:30 am EST US gasoline inventories street 1.5 mmbbls 2:00 pm EST US interest rate street 0.25% no change expected 2:00 pm EST FOMC statement and tapering decision 2:00 pm EST FOMC member economic and monetary policy projections 2:30 pm EST Fed Chair Bernanke press conference 4:45 pm EST NZ GDP street 3.4% vs previous 2.5%


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