Fed mulls extending operation twist; A$ and Yen take a hit

[B]Fed mulls extending operation twist; the ‘Evans Rule’ gains traction[/B]

A number of Fed members saw a need to maintain its existing stimulus program of buying long-dated debt with the proceeds of short-term treasuries, according to the FOMC minutes from their October meeting. Dubbed operation twist, the aim is to flatten the yield curve to bring down longer term mortgage rates in an effort to stimulate the U.S housing market. “A number of participants indicated that additional asset purchases would likely be appropriate next year after the conclusion of the maturity-extension program.”

Also in the Fed’s sights is adopting new language by defining what financial conditions would likely warrant a removal of existing stimulus measures. Currently, the Fed’s official line is “exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015,” however the Fed discussed adopting a new guidance approach by placing explicit targets on employment and inflation before policy changes occur. Chicago Fed governor Charles Evans has in the past been the most vocal advocate of further transparency in the decision making process. Dubbed the ‘Evans Rule’ he believes monetary policy should remain accommodative until the unemployment rate is below 7 percent and/or inflation is above 3 percent.

In economic news, US retail sales fell 0.3 percent in October after an upwardly revised 1.3 percent rise. The effects of super-storm Sandy had was both a positive and negative for retailers according to the release. On one hand the storm forced store closures given the damage, which was negated by a significant rise in demand as the rebuilding work ensued.

[B]Euro snaps losing streak on Greece, Spain[/B]

Despite broad based greenback strength overnight, the Euromanaged to squeeze out moderate gains as markets found solace in reports Germany supports giving Greece more than the 31.2 billion euro installment. Euro group ministers may have agreed to provide Greece with a two-year extension to meet its debt to GDP target ratio of 120 percent by 2022, but the decisions to unlock the next 31.2 billion euro bailout installment will not be made until the Euro group meeting on November 20. It is clear Greece has jumped through the hoops set by the troika, hence, there is no reasons to suggest the funds are not forthcoming. An article in German publication Bild took it a step further this week suggesting Germany was in favour of giving additional funds to Greece by bundling current and future bailout installments. The report suggested over 43 billion euros could be forthcoming, made up of 31.2 billion euros due for the second quarter, 5 billion for September and 7.2 billion due at the end of December. Although this has not been confirmed, the reports are considered to have substance, and take some of the uncertainty of Greece’s funding commitments in the new year. Spain also received a vote of confidence overnight from European economics commissioner Olli Rehn, who said Spain has taken “effective action” to meeting its 2012/13 budget targets. The Euro has found some form once again above the $US1.27 region, but we consider any gains at this juncture tentative at best, with broad peripheral concerns no doubt likely to come back to haunt markets, amid signs Europe’s flagship economy, Germany, is stammering under the weight of deep seeded weakness across the periphery.

[B]Japan set for leadership change…again; Yen takes a hit[/B]

The political high-drama continues to in Japan with Prime Minister Yoshihiko Noda likely to dissolve the lower house of parliament on Friday, in turn an election is expected to see Noda’s ruling party ousted. Under Japanese law and election must take place within 40-days from the dissolution of parliament. It’s expected the ruling Democratic Party of Japan will be voted out in place of the Liberal Democratic Party, led by Shinzo Abe. Should this occur, it will be the seventh change of leadership in seven years. Meanwhile, the Japanese Yenmaterially weakened overnight on political uncertainty and speculation over further monetary easing initiatives amid a stronger greenback across the board. The closely watched USDJPY pair made a convincing break to the upside of the 80-handle to highs of Y80.32, also taking a significant against the Euro which broke Y102 for the first time this week. At the time of writing the pair is testing the 200DMA at 102.14, with a break to the upside signalling bullish momentum.

[B]A$ falls as sentiment overshadows easy money
Generally one would consider the prospect of further accommodative policy from the Fed to be conducive to greenback slump and risk currency rally; however, markets are clearly focused less-than-inspiring economic fortunes – with fiscal cliff concerns thrown in the mix – rather than the prospect of easy money. US markets responded negatively to the FOMC minutes, in turn, prompting a slump across the risk spectrum with the Kiwi and Aussie leading the charge lower. The Aussie dollar has fallen below the 104-handle with to lows of 103.65, alongside solid losses from U.S equities with the risk barometer S&P500 falling 1.39 percent on the day. This is a clear case of the Australian dollar reasserting its risk currency credentials, for which US equity performance – for the most part – will holds strong correlative value. Nevertheless, the Aussie dollar has displayed remarkable resilience in over recent weeks managing to squeeze out moderate gains against a backdrop of losses from US equities. On the local economic docket today is consumer inflation expectations at 11am and new auto sales and RBA FX transactions at 11.30am AEDT. At the time of writing the Aussie dollar is buying 103.7 US cents.