At the latest FOMC meeting this week, the Fed FOMC ended the legendary quantitative easing (QE) by discontinuing the last 15billion USD of the monthly bond purchases. The meeting's hawk nuances have sent US Dollar skyrocketed in major pairs, whilst elsewhere, future projections are not as bright.

At the latest FOMC meeting this week, the Fed FOMC ended the legendary quantitative easing (QE) by discontinuing the last 15billion USD of the monthly bond purchases. The meeting's hawk nuances have sent US Dollar skyrocketed in major pairs, whilst elsewhere, future projections are not as bright.

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FOMC Ends QE, Hedge Against Rate Hike Remains

FOMC The Fed decision to completely obliterate QE was still accompanied by statement that rate hike will come at a considerable time afterward. Even so, FOMC uncertain assurance about Fed rate hike this time sounds hawkish because the committee admitted job market improvement.

As quoted by CNBC, FOMC said that they are likely will maintain the Fed funds rate at 0-0.25% for a considerable time following th end of asset purchases, particularly if projected inflation continue to run below the 2% target. A long time ago, the Fed set 6.5% unemployment and 2.5% inflation as bechmark for when they are going to hike rates. However, as of late, although unemployment have slid to 5.9%, inflation stuck under 2%. In the circumstances, FOMC acknowledged job gains, but also stipulated that inflation has to improve before Fed rate could be hiked. Again, FOMC stated, The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.

It is interesting to note that there doesn't seem to be any concern about strong dollar and weak global economy as revealed in the past FOMC meeting minutes. The only concern in the meeting was expressed by President of Minneapolis Fed, Narayana Kocherlakota, who objected to the decision and suggested that the current Fed rate and asset purchases should be continued at least until inflation gets up to the 2% target. On the other hand, Dallas Fed's Richard Fisher and Philly Fed's Charles Plosser remained hawkish. Is this a signal that FOMC has started to turn around? Bloomberg Businessweek pointed out that the current composition of the Fed FOMC will only stay until one more meeting.

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It needs to be noted that The Fed FOMC has 12 seats in which four seat is served by rotation between 11 Fed presidents. Next year, the composition will change as some members will be out and new ones in on the Fed FOMC annual rotation. In 2015 FOMC, Richmond Fed's Jeffrey Lacker (centrist) will replace Plosser, Atlanta Fed's Dennis Lockhart (dovish) will replace Fisher, San Fransisco Fed's John Williams (dovish) will replace Kocherlakota, and Chicago Fed's Charles Evans (dovish) will take the place of Cleveland's Fed. The change is expected to influence the Fed FOMC viewpoints (note that there will be more doves, less hawks), but for the time being, market is still expecting Fed rate hike to occur in the second half of 2015.

The expectation was further bolstered by US GDP Advance Estimate that showed the US grew 3.5% in the third quarter of 2014. The figure was better than the expected 3.0%. As well, initial jobless claims this week came in at 287,000, above the forecasted 283,000. The impact of the news on US Dollar movements was disappointing due to the fact that the GDP report includes too much of government spending than the market would like to see. Reuters quoted JPMorgan note that they are lowering US GDP Q4 growth from 3% to 2.5% because, The upside surprise was mostly located in defense spending, inventories and, to a lesser extent, net foreign trade. All three of these categories tend to be associated with payback the following quarter. However, the glitch little changed the current market sentiment, especially because worldwide monetary policy divergence reigns still.

 

Japan Adds Stimulus, Eurozone Stay Dismal

Today, Bank of Japan left rates unchanged at 0.1% and expands its monetary base to 80trillion Yen from 60-70trillion in the previous periods in order to pursue their 2% inflation target. The latest inflation record was disappointing, with inflation rate fell to 3.2% from 3.3% (yoy) and core CPI slipped from 3.15 to 3% as well. Economist surveyed by Reuters prior to BoJ decision have said that Japan inflation target is not likely to be achieved any time soon. The BoJ admitted this, and said that they might need to do more for the deflationary trend to revert.

When this editorial is written, USD/JPY has risen to its highest since August 2008 and it is still going up. This place USD/JPY an uncomfortably record high level, but if we consider the same condition that has occured years ago, it is possible that USD/JPY will stay in the current record high level for some time.

USDJPYUSDJPY In Monthly Chart With EMA-20, EMA-60, EMA-200, and MACD

Similar unfavorable trend also haunts Eurozone. Yesterday's Germany inflation report was recorded at 0.8% for the third time in a row. First estimate of Eurozone's inflation was noted at 0.3%. Analysts are expecting it to be revised up, but that will only bring Eurozone's inflation to 0.4%. A dismal figure indeed. Prospect in the area is inexplicably bleak, and ECB is expected to maintain loose money policy for the foreseeable future.

Deflation is such a frightening threat that each region is trying to outdo each other in order to drive their exchange rate down and export deflationary pressures to other countries. The circumstances reminds many people to the currency war back in 2010 when major central banks competed to boost their country's competitiveness through weaker currencies. The currency war at the time is said by some to be the reason why global economy now is in a state of decline. Exporting your problem abroad is not an answer to economic problem, because flow of goods, services, and money, in the end is spread beyond the border of a country. Which means, currency war is likely to create backlash which traps the world in a never-ending cycle of decline that occurs interchangeably between one country and another. Will Japan and Eurozone manage to escape their fate? Future is not ours to see, but we can say that for now, Japan and Eurozone is heading down.