Citi: 3 scenarios for the Fed
According to Bloomberg consensus forecasts, the Fed will reduce QE3 by $10 billion next week (US Treasury purchases will be reduced from $45 to $35 billion). US central bank will announce its decision on Sept. 18.
Analysts at Citi see 3 scenarios here:
- Neutral (Citi prefers this scenario): tapering by $10-15 billion combined with extremely dovish language, no change to tapering timetable. This is fully priced into the market.
- Hawkish: tapering by more than $15 billion. US dollar will strengthen in this case. Most vulnerable are currencies with high current account funding needs in G10 – NZD, AUD, CAD – and JPY, if the hawkishness induces a backing up of 2-year yields.
- Dovish: delay of the QE ending. There will be a rebound all assets that have been damaged by liquidity fears.