USD Dips As QE3, Retail Sales Deemed To Enhance Risk

With the markets still off a high from the Federal Reserve’s decision to launch a third round of quantitative easing to breathe life to a sputtering US economic recovery, the US dollar is deemed to sustain its losses opposite the Australian dollar. The Fed launched an aggressive program yesterday, saying it will embark on open-ended purchases of mortgage debt and at the same time extended its pledge for near-zero interest rates. Likewise, a report today that American consumers continued to spend in August is seen to further boost market sentiment.

At the conclusion of its two-day policy meeting, the Fed revealed its plans of expanding its holdings of long-term securities with open-ended purchases of $40 billion of mortgage debt a month until it sees a sustained upturn in the weak jobs market. To underscore its resolve, the Fed said it would pursue easy policy for a considerable period even after the economy strengthens.

The purchases are set to begin today, and are expected to add up to $23 billion for the remainder of September. The central bank also extended its guarantee of low borrowing costs into mid-2015 from its previous pledge of late 2014.

After the decision, Bernanke told reporters that the employment situation remains a “grave concern.” While the economy appears to recovering modestly, growth is not fast enough to make significant progress reducing the unemployment rate. As such, the US central bank hopes that by buying mortgage-linked debt, mortgage rates will decline to help a still subdued real estate sector.

Meanwhile, the Fed also released fresh forecasts for the US economy. With a third round of asset purchases expected to ramp up, the FOMC projects the economy to expand by 2.5 percent to 3 percent in 2013, better than its 2.2 percent to 2.8 percent forecast last June. For 2014, GDP growth is estimated to range from 3 percent to 3.8 percent versus its previous forecast of 3 percent to 3.5 percent.

Meanwhile, American consumers are deemed to power the US economy in its recovery. The Commerce Department is awaited to report that both the Core and headline Retail Sales likely rose by 0.7 percent in August, to post a strong follow-up to the 0.8 percent increase in July. The report signifies the resilience of consumer spending, considering stagnant wages and bleak job prospects. Nevertheless, strong spending in the first two months of the third quarter portends favorably for GDP growth.

Outlook for retail spending is also believed to continue improving as a gauge of American consumer confidence is estimated to hold near a three-month high this month. The Preliminary University of Michigan Consumer Sentiment is seen to come in at 74.1 points, just below the 74.3-point reading in the previous month.

With favorable prospects for the US economy considering the QE3 by the Fed and consumers continuing to spend, enhanced risk appetites are presumed to weigh on the Greenback. As such, a long position is advised for the AUD/USD today.

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Written By: Aviv N. Shapiro