Yesterday, we posted a review of what Operation Twist is.
The bulk of the pre-FOMC talk surrounds Operation Twist and I estimate an 80% probability of some type of Twist.
A Passive Twist would involve re-investing maturing securities in long-dated bonds. Maturities in the next 12 months total about $250B, so using those would be the minimum.
An Active Twist would involve selling short-dated maturities and investing more aggressively in the long end. This could push the total to $400B or higher.
The fx reaction will be minimal so long as the Twist for the next 12 months totals $200B-$400B. If it’s less than $200B or no amount is announced, the USD will rally as stocks sell off due to risk aversion. If more than $400B, stocks will rally and the buck will sell off on risk appetite and the feeling that QE3 has drawn closer.
Of course, there are many moving parts and the unveiling of a Passive Twist that sounds like it could morph into an active one, will be neutral.
I don’t think the bulk of the FX reaction will be tied to Twist, partly because it’s priced in. Other factors like IOER, QE3, the assessment and language will be more important.
