FX Primus Ltd.

FX Primus Ltd.

December 17, 2013 01:03 ET

FXPRIMUS Market Brief of the Week: Federal Reserve (Fed) Will Likely Taper This Week

SINGAPORE, SINGAPORE--(Marketwired - Dec. 17, 2013) - In FXPRIMUS' Market Brief of The Week for 16 December, the brokerage firm's Senior Economist, Jimmy Zhu, looks at the probability of tapering based on current market concerns.

Economic Insights

Tapering is highly likely

With uncertainties removed, economic data reaching the Fed's forecast provides less leeway to delay tapering. It is unnecessary for the Fed to delay the tapering into next year.

Data and market reaction - Since September, the Federal Open Market Committee's (FOMC) statement was "In judging when to moderate the pace of asset purchases…" - Data focus! With the latest 4-month Non-Farm Payroll (NFP) growth at an average of 204K, together with reaching a budget deal last week, it makes the Fed's tapering job easier. Treasury yield and the Greenback were capped well, which means there is less worry on any "miscommunication" between the Fed and Wall Street.

Credibility concern - The Fed will need a lot of verbal communication in upcoming years when it exercises its "forward guidance." Ben Bernanke mentioned in May that "tapering assets could arrive later in the year and we might consider ceasing Quantitative Easing (QE) if unemployment hits 7%." So tapering a small amount would still be considered very dovish because of it happening in the last month of the year, and the last unemployment rate reading in 2013 was 7%. If they don't do it, their future credibility might be tested.

"Moderate Dollar" gain will happen next year, as Dollar's recent weakness was largely due to "exact tapering timing uncertainty" besides expectation on forward guidance strengthening

Policy divergence is the main driver lifting the Greenback next year. In order to transit monetary policy smoothly, there could be another 2-3 rounds of tapering next year. Meanwhile, most of the major central banks remain with an "ultra accommodative monetary policy," such as the European Central Bank (ECB), Reserve Bank of Australia (RBA) and Bank of Japan (BoJ). Looking at the Dollar index this year, the current level slightly above 80 definitely has not priced-in "a few tapering rounds."

Tapering is a good recognition of economic improvement, helping boost the confidence on the main street. It is a positive sign for the Dollar if U.S. growth accelerates.

Based on Real Trade Weighted U.S. Dollar Index: Other Important Trading Partners - TWEXOPA (effective exchange rate), the current level around 93.2 is well below the 5-year average at 98.4. When ultra monetary policy is slowly removed, "USD bearish" should be gradually priced out.

The Aussie failed to appreciate in the past two months when Chinese economic data rebounded, with fewer bets on the Fed's tapering this year and "mute action" from the RBA. What catalysts are left for the Aussie to appreciate? They are probably very invisible. It depreciated against the rest of the G10 currencies by 3.63% on average and was down 3.68% against the U.S. Dollar in the past two months.

China's Purchasing Managers' Index (PMI) stabilized above 51.0 for a fourth consecutive month, suggesting that further activity expansion will be very limited, which shouldn't be treated as positive news for the Aussie. The HSBC Flash China Manufacturing PMI data was released yesterday as well.

In Australia, a decade high unemployment rate and subdued Gross Domestic Product (GDP) growth rate may prompt the RBA to exercise one more rate cut in 1H 2014.

I also noticed that the AUDUSD is one of the most sensitive currency pairs to the "tapering reaction" by comparing its price to the U.S. 10-year yield. Given that tapering is near, the downside risk for the AUDUSD is heavy.

To view a graph associated with this release, please visit the following link: http://media3.marketwire.com/docs/1217fx_image.jpg

Top news this week

Germany's Manufacturing PMI

I expect figures to come in at 52.8

New Zealand's GDP QoQ

I expect figures to come in at 0.9%


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