FX Primus Ltd.

FX Primus Ltd.

September 19, 2013 02:55 ET

FXPRIMUS Market Brief of the Week: "One Horse Race" Game Now

SINGAPORE, SINGAPORE--(Marketwired - Sept. 19, 2013) - In FXPRIMUS' Market Brief of The Week for 16 September, the brokerage firm's Senior Economist, Jimmy Zhu, looks at U.S. quantitative easing tapering and currency movements.

Economic Insights

Lawrence Summers quits, hint for tapering this week?

Lawrence Summers decided to quit the race for the Fed Chairman position yesterday. He was considered the most hawkish among candidates. Global equities and most Dollar-counterparties resumed their gain from last week.

There is only one question in the next two days before the Federal Open Market Committee (FOMC) meeting: Is this a separated event or does it provide some hints for the upcoming FOMC?

No matter what the real story is, or the political issue, we were perfectly informed that the current leadership and direction of the Fed will continue, and it is considered more as a "pro-growth" approach. Asian stocks resumed their optimistic mode, with bulls pointing to continued signs of a recovering U.S. economy, Euro Zone and China.

All G10 currencies outperformed the Greenback last week, mostly due to Syria agreeing to hand over chemical weapons, driving demand lower on safe havens. The flat move for the U.S. 10-year yield with a USD sell-off, which used to move consistently, explained the reasons for increasing "risk" position holdings.

The NZD outperformed the most last week on shining Chinese data and a less dovish statement from the Reserve Bank of New Zealand (RBNZ), while the Aussie Dollar outperformed less because of the downbeat labor report. European currencies stayed quiet last week with no available events.

To view the first image associated with this press release, please visit the following link: http://www.askmariosingh.com/wp-content/uploads/2013/09/Major-currencies-performance-vs.-USD-last-week1.png (Source: Bloomberg)

To view the second image associated with this press release, please visit the following link: http://www.askmariosingh.com/wp-content/uploads/2013/09/U.S.-10-year-yield-Dollar-index.png (Source: Bloomberg)

Associated risks if Federal Reserve (Fed) decides to reduce stimulus pace

The long-awaited week finally arrives and investors will pay full attention to the upcoming FOMC meeting in two days, whether they are Equities, Forex or Rates traders. The Fed does have some options at this moment; the final outcome may not just be "yes or no" since many conditions and clauses may be attached. Based on the current consensus, the chance is a close 50/50; both arguments make sense at this moment. If we look at recent fading economic releases, especially on jobs creation and the subdued inflation, it is natural to predict that the Fed will likely hold its current pace.

However, if we look at current various economic conditions, it does look better than the months before QE3 (Quantitative Easing) was implemented. Standing in a neutral position and pondering the Fed's message in June that it "may taper later in the year," can we say that the Fed was not ready to taper at that point? Theoretically speaking, the Fed shouldn't taper this week with many fading economic releases after that. Most importantly, it contradicts its forward guidance.

The central bank is definitely concerned about the recent higher long-term borrowing cost and mortgage rates. With that said, many "languages" will be attached if they decide to taper a small portion of the purchases, and I believe the amount will be capped at USD20 billion for the first taper. Even if that happens, the Fed will very likely reiterate that purchases could be adjusted higher once outlook dims.

The other interesting thing will be the unemployment rate target. The Fed could consider rates normalization once unemployment drops to 6.5%, which is only 0.8% from today's level. The Fed only expected that to happen in the middle of 2015, at least according to its latest prediction. However the 35-year low participation rate alarmed us that more of the population left the labor force. Thus, we can't rule out the possibility that the Fed will lower the unemployment rate's target in the future, though it will unlikely happen this week.

To view the third image associated with this press release, please visit the following link: http://www.askmariosingh.com/wp-content/uploads/2013/09/Consensus-on-the-Pace-of-Fed-T-Bills-Purchase-this-week.png (Source: Bloomberg)

To view the fourth image associated with this press release, please visit the following link:http://www.askmariosingh.com/wp-content/uploads/2013/09/U.S.-Treasuries-Yield-Curve-less-steepening.png (Source: Bloomberg)


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