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FX Primus Ltd.

May 28, 2013 02:59 ET

FXPRIMUS Market Brief of The Week-QE Taper Trial Run Last Week?

U.S. to Exit Quantitative Easing By the End of The Year?

SINGAPORE, SINGAPORE--(Marketwired - May 28, 2013) - In the FXPRIMUS Market Brief of The Week for 27 May, leading global foreign exchange trader, educator and author Mario Sant Singh, looks at safe haven currencies, Euro outperformance, profit-taking, and a possible U.S. QE exit process by then end of the year.

Key Events to Focus On This Week

  • U.S. Consumer Confidence
  • Bank of Japan Governor Haruhiko Kuroda speaks
  • U.S. Pending Home Sales
  • China's Official Manufacturing Purchasing Managers' Index (PMI)
  • Japan's Consumer Price Index (CPI)

Key Events Last Week

  • Federal Open Market Committee (FOMC) hints "QE exit" if U.S. economy continues recovering in upcoming month
  • HSBC Flash China Manufacturing PMI below 50 at 49.6
  • Euro Zone's PMIs edged higher, German manufacturing PMI hit 49 from previous 48.1
  • German Ifo boosts earlier expectation, climbing to 105.7 from previous 104.4

Economic Insights

Increasing volatilities present "risk off picture" in currency market last week

Traditional "safe haven" currencies such as the USD, JPY and CHF outperformed other currencies (or "risk currencies") last week, while the Euro's outperformance was due to regional better-than-expected economic data, such as Purchasing Managers' Indexes (PMI) and the German Ifo. U.S. equities merely had a "knee jerk" reaction after the Federal Open Market Committee (FOMC) meeting as price recovery was seen later. However, it seemed that large "bubbles" were squeezed out in the Japanese equities market.

Click here to view image. (Source: Bloomberg, FXPRIMUS)

The good thing for "rational investors" so far was that we haven't seen real fundamentals change, such as Abenomics, the U.S. outperformance, the subdued Euro Area and Chinese slowdown. More importantly, besides China and Japan, the other three large economies' policies moving forward will be pledged to economic data, according to the European Central Bank (ECB) and Federal Reserve (Fed). In this case, I view the "risk assets" sell off last week as mainly profit taking, instead of fresh position setup.

QE will unlikely be tapered before September

The market might have been too sensitive last week, even with a reliable benchmark when the Fed realized "QE tapering".

With the market's hot debate last week on whether or when the Fed should withdrawal its stimulus, I viewed it as a "reliable benchmark."

In many circumstances, the Fed made it clear that the duration of its USD85 billion purchasing will largely depend on the labor market, inflation and growth. We have yet to see the current recovery level trigger an "exit," although the Fed hasn't expressed a target to look for besides the unemployment rate at 6.5%.

Click here to view image. (Source: Bloomberg)

I think that the QE exit threshold for the U.S. Non-Farm Payroll (NFP) would be a sustainable 200k jobs added every month and an unemployment rate slump to at least below 7%. Hence, I do not see a slowing pace toward the end of the year, or at least September, because the current labor market recovery should still be well below the Fed's expectation.

Thus, the engine to smooth the QE exit process is setup at this stage. This means the U.S. economy should recover on its own without stimulus. The truth might hurt as resilient rebounds of U.S. data in 2013 could largely be from the monthly purchases, since growth engines are still missing amid the slowing global recovery.

Investment Insights

Strategy for JPY is "sell the peak" at the moment

It was an ugly period for the Japanese financial market last week when the Nikkei sold off and the Yen surged, which mainly addressed worries on the Fed's QE withdrawal instead of instabilities from the Japanese local market.
Net foreign equity purchases in Japan YTD counts at around USD80 billion, compared to just USD11.3 billion on a YoY basis. Hence, large selling off positions could only serve as a warning to policy makers to excise caution if monetary policy needs amending.

Click here to view image. (Source: Bloomberg)

Yesterday, Bank of Japan Governor Haruhiko Kuroda hinted that the current financial condition in Japan still trades within rationale since there are no signs of excessively bullish expectation. He also indicated that rates could rise between one and three percentage points in an improving economy without causing financial instability and would be manageable. His view clearly suggested bullish moves in the Japanese financial market without worries on excessive liquidities in the market.

On the technical side, the USDJPY might be supported at 100.80 in the near term, but the Consumer Price Index (CPI) event risk couldn't be ruled out. The coming resistance stands at around 102.30.

Click here to view image


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