Wednesday's Federal Open Market Committee outing saw the US central bank take a slightly more hawkish stance than was expected. Equities took only a minimal hit but the long-term impact on emerging markets could prove far more severe,
Article / 16 December 2013 at 9:15 GMT

Focus firmly on Bernanke’s penultimate FOMC meeting Wednesday

Head of FX Strategy / Saxo Bank

By John Hardy

USDJPY tumbled further from the new highs of last week on a strong Tankan survey, with most categories of the survey — manufacturing and services and for large and small enterprise — jumping beyond expectations and to the highest levels since 2006. I suggested on Friday that the timing of the USDJPY break to new highs was awkward as it came before we get this week’s most important news, the Fed’s latest monetary policy statement. It’s usually best to wait until after an anticipated event risk before taking a position on what will happen next even if for every rule, there is always the exception.

All eyes are on the US Fed for this Wednesday's FOMC meeting. Photo:


There was a false break last week and subsequent reversal — note the local small-scale trendline in play. Support looks like 101.50-102.50, but if we see a no-taper and no hint at January taper on Wednesday, the consolidation could turn into a rout. Stay tuned as well for the Bank of Japan meeting on Friday.



Source: Saxo Bank

It’s all about the Federal Open Market Committee meeting this week, as we all have to figure out what is in the price for the major USD crosses and asset markets. There is some obvious anticipation that a taper move is coming, but what does the Fed actually say and how fully priced are we? I think we’re maybe fifty-fifty on whether the Fed moves at this meeting or at the following meeting, with the market leaning a bit more towards January than I am (and some still not expecting anything until March).

If a tapering move is announced, it will likely be modest with a clearly indicated likely time frame for further reductions, as well the Fed bending over backwards to emphasise that rates are going nowhere any time soon. The latter is something the market already assumes anyway, unlike the summer episode when US 2-year rates, for example, blew out rapidly after outgoing Fed chairman Ben Bernanke’s May hint at eventual tapering. From late May to early September (just before the Fed surprised by not tapering), the 2-year US benchmark yield went from about 25 basis points to over 50 basis points. After the non-taper, the rate fell to 27 basis points by late November, and has since only risen to around 33 basis points.

I would expect for an actual tapering move to mean USD strengthening — no surprise there — but I still want to see the other side of January 1 before believing what the market is telling us. It feels like some of the action, particularly in EURUSD this December, has been about other mysterious large scale flows in the market that don’t fit particularly well with the overall narrative.

This could be anything from European exporters hedging to the anticipation of the asset quality review and bank stress tests in the EU early next year. The other side of January 1 could mean a pivot point. If the Fed entirely fails to taper or strongly hints at a January taper. I suspect we could see a brutal further weakening in the USD into year-end.

Looking ahead

Watch for the Germany and Eurozone-wide flash December manufacturing and services PMI’s out this morning after a horrible set of French numbers, which are certainly headed the wrong way. The full data set will tell us whether this is Europe's problem or whether France is merely more clearly becoming the sick man of Europe.

Besides the obvious looming FOMC meeting on Wednesday, we have a Riksbank meeting up tomorrow. The market is split on whether the Riksbank may cut rates by 25 basis points, so there will be room for a surprise in both directions. I suspect it will cut tomorrow after the ECB’s recent cut and after the recent very low Swedish inflation and industrial production figures. This meeting will be the critical test for EURSEK and whether the 9.00 break holds.

The CPI data tomorrow will be an interesting “set-up” data point for the Wednesday FOMC decision, as very low inflation is perhaps the key phenomenon potentially holding the Fed back from a tapering move. Look out for ECB President Mario Draghi speaking to the European parliament this afternoon.

Economic data highlights

  • New Zealand Q4 Westpac Consumer Confidence out at 120.1 vs. 115.4 in Q3
  • New Zealand Nov. Performance of Services Index out at 56.3 vs. 57.7 in Oct.
  • Japan Q4 Tankan Large Manufacturing Index out at 16 vs. 15 expected and 12 in Q3
  • Japan Q4 Tankan Large Non-manufacturing Index out at 20 vs. 16 expected and 14 in Q3
  • China Dec. HSBC/Markit Flash Manufacturing PMI out at 50.5 vs. 50.9 expected and 50.8 in Nov.
  • France Dec. Preliminary Manufacturing PMI out at 47.1 vs. 49.0 expected and vs. 48.4 in Nov.
  • France Dec. Preliminary Services PMI out at 47.4 vs. 48.7 expected and vs. 48.0 in Nov.

Upcoming economic calendar highlights (all times GMT)

  • German Dec. Preliminary Manufacturing/Services PMI (0830)
  • Eurozone Dec. Preliminary Manufacturing/Services PMI (0900)
  • Eurozone Oct. Trade Balance (1000)
  • US Dec. Empire Manufacturing (1330)
  • US Dec. Markit Preliminary US PMI (1358)
  • Eurozone ECB President Draghi to speak (1400)
  • US Oct. Total Net TIC Flows (1400)
  • US Nov. Industrial Production and Capacity Utilization (1415)
  • Australia RBA to release meeting minutes (0030)



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