In a day rife with revisions, the Fed also must revise its FOMC statement, indicating the conditional intention to taper purchases, specifically this year.
Currencies ignore the downward revision in US Q1 GDP (from 1.8 to 1.1%) and focus on the stronger than expected 1.7% rise in Q2 (exp 1.0%) as well as the bigger than expected 2.8% rise in personal consumption (exp 2.6%). Revisions from 6 months ago (GDP) are less likely to move markets than are revisions from 2 months ago (employment data).
The 200K rise in July ADP should add to the host of reasons why the Fed must signal its readiness to taper asset purchases this year—and clearly distinguishes bond purchases from raising rates.
6 reasons the Fed will/must taper in September
- Record highs in US equities
- 6-year highs in US consumer sentiment/consumer confidence
- Longest streak of +100K NFP in 12 years
- 6-year lows in unemployment rate
- Bernanke is highly unlikely to leave this year depart without a tweek in the asset purchasing program. Failing to do so would label him as Greenspan Bubble Master #2, starting the QE bubble without a plan to end it or even scaling it down.
Cannot afford a new round of USD weakness at expense of strengthening currencies of weaker economies.
With these dynamics at play, the Fed ought to scale down monthly asset purchases, by at least $10 bn this year via a mixture of treasuries and MBS (even if it is symbolic) to account for the change in fundamentals over the last 6 months (and not the last 6 weeks). Failure to do so would be a serious lapse of credibility to Bernanke and doves at the Fed.
In September, the Fed could either announce its intention to taper later in the year (December), or announce and begin the taper on the week following the September meeting. In order to avoid further market confusion and volatility, the Fed ought to add a phrase to today’s FOMC statement, signalling a readiness or consideration to scale down asset purchases in autumn (September or December – depending on data). Failure to do so would increase chances of sudden spikes in volatility in autumn, brought about by rapid jumps in yields and considerable declines in equities. The only way to avoid these events is by preparing the market with an extra phrase today.
RBA: Aussie is for Sale
RBA Governor Stevens’ Tuesday comments stating there is scope for more easing after last week’s CPI data and that Aussie’s decline does not threaten the inflation outlook, bolstered market confidence to sell the rebounds in the Aussie. Stevens’ comments follow 2 consecutive monthly net losses in Aussie jobs report and the 6.9% plunge in building approvals. Markets are now pricing a 25-bp cut next week in the RBA’s cash rate. Any bounce in the Aussie emerging from Fed dovishness or PBOC’s liquidity injection is seen as a sell. AUDUSD still expected at 0.8820s, while AUDJPY is seen testing 85.50, followed by 81.00.
Possible plays on the Aussie, are bearishness in AUDJPY, partly hedged by favouring USDJPY. Similarly, renewed bearishness in EURUSD ahead of the inevitable taper may be countered with favouring EURAUD. Shorting euro’s rallies against the USD has proven frustrating for many dollar bulls, therefore, siding with the euro against the Aussie and GBP continues to prove beneficial ahead of more policy action from the RBA (rate cuts) and BoE (forward guidance).