Week In FX Americas - Bernanke Tapers On His Final FOMC

Includes: UDN, UUP
by: Dean Popplewell

By Alfonso Esparza

One of the biggest questions in the forex market was answered this week. It was never a will the Fed taper? As Bernanke assured the markets the Federal Reserve would. The unanswered question was: When? This week Bernanke surprised some by announcing the start of the taper. It was not a total shock because the move had been announced in May, only the schedule or the first taper amount and timeline was missing.

Now at what the final FOMC led by Bernanke a $10 billion taper. There will be $5 billion less in the long-term Treasury bonds budget and another $5 billion cut to the mortgage-backed securities monthly amount. The fact that next year the Federal Reserve’s FOMC committee will be filled with more hawkish economies could have played a part. Bernanke wanted to get the ball rolling before that happens to ease the transition for Janet Yellen. Yellen is due to be appointed in the beginning of January.

The Fed is trying to reiterate that “tapering is not tightening” as they still see rates at lower levels with only 2 members forecasting a rate hike in 2014. The majority of the Committee expects 2015 to be a more appropriate time for a rate raise.

The vote to taper was supported by 9 members out of 12. Boston Fed President dissented citing a still too high jobless rate and lower than targeted inflation. He did not approve of the taper as he thinks its premature until economic growth can be shown to be sustainable.

The EUR/USD remains under pressure on Friday, as the pair trades in the low–1.36 range. The high-flying euro has hit some turbulence, coughing up about 150 points since Wednesday’s dramatic Fed announcement to taper QE. US releases were a major disappointment, as Unemployment Claims rose for the second consecutive week. As well, Existing Home Sales and the Philly Manufacturing Index both fell short of their estimates. On Friday, German numbers were mixed. PPI posted another decline, but German Consumer Climate jumped to its highest levels in six years. In another US positive data point the GDP for the third quarter of 2013 was revised upward to 4.1%