Week In FX Americas – It’s Still About The Fed in 2014

Central banks’ monetary policies are expected to remain highly simulative and somewhat innovative in 2014. The Fed (soon-to-be under new leadership) will provide stronger forward guidance and it will reduce its monthly asset-purchase program. Other central banks will have to adapt to any move the Fed makes. With global rates remaining “lower for longer”, it would suggest more market opportunities in other asset classes like equities. However, investors have yet to experience how a Fed taper will play out.

The Fed requires the “terrible twos” to be constant before tapering will be seriously considered:

1. U.S. growth more than +2%;
2. Inflation greater than +2%;
3. Nonfarm payrolls to print employment numbers in the +200k’s.

The forex market is under the impression that any notion of Fed tapering is data-dependent. This may not be wholly accurate. Reading between the “transparent” lines, it’s been suggested that U.S. policymakers are increasingly keen to pullback on liquidity and reduce the Fed’s monthly bond-buying program, with or without any noticeable improvement on the jobs front. If one digs deeper, it becomes obvious that the Fed is already discussing “concerns about the efficacy or costs of future asset purchases.” The main hurdle for the Fed to overcome has to do with communicating its intentions concisely. The steepness of the U.S. Treasury yield curve suggests that it so far has succeeded in getting its message across clearly to investors – front rates remain low, while the long-end has backed up. The Fed is required to partake in a fine balancing act – too much tightening too fast could cause an unsightly global domino effect.

Please read more in Global Currencies Forecast: 2014

WEEK AHEAD

* GBP Consumer Price Index
* EUR German ZEW Survey (Economic Sentiment)
* EUR Euro-Zone Consumer Price Index
* USD Consumer Price Index
* USD Federal Reserve FOMC Meeting Begins
* USD Federal Open Market Committee Rate Decision
* USD Fed’s Bernanke Holds Press Conference
* NZD Gross Domestic Product
* CAD Consumer Price Index

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell