Week in FX Asia – Asian Currencies Feel Yellen Effect

The Janet Yellen era at the United States Federal Reserve has officially begun. Her first Federal Open Market Committee was memorable. The actual FOMC statement was what the market has come to expect from central bank communication: Optimistic, but cautious. The expected $10 billion added taper continues the trend set by Bernanke in the December FOMC. What took markets by surprise was Mrs Yellen first post FOMC press conference.

The Fed chair said that the quantitative easing program would could end by fall if the current pace continues to be constant and rates could be higher six months after that. Nowhere in the FOMC statement did that timeline appear. In fact the actual release foresaw low rates for “considerable time”. Yellen surprised by giving a closer date that most analyst expected given other Fed members previous statements.

What begun last summer with another apparent off script comment from Ben Bernanke regarding tapering seems to be moving forward. The era of record low rates around the world seems to be over. Emerging markets were particularly hard-hit by the tapering announcement. This time around the USD has made big gains against all currencies across the board.

The Japanese yen was feeling the pressure of higher demand for the currency which made it strengthen against the USD. This is not beneficial for Prime Minister Abe’s plans to stimulate Japan’s economic growth. A strong yen would make it harder to turn around an export led economy. Following Yellen’s comments the JPY broke through the 102 line which should give a breather to the Bank of Japan. Governor Kuroda is set to speak in London on Saturday and some of his comments will probably discuss the current state of the currency.

The CNY is under pressure from global growth expectations. Major investment banks have downgraded their forecasts of Chinese GDP. Rumours that have started to solidify around a real estate developer bankruptcy has capped the stock markets. The extra 1% added to the CNY trading band to expand it to 2% has helped the currency have extra flexibility that traders have used to reduced their holdings.

The INR dropped a two month low after the Fed hinted rates could go higher as soon as next spring but quickly recovered and is now trading above the week’s open. Global macroeconomic trends have put pressure on the Indian economy as there are still question marks around the political landscape as the country gears up for elections. The INR has showed resilience after last summer’s tapering announcement and has managed to reassure investors as one of the more solid markets in the BRIC and other emerging markets.

WEEK AHEAD

* GBP Consumer Price Index
* USD Durable Goods Orders
* JPY National Consumer Price Index
* EUR German Consumer Price Index
* GBP UK Gross Domestic Product

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.

Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza