End Of Summers Cools The Dollar

This market is just about polled out! Some polls are worth the paper they are written on, and others not so much. The numbers of surveys that have been conducted, specifically for the week that’s in it, are at least worth a quick peek. The bigger financial news sites have found some interesting market attitudes towards Bernanke and company – their views on ‘to taper or not,’ outlooks on ‘lite’ taper, and even interest and employment rates make for an noteworthy read ahead of Wednesday’s FOMC meet decision.

All surveys have a recommended margin of error, but certainly none not wide enough for a surprise Lawrence Summers exit. In truth, despite being the bookies favorite for Fed head, he probably would have had a harder time getting confirmed because of next year’s mid-term elections and because of certain personal and fairly public feelings. It’s probably a safe bet to assume that a lot of Democrats would prefer a dovish Fed through 2014.

Considering the poor data that the US has been exposed too of late some of these polls go a long way in explaining the recent softening of the USD and the reason for the strong bids that the US fixed income dealers encountered at last week’s auctions. A large number of market participants, or +16% of investors polled, appear to doubt the idea instigated by the Fed back in May that they will be done buying bonds by mid of next year. This is very much in strong contrast to the “lower for longer” attitude by both the ECB and BoE.

It’s no secret that Draghi and Carney have been using more of their own valuable time to talk “down” hike expectations by the market. So, it’s not a surprise that both the EUR and GBP have been solid of late. Only +38% of those polled expect Bernanke and company to decide at this weeks two-day FOMC meet to start lowering its monthly bond purchases. Another +35% sees such a step in either next month or December and less than one-in-four say a decision on tapering will be delayed until next-year. Just over +51% see the Fed’s first rate increase coming in 2015, with one-in-three expecting it in the first-half of the year. Only three-in-ten are forecasting a US rate rise next year.

There is the possibility of the Fed again downgrading its growth expectations. That is probably the strongest reason for current investors’ skepticism that the Fed will taper “quickly or aggressively.” There are even market whispers that US policy makers are considering something even more radical – such as lowering the unemployment threshold from its current +6.5%. This outcome would obviously soften the impact of tapering and would probably be justified by the current low US “participation rate.”

Capital Markets have been agitated for a long time by the uncertainty of where the Fed will go next with its monetary policy. When all is said and done, this market is probably not expecting much from the FOMC meet this week. The polls do not expect the Fed to stick to an aggressive tapering timeline. Given the current positions (prior to Summers exit) the market threat now would be that Ben and company are either “more positive on growth than expected” or we should be “expecting a relatively rapid pace of tapering on a tight schedule.” Both scenarios would give the deflated USD a boost and probably would send US 10-year Treasury’s back to +3% and beyond rapidly. The market seems to have priced in a “token or lite” taper of +$10b. But, there is an outside chance that the idea of a possibility of a reduction in the unemployment rate threshold (+6.5%) could also be on the cards.

The Fed is not the only Central Bank in the spotlight this week. Elsewhere the Reserve Bank of Australia and the Bank of England will publish minutes of meetings held earlier this month. The Reserve Bank of India announces its first decision under its new governor Raghuram Rajan. The UK gets to release its consumer and producer price indices, finishing off with the release of its retail sales. Stronger data obviously reflects an improving economy – this will make governor Carney’s “low interest for longer” that tad more difficult in achieving.

With Larry Summers out of the picture Janet Yellen becomes the odds on favorite (again) to succeed Ben – but odds were wrong before. Just two months ago Yellen was the bookies, Wall Street and academic favorite, but as reporting showed, the president favored Mr. Summers and naturally her chances of taking the top spot plummeted. More “polls” indicated that L. Summers had a +80% chance of getting the nomination. Without him as a contender has blown the race wide open for more surprises. The dollar on the other hand is expected to remain subdued until at least the FOMC decision – now that is not much of a surprise!

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Dean Popplewell, Director of Currency Analysis and Research @ OANDA MarketPulseFX

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