Brief Summary:
- All eyes are on the U.S. Federal Open Market Committee that will meet for their September monetary policy meeting from 4am tomorrow morning. This has long been viewed as the meeting where the committee will begin tapering of its quantitative easing program by reducing the amount of bonds it purchases each month. Market consensus at this stage appears to be for monthly purchases to be reduced to 70 billion from 85 billion coupled with a dovish forward guidance.
- Yesterday the Reserve Bank of Australia released the minutes from its 3rd of September monetary policy meeting. The rhetoric was about as neutral as possible, specifically stating, “Members agreed that the Bank should again neither close off the possibility of reducing rates further nor signal an imminent intention to reduce them.” Last Thursday, Australian employment data was released for August showing 10,800 jobs were lost in the month and the Unemployment Rate held at 5.8%. The AUD lost about a cent against the USD in the trading day though losses were temporary as Fed developments took hold in the new week.
The Septaper is upon us
The U.S. Federal Open Market Committee (FOMC) is the focal point of financial markets worldwide this week. The long awaited September FOMC monetary policy meeting will be held tonight with the official decision at 04:00 AEST and press conference beginning at 04:30.
More important than the decision itself, the forward guidance issued for further tapering will be closely watched. It is not known how the forward guidance will be delivered, but tradable clues are usually revealed in the press conference. This makes for a volatile hour or so of trading as the market interprets and analyses the rhetoric.
The committee have stated that they plan to have finished tapering by the middle of next year, forecasting the Unemployment Rate to be in the vicinity of 7.0%. This roughly implies tapering of 10 billion at each meeting until the middle of next year. The latest reading of Unemployment was 7.3% from 8.1% a year ago, a trajectory that suggests steeper tapering than this; however. Another consideration is the inflation target which was this week reaffirmed at 1.6% for the year, below the 2.0% target. In recent weeks, the market has priced a less severe taper in September as most U.S. data read softly; though both hawkish and dovish surprises are possible. Market consensus is for the committee to scale back its bond purchase program to 70 billion per month from 85 billion. A hawkish surprise would be any scale back in excess of this, say to 65 billion. Conversely, a dovish surprise would be a small taper of 10 billion or less. The market will also analyse hawkish or dovish comments in the forward guidance. Hawkish rhetoric include that which brings forward the planned end of tapering. Dovish rhetoric to watch for is a possible lowering target Unemployment Rate in recognition of weak underlying labour market conditions, or, comments suggesting extending stimulus in order to reach the inflation target. In a hawkish case, we can expect the USD to strengthen, reversing the AUD rally. A dovish case may see the AUD extend its recent rally, though its gains suggest the market already leaning on the dovish side of expectations.
Another driver of this week’s USD weakness came in the withdrawal of Lawrence Summers from the upcoming Fed Chairman nomination expected sometime in “fall”. Summers was viewed as more hawkish, preferring tighter monetary policy, whereas, next in line Janet Yellen is at the opposite end of the scale. This has led the market to price in the possibility of more monetary stimulus for longer in future Fed policy. Ben Bernanke’s term ends on the 31st of January 2014.