The Dollar’s Taper Pace
Friday’s payrolls release, while soft, was probably just enough to keep tapering on track. Non-financial risk aspects aside, we expect the dollar to maintain its current trajectory heading into the Fed. Markets are now looking at just how much tapering is ‘priced in’ to gauge the potential dollar reaction. We acknowledge that for now it is easier to allow the currency to respond to fixed income pricing, and this will remain the case for some time. However, as tapering picks up there will be a direct transmission into currencies as markets begin to notice stronger liquidity preference for the dollar. Markets may be currently fixated on the absolute size of tapering, but we note that the relative numbers matter just as much.
Read the full report: UBS