Major Overnight Headlines
• Conditions stable in London; European equities up as developing market currency losses fail to accelerate
• BoE’s Weale says sees “circumstances” in which it would be sensible” to engage in more QE, Telegraph
• PMIs mixed and point to uneven Q3 growth; France worse than expected and Germany beats expectations
There was a modest albeit very subtle relief rally in developing market FX and European equities in the London morning and this capped weakness in the Scandianvian and Antipodean spaces versus the USD, but the key question is “why was this the case?” We think the overall stability so far today is the final input in confirming that timing and pace of QE withdrawal are the only two pieces left to fill in the “tapering puzzle”. There was nothing in the minutes to answer the timing and pace questions, and so there was nothing for London to react to.
The July FOMC minutes have certainly confirmed a degree of consensus in terms of intent, yet according to the primary Bloomberg headline last evening, at the July meeting there was only “broad support for the Bernanke tapering timeline”, but not much else. We suspect therefore that forthcoming four weeks or so leading into the September FOMC rate decision are quite likely to be the most data-dependent of all for rates and FX, starting with claims today. Expectations based on the data that the Fed will need to move more abruptly on the first round of QE withdrawal will drive “risk-off”, and expectations that the Fed will either start later than September and/or with a particularly small amount of reduction should drive “risk-on”. Look to rates first, developing market currencies and asset prices second, and then to the G-10 space third.
Additionally, the coming few weeks will, we think, be very important for setting the directional trend for the JPY for the balance of the year. As the Fed tapers is asset purchases, “dovish” rhetoric from the BoJ which aligns itself with any downside misses in CPI and growth data will find that it has a nice window to force the JPY to weaken through. All things being equal, the line of JPY weakness should be a bit less encumbered as the Fed sets itself up wind down its asset purchases by next summer.
Read the full report: FX Daily
BMO