Don’t Misread Equities
One of the biggest talking points in the tapering story is how equity markets will respond to the marginal decline in liquidity provision. Views differ on this matter, and if the dollar is, as we expect, on the way to growth status then greenback longs (especially in USDJPY) will need to be more sensitive to any post-tapering reaction which hurts equities more than it ‘helps’ US yields. Even without an early Fed move in the mix, investors may already be cautious about the potential for a correction and the cross-border flow implications. Heading into year-end, adjustment risks are high, but the FX market should not over-interpret the signals.
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