There is no doubt that this week's hot issue is second round of the Fed's tapering. Although unsatisfactory NFP evoked some question on whether they are going to play the tapering game again, but some officials have stated their optimism that sooner or later tapering will continue on. Currently, there is a rising positive sentiment toward USD with negative impact already flooding on the other currencies.
There is no doubt that this week's hot issue is the second round of the Fed's tapering. Although unsatisfactory NFP evoked some question on whether they are going to play the tapering game again, but some officials have stated their optimism that sooner or later tapering will continue on. Currently, the market mostly in waiting for the upcoming tapering, as if it is most likely will happen. It could be seen by the rising positive sentiment toward USD and its negative impact on the other currencies.
No Matter What, Tapering Will Go On
Emerging markets are the ones in the most precarious position here. Regional instability plus speculation on tapering toppled emerging markets currencies, including Indonesian Rupiah, and is predicted to go downward if FOMC decide on tapering again. IDR weakened 0.55% to 12,177 throughout the last week. It is true that in Indonesia, there's no massive political demonstration, but the widespread natural disasters, especially floods on vital transportation lanes, have made the Rupiah less and less attractive. This generates worries on whether what happened in 97/98 will be repeated. Moreover, China and Japan as the two biggest economies in the area are not in their prime.
Reuters this morning (27/1) explicitly stated that the Fed will focus on what is best for the US, no matter what happened in emerging countries. Charles Plosser of The Fed Philadelphia said that, if the monetary policy that we have is the best for the U.S. economy, then that's the policy that we ought to pursue because a strong U.S. economy would be good for most of the rest of the world.. Such attitude, of course, made speculation more rife, and hurts other countries' exchange rates.
Signal for Future Trend?
Release on Japanese trade this morning showed widening trade deficit from -1294.1billion Yen to -1302.1billion Yen. The bad news was, year-on-year exports declined. While the good news was, year-on-year imports declined too. USD/JPY showed mixed responses toward the news and tend to move sideways. The result of FOMC meeting and 30th January Japanese releases (CPI, Manufacture PMI, Household Spending, and Industrial Production) may very well set USD/JPY trend till the next FOMC Meeting in March. In the minutes before FOMC announcement, JPY could suffer slight decline, but the real attention is in Japanese CPI which will help to determine Bank of Japan next policies.
AUD/USD fell to its lowest level since July 2010 in Friday after Chinese PMI dropped and emerging markets currencies toppled in risk aversion. Pressure also came from the RBA (Reserve Bank of Australia) as an official outright said that 0.80 USD will be a fair level for Aussie. However, AUD/USD traded slightly stringer in Asian session this morning. Be very careful of this pair, because it is the major most likely to fall if tapering happens.
Poundsterling traded lower against USD in the end of last week, but showed tendency to go higher in this week's opening. GBP's only stronghold against tapering is fourth quartal GDP yesterday which, unfortunately, predicted to decline from 0.8% to 0.7%. Hours before FOMC announcement in 29 January, governor of BoE, Mark Carney is also going to speak. At a glance, it seemed GBP is taking stance to shot off, either bear or bull. Taking notes from last month tapering, GBP most probably has unique resistance toward the Fed's tapering.
The only currency with more than good potential to survive post-tapering is Euro. Yesterday's PMI strengthened EUR, and although there are doubst over deflation in the region, but it doesn't seem going to suffer too much. ECB President, Mario Draghi clearly said that he see no deflation, and inflation is still expected at 2%. It could be seen as ECB's unwillingness to take early precautions. If we consider the fact that central banks' intervention lately seemed to have negative effect on their currency, then the statement further supports a stronger Euro. However, it's not a given. Especially because there are some quite important releases from Europe too.
In short, tapering is not the only trend-setter here. Watch your fundamental calendar, and be aware of speculations on tapering. Whatever you are going to do this week, make sure you have a strong money management.