Saturday, January 18, 2014

US Dollar Recovers

It has been a wild week since the US non-farm payrolls data were released last Friday. The US dollar, as measured by the DXY index, fell for three days from 81.2 to a low of 80.5
after non-farm payrolls disappointed with a sub-100,000 reading for December. It has subsequently recovered back to its starting point of 81.1 again as the US ten-year bond yield rose back to 2.89%, the level seen at the first taper on December 18.

Most of the Fed officials who spoke this week were, for now, looking at a “steady, measured” pace of tapering asset purchases by US$10 billion at seven Federal Open Market Committee (FOMC) meetings, and by US$5 billion at one meeting, this year. This was consistent with Atlanta Fed President Dennis Lockhart’s projection for the Fed’s balance sheet to top out around US$4.5 trillion from the present US$4.0 trillion. The next FOMC meeting is scheduled to take place on January 29, less than two weeks away.

Despite this, Fed officials did not want markets to bring forward rate hike expectations. With regards to last week’s jobs report, the concern fell more on the unemployment rate falling below 7% to 6.7%, rather than non-farm payrolls falling below 100,000. More Fed officials felt a need for greater clarity that they can still keep rates low even if the unemployment rate hits its 6.5% threshold.

As witnessed Thursday, it is still too early to declare that tapering would automatically lead to a higher US dollar on higher bond yields. In fact, both have been unwilling to take out their highs seen at the first taper last month. The post-taper currency market is still very much range-bound and lacking conviction.