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With its back up against a wall, the US Federal Reserve has pledged to begin tapering its asset purchase program. Beginning later this month, the Federal Reserve will taper the number of US Treasury Securities it purchases each month by US $10 billion and the number of Mortgage-Backed Securities by US $5 billion.

 

How did the USD react to the Federal Reserve taper announcement?

Federal Reserve DXY

By all accounts, a dreaded ‘taper tantrum’ has been avoided in the wake of the announcement. At least in relation to the forex market. Federal Reserve chairman Jerome Powell has been extremely careful to prime investors for this moment. For one, all hawkish commentary from the chairman has been mediated with dovish caveats. Admittedly, less senior Federal Reserve officials have done much of the leg work in hinting and out-right suggesting the need for a reduction in its purchases. Either way, the conversation surrounding tapering has been sustained for months, giving investors time to mull over the implications.

As of writing, the USD index, the DXY has crossed back over the 94.00 mark and comfortable sits 94.33, up 0.53% since the Federal Reserve’s tapering announcement.

Will the Federal Reserve continue to taper?

The Federal Reserve will still be purchasing $105 billion worth of securities, with further reductions dependent on continuing favourable economic outlook. The Federal Reserve has indicated it is considering reducing spending, month over month, moving forward. However, if economic conditions deteriorate, the spending reductions could be nullified or reversed. The Federal Reserve will be keeping an eye on inflation and the number of jobs added to the economy each month.

Inflation remains at a decade high

A significant consideration of the Federal Reserve when determining its reduction in spending is the US inflation rate. While it is at a 13-year high, the Federal Reserve maintains that most of the inflation experienced heretofore is temporary.

Octobers inflation number is released next Wednesday. Trading Economics is forecasting a 0.1% increase in US inflation.

Up next: Non-Farm Payroll

Another significant consideration of the Federal Reserve when determining its tapering is the Non-Farm Payroll (NFP). The NFP indicates how many non-farm jobs were added to the economy in a given month. The data for the October non-farm payroll will be released tonight to great anticipation. Trading Economics is forecasting 400K jobs, while the market consensus is a little more optimistic and is forecasting 450K jobs.

The NFP has disappointed for the past two months, with actual job figures falling far short of the numbers predicted. Even so, the Federal Reserve has seen fit to begin tapering as job growth seemingly slows. Treasury Security Janet Yellen noted the US economy is still short 5 million jobs compared to pre-pandemic times, which will take the US years to recover at the current rate of job growth.

Stocks Settle As Powell Signals Continuing of Easing

Indices across the board sold off today, making it the 5th session in decline as many investors and traders take high valuations as a good time to take profits.

NASDAQ in Candlesticks, S&P 500 in Orange, Dow Jones in Teal

Stocks will continue to live in an accommodative environment

We have seen Stocks rally in an environment where money is cheap, 1 Trillion dollars of fiscal policy for the United States is not enough, and where the Federal Reserve is buying back 120 Billion Dollars’ worth of bonds every month. Pair this influx of liquidity with many investors and traders being able to save due to lockdowns across the world, and you have yourself a buoyant asset market. And it seems like we will be living in this environment for the foreseeable future.

Chairman of the Federal Reserve Jerome Powell signaled that it would continue to keep monetary policy loose and their bond buyback scheme consistent. With that said, he signals a positive outlook for the U.S economy in 2021. A question on whether rising treasury yields signals an improving economy, Powell replied, “In a way, it’s a statement of confidence on the part of the market that we will have a robust and ultimately complete recovery.” This is interesting as an optimistic viewpoint from the Fed may signal that they may tamper accommodative policies in the near term

However, some analysts are wary about the Fed portraying too much optimism. Steve Friedman, senior macroeconomist at MacKay Shields, stated that “We’re not out of the woods yet when it comes to the virus, and the economy also remains quite far from a full recovery.”

What are you looking at in the markets?

Week ahead - Central banks, CPI's

With the new strain of the Coronavirus causing concern across the world, many countries that continue to battle the Coronavirus hope that the vaccine gives them a head start before the strain does any more damage. This week will also see a new President take office, Democrat Joe Biden, on the 20th January US Local time. Here is your week ahead.

President Elect Joe Biden will be inaugurated on the 20th January 2021.

Monday, 18th January – China's Retail Sales and GDP

It seems like China was on their home run. Cases were initially squashed due to their strict lockdown earlier in 2020. The vaccine's advancement last year was the final factor in cementing China's success against the virus. However, a sharp outbreak in Nangong and Shijiazhuang shows the world that no matter how well your initial response is, only continuous and strict restrictions can keep the Coronavirus out of the community. Five days ago, a plot of land in Nangong, Hebei, laid flat. Now, it has become a 1500 room hospital for Covid-19 patients.

Hospitals quickly being built in Nangong, Hebei

This may be an overreaction by the Chinese government – however, they may just be preparing for the worst. This does give a sign of what the future may hold for countries like the United Kingdom and the United States, where cases are still at record highs. With that said, GDP and Retail Sales are predicted to increase on the back of a boost in the manufacturing sector alongside consumer spending the income they saved during the past lockdown. GDP is expected to rise to 6.1% in Q4, up from 4.9% in the previous quarter. Furthermore, retail sales are predicted to grow. 5.5% in the month of December, ahead of Chinese Near Year.

Tuesday, 19th January – Germany's CPI figures

The Coronavirus situation in many countries highlights the importance of implementing a strict lockdown and following it through. The benefits of a lockdown only work if community transmission is eliminated. However, many countries apart from a small handful tried to balance economic damage alongside the Coronavirus spread, which meant deescalating Coronavirus restrictions too early, rendering the lockdown useless.

Germany's Daily Coronavirus Figures

Germany is one of the nations that deescalated too quickly, causing massive spikes in their Coronavirus figures. Their total cases now stand at 2.04 Million, with German Chancellor Angela Merkel urgently trying to rush in more stringent restrictions to dampen the virus's spread. However, the recent spike is unlikely to affect analysts' expectation of Germany's CPI,s expected to print at -0.7% for the month of December, the same as a month before.

Wednesday, 20th January – United Kingdom's CPI Figures

With just under 3.6 Million initial doses having been handed out to the UK public, the United Kingdom's dire situation looks like it's starting to make a turnaround. The daily Coronavirus rate has slowly decreased in the past couple of days - however, Britons do not seem to be adhering to lockdown and social distancing rules.

The Sea Front in Brighton, England

The third lockdown in the past 12 months, UK citizens have been seen gathering around beaches with no mask on. The UK government is banking on the vaccine to help control the virus's spread, as hospital beds continue to be filled with Coronavirus patients. The CPI is expected to rise by 0.5%, up from 0.3% a month before.

Wednesday 20th January – Bank of Canada's Interest Rate Decision

Canada seems to be avoiding the limelight – however, their Coronavirus cases are continuing to skyrocket after a semi-successful, non-strict lockdown. However, like all countries that did not eliminate community transmission, their cases soared as the latter part of 2020 approached. Coronavirus cases in Canada surpassed 700,000 yesterday.

This may well play into their interest rate decision this week ahead. With the second wave all but destroying any optimism in Canada's economic recovery, analysts predict a rate cut of less than 0.25%, currently at 0.25%. Andrew Kelvin, Chief Canada Strategist at TD Securities, stated that "The fact that the Bank of Canada has kept the door open to ( a rate cut) in the recent month hasn't gone unnoticed by markets."

Thursday, 21st and Friday 22nd January – Australia's Employment Change and Retail Sales Month over Month

The news many Australian citizens wanted to hear – "There are no remaining hotspot definitions," Federal Health Minister Greg Hunt stated at a press conference, with only one community transmission in the past couple of days. However, he warned that their not out of the woods yet, stating that "invevitably, there will be days of new cases. There will be days where there may be a requirement for Commonwealth hotspot definition to be reintroduced. But they'll be done on a the basis of that, and cases". This may indicate that Australia is finally able to start its economic recovery – alongside the implementation of the Trans-Atlantic bubble between Australia and New Zealand. Employment Change is expected to decrease from +90,000 in November to +50,000 in December.

Thursday, 21st January – Bank of Japan's Interest Rate Decision

Similar to Canada, Japan did not implement a proper lockdown. Instead, they opted for an increase in social distancing measures alongside confidence in their citizens to continue to wear face masks. Just like Canada, initial results were promising. However, as the year passed, it was evident that community transmission is inevitable if it was not thoroughly squashed out. Currently, Japan sits on 325,000 Coronavirus cases, with daily cases reaching an all-time high of 8,000 just a couple of days ago. With negative rates in Japan, monetary policy moves to the downside are rare as not to dig a hole the Bank of Japan can not come out of. Chances are, the BoJ will opt for other tools for yield control, such as asset purchases. However, analysts at Bloomberg Economics forecast the BoJ to keep rates as is not only this week ahead but for the whole year.

Busy week ahead. Trade safe, and most importantly, stay safe.

Week ahead! Speeches, Interest Rates and PMI's

Hello traders! This week ahead, we have many events that directly affect significant currencies such as the GBP, USD, the NZD, and the Euro. Traders should be aware of these critical events not to be whipsawed by the market. Here is your week ahead

Fun Fact: The term "Bull" and "Bear" markets are derived from how the animals strike. A bull strikes with its horns in an upwards motion, while a bear strikes with its paws in a downwards motion. Hence, Bull up, Bear down.

Monday, 21st September – UK's Inflation Report Hearings

UK Inflation dropped sharply to 0.2% in August, as stated last Wednesday, primarily due to the governments' "eat out to help out" scheme, pushing restaurant and café prices lower. After July's higher CPI figures, this conveyed the strong influence the "eat out to help out" scheme had on meal prices. The report explicitly talks about Inflation. However, implicitly talks about what the UK's treasury economic outlook is. A dovish tone may send the GBP against the US lower this week ahead.

Monday, 21st September & Wednesday 23rd, Thursday 24th September – Fed's Chairman Jerome Powell Speech, Testify to congress.

We can't seem to escape Jerrome Powell, can we? Dubbed as the Reserve Bank of the World, the Federal Reserve of the United States' economic outlook and changes in policies directly affects traders' and investors' sentiment. It is without saying, traders and investors should be looking at these speeches this week ahead like a hawk to examine any change in Powell's tone about the economy. A more than expected dovish tone should push the USD higher against major currencies, vice versa.

Tuesday, 21st September – Bank of England's Governor Andrew Bailey Speech

Similar to the Inflation report hearing, Governor Bailey's speech will set the tone for the future of the UK's economy. However, what traders should be looking out for is whether Governor Bailey will give any hints on implementing negative rates in the UK. If he does, this would be a contrast to his position a couple of months ago, which could significantly see the Cable drop.

Wednesday, 23rd September – Australia's Retail Sales MoM

Australia has had a fierce battle with the Coronavirus. After having initial success with battling the Coronavirus without a strict lockdown, a massive spike in Melbourne, Victoria, has caused a setback of setbacks. A trans-Tasman bubble touted to be around mid this year has been pushed back to at least March 2021. Conditions are better now in Victoria, with the state reporting its lowest increase in Coronavirus cases in three months of 28. This is, in contrast, to triple-digit growth a month ago. With National Australia Bank (NAB) posting an increase of online retail sales of 62.6%, analysts predict a rise in retail sales from 3.2% the previous month. This may provide a push for the Australian dollar higher this week ahead.

Wednesday, 23rd September – RBNZ Statement and Interest Rate Decision

New Zealand has been relatively prosperous in controlling the Coronavirus in comparison to other countries. However, that success has come at a brutal economic cost. New Zealand has suffered a 12.2% drop in GDP, higher than Australia, and the OECD average of -7% and -10.6%. With the market pricing in a 72% probability of a rate cut next year (Source: Bloomberg), a rate cut this early will send the New Zealand dollar spiraling downward. However, market consensus predicts that rates will stay the same at 0.25%. All eyes will be on Adrian Orr, which may give a better indication for the timeline of negative rates in New Zealand.

Just some personal perspective. There has been some speculation that the reason why the RBNZ has not implemented negative rates as of yet is to get banks to get their systems ready and bee prepared when negative rates do come. Furthermore, evidence has been shown in mortgage rates. Or more, the duration of low-interest mortgage periods. A couple of months ago, banks would offer 2.55% mortgage rates for six months. However, now, banks are only offering the same quality for one year. This suggests that they are trying to lock borrowers in these rates for a more extended period to minimize remortgages' wave once negative rates come in early 2021.

Wednesday, 23rd September – PMI's for The UK, Europe, and Germany

Europe has faired well regarding the collaboration between the countries regarding the EU's reaction to the Coronavirus in terms of fiscal and monetary policy. With that said, individual states have had different outcomes when it comes to the Coronavirus. Pair that with countries such as Greece and Italy facing economic distress before the Coronavirus, and you have a mixed bag when it reaches the individual countries' future. PMI's measure bearish/bullish sentiment for manufacturing. A figure above 50 signals expansion, while a figure below 50 shows contraction. Consensus state that the UK is set to release a PMI of 56. While still expanding, expansion is less than in the previous month when it was 58.8. Europe is set to release a PMI of 51.7, slightly lower than the 51.9 the last month. Germany is set to release a PMI 54.2, marginally lower than the 54.4 of the previous month.

Busy week ahead as we continue to tackle the Coronavirus around the world. Stay Safe, Trade Safe.

This week ahead: US and Eurozone GDP

On January 11th, China announced its first death related to the Coronavirus. 120 Days later, the pandemic has wreaked havoc in the lives of all. This week ahead marks many important indicators that, in regular times, would be an indicator of the prosperity of the global economy. We now look to the same indicators and quantify the damage Coronavirus has done to our lives and the global economy. Note: Dates are in NZST. 

Coronavirus Cases across the world - ABC News

China’s Inflation rate – Tuesday, May 12th

The People’s Bank of China has been wary of cutting their lending rates in favor of direct approaches, such as bond issues and direct lending – a stark contrast to how many central banks tackled the issue Coronavirus. However, due to implementing one of the strictest lockdown measures at the epicenter of the virus, consumer demand has been shattered. The PBOC in a statement stated that “ there was no foundation for persistent inflation or deflation in the country” Analysts predict a 3.7% inflation rate, down from 4.3%.

Inflation rates US – Wednesday, May 13th

In contrast, the US government has favored bolstering financial stability of households – providing them with stimulus checks to keep the economy afloat. This is on the back of the Federal Reserve announcing an unlimited quantitative easing program. These measures are textbook ways in which the rate of inflation increases in the long run. However, the consensus has been that it is more important to keep the economy afloat and worry about inflation later. Analysts forecast a 1.7% inflation rate, down from a previous 2.1%.

Interest Rate Decision RBNZ – Wednesday, May 13th

With one of the lowest coronavirus fatalities in the world, New Zealand has been praised for its swift and immediate response to the threat of the Coronavirus. However, this has not shielded them from the economic shortfalls a retraction of demand has caused. With the RBNZ expecting to double their quantitative easing measures, it remains to be seen whether their aim of keeping inflation between 1% and 3% is feasible. Analysts predict the RBNZ to keep interest rates at 0.25%.

UK GDP – Wednesday, May 13th

With having the worst fatality rate concerning the Coronavirus of around 16%, analysts forecast the UK to revise their GDP rate down from 0.1% to -2.9%. This is on the back of their Prime Minister, Boris Johnson contracting the Novel Coronavirus. The UK is set to slowly come out of their 7-week lockdown as their infection rates slowly decline.

Eurozone GDP – Friday, May 11th

With the Eurozone thriving over the free travel between Europe’s borders, lockdowns across the continent have severed this fundamental backbone of the European nations. Alongside devastating Coronavirus figures from the UK and Italy, analysts are forecasting a 3.3% drop in GDP year over year, in contrast to last year’s 1% growth.

US Retail sales – Saturday, May 16th

With lockdown measures across the United States and all across the world, in person, retail sales have suffered gravely. Retail sales fell 8.4% in March, with clothing and accessories suffering the worst plunging 50.5% in March. This is on the back of JCPenney and Neiman Marcus filing for Chapter 11 bankruptcy. Analysts forecast a further 12% drop in retail sales.

US Federal Reserve Unveils Drastic New Strategy

Yesterday, the US Federal Reserve announced extensive new measures in order to help the US economy. This included a new asset purchase program, which included the purchasing of corporate bonds for the first time since the 2008 financial crisis.

These announcements were able to stop most of the day’s losses, but the US stock indices still managed to finish the day in the red, with the Dow Jones Industrial Average closing at a 3% loss, and the NASDAQ and S&P 500 also in the negatives.

Essentially, the US Federal Reserve has expressed that they are ready to spend an unlimited amount of money on bond purchases in order to try keep the economy afloat. This includes printing new money as needed.

In their press release, the Fed highlighted that their biggest priorities were to stop the loss of jobs in both the private as well as public sector, as well as to ensure a swift recovery to the economy once the virus pandemic settles.

This level and scale of intervention is something that has not been seen from the Federal Reserve since the 2008 recession. However, despite this massive amount of support, the US economy seems to be showing no signs of recovery for the time being.

The deciding factor now is next month’s NFP, or non-farm payroll data. This will measure how many jobs have been lost due to the impact of the coronavirus, and just how much trouble the US economy is really in.

While stock indices have fallen into the pattern of having a day of recovery after a big loss, they still inevitably continue to push lower and lower, with the Dow currently still trading below 20,000 points.

Large parts of the US are now under lockdown, with the citizens of California, New York, and other states all under similarly heavy lockdowns and being urged to stay at home.

Despite these drastic measures, there have also been concerns that the US government is not doing enough to prop up the economy.

For the second day in a row, Senate Democrats have once again moved to stop the coronavirus bill from being passed, citing concerns over how exactly big businesses would use this bailout money. This almost $2 trillion economic stimulus package, which was proposed by the Senate Republicans, is also an attempt to help businesses from losing money and employees from losing their jobs. Part of this plan is a proposed $1,200 check going to all US citizens, with those earning above $99,000 not being eligible to receive it. Democrats also opposed this part of the plan with concerns that it was not enough.

For more information on the movement of the markets during the previous week, as well as how we are moving forward as we start working from home, watch our latest Monday Meetings video here, and follow us on Instagram and Twitter.