The US dollar made a huge comeback, riding on the clearer prospects of QE tapering. Stocks in Europe and the US fell as market participants reacted to the release of less than impressive macroeconomic data in China, but also digested the statement and more importantly comments by the governor Bernanke who suggested that tapering could begin this year. Fed Chairman Ben Bernanke announced the Federal Reserve will likely scale down its bond-buying program this year if the economy continues to improve.
IMF is preparing to suspend aid payments to Greece by the end of next month unless Eurozone leaders plug a EUR 3 - 4bln shortfall. Eurozone central banks are reluctant to roll over Greek bonds. Sources said central bank reluctance could create shortfalls in Greek bailout program although Eurozone is confident that Greece will receive next aid payment. ECB President Mario Draghi announced in a speech that he is willing to use “non-standard” monetary measures if worse comes to worse. A negative deposit rate is a valid option to which ended up in hurting the Euro. Long-term lending operations and modifying collateral requirements are other possibilities Draghi considers to save the Euro-area from a further plunge.
The FOMC improved its outlook for unemployment and economic expansion. The members voted to keep the pace of bond buying at this stage but said the FOMC will slow down bond buying if the economy continues to improve and would end QE altogether in mid-2014. The statement and Bernanke’s words sent the dollar shooting higher to recover after 4 weeks of Bullish EUR/USD, with commodity currencies suffering the most.
USD/JPY closed last week at 97.88 recovering fully from the week before, stopping a 4 week decline and gained over 3.60 yen. Until last week, the yen owned June and posted outstanding gains against the US dollar. Last week’s correction pushed the pair to the 98 line, as the broadly stronger dollar rebounded sharply. The fallout from the QE announcement may not be over and we could see the pair move closer to the 100 level.
GBP/USD finished the week sharply lower as the USD index surged after the governor of the Fed suggested that tapering could begin this year. Even the release of better than expected macroeconomic data from the UK failed to have a meaningful impact on the pair. In terms of UK related commentary, the release of the most recent MPC minutes showed that the MPC voted 6 - 3 to keep QE unchanged, as expected, with the majority stating that the QE and FLS are still working through economy.
AUD/USD closed the week just above the 92 level at 0.9217. The Australian dollar dropped sharply last week, losing over 300 points against the surging US dollar. Australian number were respectable last week, as New Motor Vehicles Sales and the CB Leading Index posted better numbers than the previous month, however couldn’t compete with the US dollar over the tapering announcement.
Important announcement this week:
Monday:
- German IFO Business Climate.
Tuesday
:
- UK - Inflation Report Hearings.
- USA - Core Durable Goods Orders m/m, CB Consumer Confidence and New Home Sales.
:
- GDP m/m in Canada.