Dollar Strengthens As Fed Leaves December Tapering Open

Last night’s Federal Reserve meeting met expectations in that it has not clarified anyone’s thinking on when the Fed will begin its gradual reduction in asset purchases. There was never any real chance that we would have seen any form of asset purchase reduction at this meeting; they were probably more likely to take on the euro than cut stimulus tonight. The key line we are focusing on is “improvement in the economy even with fiscal retrenchment”. The Fed knew that Congress has the ability to damage the US economy; how much damage was wrought by the shutdown and the fiscal fight is however, yet unknown. The Fed is simply saying to the market that until we know more, a decision cannot be made.

Data yesterday did nothing for the case of those who are looking for a tapering of stimulus at December’s Fed meeting. The ADP jobs measurement missed expectations drastically yesterday in a further sign of decelerating jobs growth in the United States. The market was looking for an increase of 150,000 in October – 130,000 was all they could get. There is no payrolls release this week – they are being held back until Friday 8th - but you would expect that expectations will be significantly below trend to take into account the destabilising effect of the government shutdown, despite the likelihood that we will see an equal and opposite bounce back in December’s number.

We are still happy to keep our prediction for a reduction in FOMC stimulus in March 2014, given growth and inflation trends and the likelihood that Congress reopen the budget battle in Jan/Feb of next year. That being said, I am not one for consensus bets and the fact that most of the market has now shifted its expectation to match our original belief leads me to think that I need to see a month’s more data but I could easily move my tapering thoughts from March ’14 to Dec ’13.

The Fed was less dovish than most had expected yesterday and USD has ended up testing the 1.60 level in GBPUSD and the 1.37 mark in EURUSD.

News from Europe yesterday was mixed. Spanish GDP grew 0.1% in Q3 following 2 full years of recession. While this is encouraging, I’m sure the 26% of the Spanish workforce who remain out of a job would think that further progress needs to be made before smiles start breaking out. In other news, economic confidence is rising once again. October’s reading rose to 97.8 from 96.9 the month before.

German data has been disappointing, however. Unemployment rose by 2,000 in the past month, although the unemployment rate remained at 6.9%. Inflation numbers from some states that have reported this morning have shown deflationary pressures. We see the major risks to the Eurozone moving forward being declining exports due to a simple lack of affordability and deflationary risks from limited import inflation.

The wider Eurozone inflation measure is out at 10am this morning alongside the currency area’s unemployment measure.

CAD watchers have had to put up with a weakening currency for the past few weeks as the impact of the Bank of Canada’s Monetary Policy Report and dovish testimony by Poloz weighs. Today’s GDP release may provide little respite and is expected to fall to 0.1% QOQ compared to Q2’s 0.6%. The number is due at 12.30 GMT.