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Clear Proof That Now’s No Time for Tapering

By Kathy Lien
02 October 2013 23:08 GMT

The US political impasse will call into question the accuracy of US economic data, and that’s an insurmountable obstacle for Fed officials, who are now likely to delay tapering until December or later.

The US dollar (USD) traded lower against most major currencies on the back of weaker economic data and the growing prospects that the US government shutdown could delay tapering of asset purchases by the Federal Reserve.

Thursday will begin day three of the shutdown, and if public offices are not re-opened by the end of the week, it could subtract as much as 0.25% from Q4 US GDP, but that is not the only reason why the government closure could defer Fed tapering until 2014.

According to Boston Fed President Eric Rosengren, who is a voting member of the Federal Open Market Committee (FOMC) this year, the shutdown also affects the compilation of economic data and could "put out further into the future the time when we can get a real assessment." Rosengren said he would be “less willing to remove accommodation…” until verifiable US data were available.

Given the significance of the tapering decision, there's a good chance Rosengren's views will be shared by many of his FOMC colleagues, and if the shutdown extends beyond next week, it may be very difficult for the Fed to justify reducing asset purchases in December, and most certainly will rule out tapering in October.

So far, there is little sign of a compromise between Republicans and Democrats. President Barack Obama invited four leaders from both parties and both houses to meet this afternoon, although it’s not clear how much the negotiations will help.

Meanwhile, there's a very good chance that Friday’s non-farm payrolls (NFP) report will not be released due to the shutdown, but the US Labor Department has indicated that jobless claims will be issued on schedule.

When it comes to leading indicators for the NFP report, our favorite is always the employment component of the non-manufacturing ISM, which is due on Thursday. If the index declines, the dollar could extend its losses as investors pare down their NFP expectations. If the data is strong, however, it would ease some of the concerns caused by the weaker-than-expected ADP employment report.

According to private payroll provider ADP, US companies added fewer jobs in the month of September. Economists had been looking for the ADP employment change to rise from 176k to 180k, but instead, US companies added only 166k jobs, up from a downwardly revised 159k.

Based on these numbers alone, the Fed was right to defer tapering, but we will have to wait for the non-farm payrolls report—whenever it is actually released—to confirm that job growth slowed in the month of September since ADP can often over- or undershoot NFPs.

USD/JPY Sinks to One-Month Low

The Japanese yen (JPY) rose to a one-month high against the dollar on the back of steep losses in the Nikkei and the weaker US data. Prime Minister Shinzo Abe's failure to announce a corporate tax reduction is finally catching up to Japanese stocks, which dropped more than 2% overnight.

While it remains to be seen whether the Cabinet will agree on additional support for corporations, the uncertainty suggests that internal differences could stymie Abe's efforts.

The recent decline in the Nikkei and rise in the yen will keep the Bank of Japan (BoJ)—which begins a two-day monetary policy meeting on Thursday—dovish.

There are no major Japanese economic reports expected overnight outside of the weekly Ministry of Finance portfolio flow data. We expect JPY crosses to remain under pressure for the near term, and as for the Nikkei, 14,000 is an important support level. In the event that Japanese stocks continue to fall, it can drag USDJPY down with it.

By Kathy Lien of BK Asset Management

provides forex news and technical analysis on the trends that influence the global currency markets.
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02 October 2013 23:08 GMT