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Forex: Market Reaction to Fed QE Taper Likely Reflects Seasonal Forces

Forex: Market Reaction to Fed QE Taper Likely Reflects Seasonal Forces

Ilya Spivak, Head Strategist, APAC

Talking Points:

  • Japanese Yen Corrected Higher, NZ Dollar Broadly Fell in Overnight Trade
  • Sentiment Swell After First “Taper” of Fed QE May Reflect Seasonal Forces
  • Price Action to be Muted Through Year-End as Markets Move Past Key Risk

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Currency markets are in digestion mode after yesterday’s much-anticipated FOMC monetary policy announcement produced the first “tapering” of the Federal Reserve’s QE3 program, with monthly purchases of US Treasury bonds and MBS securities reduced by $5 billion each. The Japanese Yen corrected higher having been the worst-performing currency in the preceding 24 hours, adding as much as 0.5 percent on average against the majors. The New Zealand Dollar came under broad-based selling pressure despite supportive GDP and Trade Balance figures. A singular catalyst for the move is not readily apparent.

Perhaps the most surprising and somewhat counter-intuitive feature of price action after the FOMC announcement was a strong rally in the S&P 500 and a sharp push higher in Yen-funded carry trades. That points to firming risk appetite, which is polar opposite dynamic to what might have been predicted given investors’ response to QE taper speculation in the spring and summer. Seasonal factors may ultimately explain what happened.

The S&P 500 is up nearly 27 percent so far this year, putting the index on pace to produce its best annual performance since 1997. Moving past the most significant bit of event risk left between now and the turn of the calendar year leaves little room for things to go dramatically wrong with only six trading days left in 2013. That means large investors concerned with meeting performance benchmarks have little reason to liquidate before their prowess is locked in. Tax considerations may have likewise played a role: waiting for 2014 to book profits on trades taken this year allows investors to delay paying payment as well as take advantage of lower long-term capital gains rates.

Price action across the financial markets is likely to be fairly muted from here if that is indeed the case. The weekly set of Jobless Claims figures and November’s Existing Home Sales report headline an otherwise uneventful US economic calendar. Dramatic changes are not expected on either front: home sales are expected to print at 5.02 million, a hair below the 12-month trend average at 5.09 million. Meanwhile, initial and continuing applications for jobless benefits are expected to pull back slightly after posting strong gains last week. On balance, this seems to offer little reason to suspect that traders will be keen to commit to meaningful trend development.

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Asia Session:

GMT

CCY

EVENT

ACT

EXP

PREV

21:45

NZD

GDP (YoY) (3Q)

3.5%

3.3%

2.3%

21:45

NZD

GDP (QoQ) (3Q)

1.4%

1.1%

0.3%

0:30

AUD

RBA FX Transactions Total (A$) (NOV)

444M

-

648M

0:30

AUD

RBA FX Transactions Government (A$) (NOV)

-471M

-

-318M

0:30

AUD

RBA FX Transactions Other (A$) (NOV)

38M

-

39M

1:00

NZD

Trade Balance (NOV)

183M

-

-173M

1:00

NZD

Trade Balance 12 Mth YTD (NOV)

-248M

-

-1018M

1:00

NZD

Exports (NOV)

4.47B

-

4.24B

1:00

NZD

Imports (NOV)

4.29B

-

4.41B

4:30

JPY

All Industry Activity Index (MoM) (OCT)

-0.2%

-0.3%

0.5%

5:00

JPY

Leading Index (OCT F)

109.8

-

109.9

5:00

JPY

Coincident Index (OCT F)

110.4

-

109.6

5:30

JPY

Nationwide Dept Store Sales (YoY) (NOV)

2.4%

-

-0.6%

5:30

JPY

Tokyo Dept Store Sales (YoY) (NOV)

3.9%

-

1.2%

Euro Session:

GMT

CCY

EVENT

EXP/ACT

PREV

IMPACT

6:45

CHF

SECO December 2013 Economic Forecasts

-

-

Medium

7:00

CHF

Trade Balance (CHF) (NOV)

2.11B (A)

2.28B

Medium

7:00

CHF

Exports (MoM) (NOV)

4.2% (A)

-3.0%

Low

7:00

CHF

Imports (MoM) (NOV)

6.8% (A)

-2.2%

Low

9:00

EUR

Eurozone Current Account n.s.a. (€) (OCT)

21.8B (A)

14.9B

Low

9:00

EUR

Eurozone Current Account s.a. (€) (OCT)

26.2B (A)

15.2B

Low

9:30

GBP

Retail Sales (MoM) (NOV)

0.4% (A)

-0.7%

Medium

9:30

GBP

Retail Sales (YoY) (NOV)

2.3% (A)

2.3%

Medium

9:30

GBP

Retail Sales Incl. Auto (MoM) (NOV)

0.3% (A)

-0.9%

Low

9:30

GBP

Retail Sales Incl. Auto (YoY) (NOV)

2.0% (A)

1.8%

Low

Critical Levels:

CCY

SUPP 3

SUPP 2

SUPP 1

Pivot Point

RES 1

RES 2

RES 3

EURUSD

1.3452

1.3588

1.3636

1.3724

1.3772

1.3860

1.3996

GBPUSD

1.5935

1.6157

1.6274

1.6379

1.6496

1.6601

1.6823

--- Written by Ilya Spivak, Currency Strategist for DailyFX.com

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