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18 Sep 2013
FOMC tapering isn’t tightening
FXstreet.com (Athens)- While investors seem to have priced in crosses and markets generally-to a more or less extent-a dovish FOMC policy, we should bear in mind that markets might act quiety differently if FOMC does not fully deliver on these expectations.
Traders have already priced in a modest tapering; but if FOMC does not fully deliver on these expectations?
Traders especially yesterday stayed muted on US CPI and TIC results, mainly due to the fact that they have already priced in a modest FOMC outcome, i.e. a modest taper of 10-15billions in combination with some additional forward guidance rhetoric. But we should take a more thorough look to see behind the curtains in order not to be taken aback if the FOMC fails to deliver on the vast majority of investor world expectations.
First of all, we should say that the Fed decision is characterized by some on “sooner” than “later” tapering as well as on the decision about how much to taper. There are many moving parts and even the dovish or hawkish outcome does not seem to be dependent only on the above factors. Elaborating on, we should not only focus on the amount of tapering as on how Fed will proceed in the long-term. Ben Bernanke has already stated that the mid of 2014 is the deadline to end the QE.
Having in mind that, the first thing the traders should have into mind, isn’t the initial amount of money to taper, but what can one “read between the lines” in terms of the future “tapering” and to the timeline. While traders have been stuck that a dovish FOMC would by any means be characterized by a very light amount of money to start “tapering” in combination with some additional forward guidance, things does not seem to be that easy. FOMC would indeed release a modest tapering of $5B-$10B, but if that is accompanied by a very aggressive taper in the months ahead and/or in tight accordance with the middle of 2014 timeline, then that would be a “hawkish” result by any means, thus extremely well news for the greenback.
On the other side, FOMC could deliver a result of a higher amount of tapering e.g. $15B-$20B, but then decides to move on very slowly and extend tapering beyond 2014. That would also catch traders off guard, as in the very example as in that case the “reading between the line” message would be a very dovish FOMC. All in all, investors should focus not only in the initial amount of tapering or if it starts now or a bit later this year on November or December. They should rather pay attention to the forward guidance that will accompany the minutes, any changes in forecasts, the future path of “tapering” and the willingness to stick or not with the “timeline”.
Last but not least, Yellen is now the great favorite for the top chair of the most prestigious Central Bank of the world. That’s good news for traders, as if she gets elected the credibility on FOMC projections and forward guidance will be heavily boosted as she is considered to be the leading force behind the current Fed’s communication policy.
Traders have already priced in a modest tapering; but if FOMC does not fully deliver on these expectations?
Traders especially yesterday stayed muted on US CPI and TIC results, mainly due to the fact that they have already priced in a modest FOMC outcome, i.e. a modest taper of 10-15billions in combination with some additional forward guidance rhetoric. But we should take a more thorough look to see behind the curtains in order not to be taken aback if the FOMC fails to deliver on the vast majority of investor world expectations.
First of all, we should say that the Fed decision is characterized by some on “sooner” than “later” tapering as well as on the decision about how much to taper. There are many moving parts and even the dovish or hawkish outcome does not seem to be dependent only on the above factors. Elaborating on, we should not only focus on the amount of tapering as on how Fed will proceed in the long-term. Ben Bernanke has already stated that the mid of 2014 is the deadline to end the QE.
Having in mind that, the first thing the traders should have into mind, isn’t the initial amount of money to taper, but what can one “read between the lines” in terms of the future “tapering” and to the timeline. While traders have been stuck that a dovish FOMC would by any means be characterized by a very light amount of money to start “tapering” in combination with some additional forward guidance, things does not seem to be that easy. FOMC would indeed release a modest tapering of $5B-$10B, but if that is accompanied by a very aggressive taper in the months ahead and/or in tight accordance with the middle of 2014 timeline, then that would be a “hawkish” result by any means, thus extremely well news for the greenback.
On the other side, FOMC could deliver a result of a higher amount of tapering e.g. $15B-$20B, but then decides to move on very slowly and extend tapering beyond 2014. That would also catch traders off guard, as in the very example as in that case the “reading between the line” message would be a very dovish FOMC. All in all, investors should focus not only in the initial amount of tapering or if it starts now or a bit later this year on November or December. They should rather pay attention to the forward guidance that will accompany the minutes, any changes in forecasts, the future path of “tapering” and the willingness to stick or not with the “timeline”.
Last but not least, Yellen is now the great favorite for the top chair of the most prestigious Central Bank of the world. That’s good news for traders, as if she gets elected the credibility on FOMC projections and forward guidance will be heavily boosted as she is considered to be the leading force behind the current Fed’s communication policy.