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To Taper, or Not to Taper?

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August 19, 2013 By: , No Comments

The reasons behind these moves are coming largely as a result of central bank activities, with various official policy stances around the world seeing divergences with respect to the level of accommodation likely to be implemented into the latter parts of this year.  Recent examples of this can be seen in the Reserve Bank of Australia, which reduced its benchmark interest rate to a new all-time low.  The decision was based on declining growth prospects in countries that import raw materials from Australia (particularly in China), as this is a strong indication that both GDP growth and employment numbers will start to show weakness into 2014.

But while additional monetary stimulus is likely to be seen in many areas around the world, an exception to the right might be seen in the US, as the Federal Reserve is now seen approaching its September deadline for reductions in its own quantitative easing stimulus programs.  For forex traders, developments here will be important for long term trading prospects, as the path for additional stimulus is clearly set in Australia, the Eurozone, Japan, China, and other emerging markets.

The Week Ahead in Forex 

Into next week and for the remainder of the month, sentiment in the forex markets will be largely dictated by the expectations from the Federal Reserve.  In the last six weeks, we have seen some conflicting signals from various voting members at the central bank, so there is still some uncertainty in the market with respect to how policy strategy will progress from here.  And when we compare these potential changes with what is happening at most of the central banks in major economies, it becomes clear that forex markets are in store for some significant moves in coming weeks.

Currently, the Federal Reserve makes monthly bond purchases of $85 billion.  Market expectations now call for a September reduction of $10 billion, so any number that surpasses this will likely lead to large upside moves in the US Dollar.  At the same time, there is still a possibility for a “no change” September result from the Fed.  This type of outcome would also jar market expectations but the reaction would lead traders to fall in line in the opposite direction, selling the Dollar as stimulus measures would be more likely to continue.  In either case, the slow summer trading months will soon come to an end, and forex traders will need to closely watch central banks for the next likely moves.

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