SINGAPORE, SINGAPORE -- (Marketwired) -- 06/24/13 -- In the FXPRIMUS Market Brief of The Week for 10 June, leading global foreign exchange trader, educator and author Mario Sant Singh looks at Greenback strengthening and the Fed's forecast.
Key Events to Focus On This Week
-- German Ifo Business Climate Index-- U.S. Consumer Confidence-- FOMC-- New Zealand's Trade Balance-- U.S. Home Sales-- EU Summit
Key Events Last Week
-- German ZEW shot to 38.5 from previous 36.4-- FOMC meeting: Fed may taper Quantitative Easing (QE) this year and cease purchases by mid-2014, IF ECONOMY GOES ACCORDING TO FED'S PROJECTION-- New Zealand's Gross Domestic Product (GDP) unexpectedly lowered to 0.3% QoQ last quarter from 1.5%-- China's HSBC Flash Purchasing Managers' Index (PMI) fell further to 48.3 from previous 49.2-- Euro Zone Flash PMI slightly improved to 48.7 from previous 48.3
Federal Open Market Committee (FOMC) meeting last week - most hawkish Fed since beginning of year
Equities and bonds fell sharply with the Greenback strengthening, thanks to the Fed providing further hints that the historically longest and largest easing scheme might be tapered as early as this year, and ceased in middle of next year if the U.S. economic recovery moves toward the Fed's forecast.
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If we put the words "economic conditions" in the game, the latest FOMC statement didn't really convey the message as the market reacted, because no one knows how the recovery will be. Labor market conditions showed further improvement in recent months, on balance, but the unemployment rate remains elevated. Thus, we are more willing to take this period as a "trial run," instead of setting up new positions for the regime change immediately.
Based on the overall presentation from Ben Bernanke, he highlighted that the Fed's easing pace will be adjusted if the economic environment requests it, and it will be on both sides. Even so, the word "adjustment" was heard more often compared to the conference in May. The most important message appeared in the Q&A session: Bernanke mentioned that the Fed would probably make some adjustments to its USD85 billion monthly bond buying later in 2013 and cease QE3 around mid-2014, as long as economic conditions, such as inflation and the labor market, are in line with Fed projections.
I raise some cautiousness here, not a disagreement to the current market sentiment. Why should we be so certain on a robust recovery purely based on the improving U.S. labor market in recent months and improving Euro Zone economic data? What if peripherals in Europe kick off another round of a "bail-out" saga, or China's slowdown lags global recovery? These possibilities still exist.
However, the FOMC showed a more "hawkish" tone this time, forecasting the unemployment rate slightly lower compared to its previous meeting, and the few upcoming labor market data releases will be still closely monitored. Having said that, some hurdles need to be crossed before adjusting to a slower easing pace. The FOMC expects the economy to grow 3% to 3.5% next year, driving the unemployment rate down to 6.5% to 6.8%, which will obviously trigger a "QE Ending" if reality moves according to the Fed's projections.