Forex: Dollar Looks to Fedspeak, US Credit Data for QE Taper Clues

Talking Points

US Dollar Looks to Comments from Fed’s Williams to Guide FOMC Bets
Japanese Yen Fell as Chinese Exports Data Stocked Carry Trade Demand
Aussie Dollar Outperformed to Stat the Trading Week; Long Trade in Play

A quiet economic calendar in European trading hours is likely to see investors looking ahead to the US docket. Scheduled commentary from San Francisco Fed President John Williams is in focus. While Mr Williams is not a member of the rate-setting FOMC committee this year, his speech and subsequent Q&A session mark the last bit of “fed-speak” before next week’s monetary policy announcement. Needless to say, this is likely to generate interest considering that sit-down is expected to produce a reduction of the Fed’s QE3 program. Separately, July’s Consumer Credit reading is expected to print at $12.3 billion, down from $13.82 billion in the prior month.

On balance, a small initial cutback of asset purchases this month is probably priced in at this point. Indeed, opting to do nothing this time around might be problematic from a credibility perspective given Fed officials’ considerable efforts to telegraph the move over recent months. That means the object of speculation at this stage is the trajectory of further “tapering” of QE after September’s outing. With that in mind, news-flow arguing against a sustained stimulus reduction cycle through the year-end (such as a dovish tone from Mr Williams or a particularly disappointing Consumer Credit print) is likely to weigh on the US Dollar, and vice versa.

The Japanese Yen gapped down at the open of the trading week and underperformed against its top counterparts as risk appetite swelled overnight, sending stocks higher and boosting demand for carry trades funded in terms of the perennially low-yielding currency. The MSCI Asia Pacific regional benchmark equity index rose 1 percent wake of better-than-expected Chinese Trade Balance data published over the weekend. The report showed that exports rose 7.2 percent year-on-year in August, marking the largest increase in four months and topping forecasts calling for a 5.5 percent increase. The release stoked optimism about economic growth in the world’s second-largest economy. The Australian Dollar outperformed and we remain long AUDUSD.

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