Talking Points:

US Dollar Rebounds as Fed Officials Talk Up QE “Taper” Outlook
Australian Dollar Underperforms as US Treasury Yields Advance
Fed Beige Book in Focus Amid Post-NFP FOMC Policy Speculation

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The US Dollar pushed broadly higher against its major counterparts in the wake of supportive comments from Charles Plosser and Richard Fisher, Presidents of the Philadelphia and Dallas branches of the Federal Reserve respectively. Both policymakers are voters on the rate-setting FOMC committee in 2014. As we suspected, the outcome overshadowed a slowdown in headline US retail sales growth (albeit a smaller one than expected).

The yield-sensitive Australian Dollar bore the brunt of the selloff among the non-USD G10 FX majors, sliding as much as 0.4 percent on average. The inverse correlation between AUD/USD and the 10-year US Treasury yield – a benchmark for tracking the markets’ Fed QE “tapering” expectations – is now at the highest level since July 2008 (-0.58 on 20-day percent change studies).

Looking ahead, a lackluster economic calendar in European hours is likely to see traders looking ahead to the release of the Federal Reserve Beige Book, a survey of regional economic conditions. An upbeat report that reinforces the argument in favor of continued reduction in Fed asset purchases stands to boost the greenback further. On the other hand, a soft tone that echoes last week’s disappointing jobs report may cap gains in the benchmark currency.

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