40% of QE tapering in December; more German opposition

After the Fed has largely managed to separate QE tapering from expectations of  rate rises, there is a better chance of a “Dectaper” – QE tapering in December: around 40%, says Simon Smith of FxPro.

In the interview below, Smith also discusses other topics, including the different directions in which ECB members are pushing, and the bigger potential divide between Germany and its peers regarding monetary policy.

Simon has over seventeen years experience of macro forecasting and investment strategy research. Prior to joining  FxPro  in May 2010, Simon was a consultant with Thomson Reuters, having spent four years as Chief Economist at Weavering Capital.  He has held economic and strategy positions with Standard & Poor’s, together with consultancy firms 4Cast and MMS International.  Simon holds an MSc. in Economics from the University of London and a BSc. from Brunel University.

I think the fact that the Fed has largely been successful in convincing markets that the start of tapering does not mean rate rises are around the corner.   As such, everything else equal, it does make it easier for the Fed to taper. The arguments remain finely balanced, but I think there is a 40% chance that the Fed tapers in December and I sense that markets are moving more towards this view.

2. When QE tapering eventually happens, can this trigger a financial crisis in emerging markets, or they better prepared after the sell-off in the summer?

I would not say crisis, because I think the Fed is going to be measured in its approach. The losses seen in emerging market currencies from May to September have only partially been unwound. What was noticeable during that time was how those countries running currency account deficits (e.g Brazil, Indonesia, South Africa, Turkey) saw their currencies sell off a lot harder that surplus countries (e.g. Hungary, Taiwan).   I created a weighted basket of surplus and deficit EM currencies.   Since the start of 2012, deficit country currencies are 12% lower in aggregate, surplus countries 3% higher.

No (to capping) and Yes (to a weaker pound).   The pound has done well, but that’s largely because the economy has done better than anticipated.   It would be madness to cap the pound because of that and would not sit well within the major international trading partners. Yes, the Swissie has a cap, but I don’t think the circumstances comparable. Net exports have weakened more recently and a firmer pound does not help the re-balancing story which the Bank of England craves, but I think the pound will weaken in 2014, partly owing to a firmer dollar but also because I expect the economy to moderate as I don’t think the current drivers to growth are sustainable.

Not judging by the recent Swissie performance, which has been the strongest currency on the majors so far during December. Things may settle and reverse a little once year end is out of the way, but I don’t think we are at a stage where the SNB can relax.

I think the shift on austerity has already been seen, whilst on monetary policy the views are little changed. There were signs earlier in the year that Merkel was softening on the stance that austerity is the answer to the issues of the periphery and Greece has also been pushing back, but also on the basis that it has been making some progress.   With regards to the ECB and rates, Germany is going to find it difficult going during 2014, regardless of the politics. Inflation in the periphery is nearly negative (on broad GDP-weighted measure) and it’s clear that monetary policy is looking increasingly uncomfortable for Germany, which is why there was noted opposition to the latest rate cut from the ECB. What we can expect is further opposition in relation to more measures from the ECB and certainly in relation to full scale QE.

More: Perfect storm for QE tapering?