The Fed announced QE tapering worth $10 billion. However, it sweetened the move especially with strengthening forward guidance. There are 5 sweets spots in the statement.
While this balanced approach prevented huge moments and initially separated weak currencies from stronger ones, the USD has the upper hand.
First, let’s see why the taper is sweet:
- Only $10 billion: this is enough to be serious, but the bare minimum. Also a move of $15 was speculated.
- No commitment for subsequent tapering: The Fed didn’t lay a road map for further cuts. The next moves could take a long time. Bernanke pushed back the tentative end of QE to late 2014 from mid 2014 as presented in June.
- Stronger forward guidance: The Fed now states that interest rates will remain low “well past the time the unemployment rate declines below 6-1/2 percent”. This is more dovish than earlier.
- There was a dovish dissenter: Contrary to normal times, there was a dovish dissenter and not a hawkish one. The usual hawk this year, Esther George, joined the taper majority, while the dovish Eric Rosengren dissented didn’t want to taper.
- Bernanke stated that low inflation is taken very seriously. As a scholar of a great depression, this emphasis is important. And, Yellen is fully supportive of the decision and the general approach.
But this is still a taper: the Fed is doing less in bond buys. In addition, Bernanke brought the case for stronger inflation.
The impact on currencies is along the lines of this currencies preview:
- EUR/USD is down, struggling to hold onto 1.37. This happened after it marked a lower high last week. While it wasn’t the weakest currency, it might have topped out for the year.
- USD/JPY is at 103.80. Is it going to make a convincing break to new multi-year highs?
- AUD/USD is down under: at 0.8850, it is set to settle at new multi year lows.
- GBP/USD: The pound is indeed relatively resilient. While it cannot maintain the highs above 1.64, it is quite strong.
- NZD/USD is somewhat lower, but still above 0.82.
- USD/CAD is relatively stable, at 1.0650. A strong US is good for Canada.