Fed tapering remains the dominant theme

Asia got off to a low start as investors digested the slightly more hawkish tone from the Fed.

The US dollar came straight back to life with the dollar index rising back above 81 to around 81.14. A key line from the Fed minutes was that tapering is likely in the coming months as the economy improves. Fed member James Bullard added to the hawkish tone by saying that December taper is on the table and will be dependent on data. Essentially this puts significant pressure on the November jobs reading and if we see a non-farm payrolls print around the 200,000 mark then tapering will be probable. The question then will be whether or not good economic data will be enough to nullify the impact of reduced QE. On the other hand, the minutes are a bit stale and judging by the recent comments from some key Fed members, I still feel tapering in the first quarter of 2014 is the most likely outcome.

US dollar strength supporting Japan

The Nikkei has outperformed Asia today by a long way with USD strength helping sentiment. USD/JPY has been testing September highs in Asia, while the Nikkei has printed its highest level since May. As expected there was no change from the BoJ meeting with the board unanimously voting to keep monetary policy steady. We also received weekly fund flows data out of Japan which showed a pick-up in foreign buying of Japanese bonds and stocks. Ideally Japanese officials would have wanted to see a drop in Japan bond buying to support the notion of a weaker yen. However this was countered by the rise in foreign buying of stocks.

The other main release in Asia was a disappointing HSBC flash manufacturing PMI reading. It came in at 50.4 which was below expectations of 50.8. This data seems to have sealed the AUD’s fate in Asia, with AUD/USD dipping below the 0.93 handle. The disappointing reading is also hurting markets in China with the Hang Seng and Shanghai Composite weaker.

Europe on PMI watch

European bourses are in for a weaker start as they play catch-up to the selling on the back of the FOMC minutes. EUR/USD has found some stability in Asia after losing ground to the greenback on the back of the FOMC minutes and a headline that the ECB is weighing a -0.1% deposit rate if more easing is needed. Later today we have a raft of PMI releases which have the potential to cause further volatility for the pair. The main ones to look out for will be German and French manufacturing PMIs. Any disappointment in these readings could result in further near-term weakness for the euro.

Perhaps we will hear more about the negative deposit rates idea when ECB President Mario Draghi speaks in Germany later today. On the US economic front we have unemployment claims, which are expected to fall to 333,000. We also have PPI, flash manufacturing PMI and the Philly Fed manufacturing index.  Fed member Powell will also be on the wires and of course in the current ‘taper talk’ environment any comments will carry weight. Unemployment claims will also be good for an indication of the health of the jobs market.

Healthcare sector outperforms in Australia

The ASX is having a subdued session and is struggling to reclaim the 5300 handle. The major sectors are weaker, with gold miners under significant pressure on the back of the gold price slide. Healthcare names have bucked the trend with gains for CSL Limited, Resmed and Sonic Healthcare. The AUD will be in focus once again later today with Glenn Stevens delivering a speech titled ‘The Australian Dollar: Thirty Years of Floating’. We have heard increasing jawboning recently but what remains a mystery is exactly how the RBA could intervene without lowering rates. As a result, this speech might flesh out some detail which could drive AUD/USD weaker.

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