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Markets had been pricing in the possibility of tapering for a while but clearly the magnitude of the impact was underestimated. Economic data released in US trade including the Philly Fed manufacturing index (strongest headline print since April 2011) and existing home sales came in well ahead of expectations, supporting the notion that the US recovery is on track. The dollar index spiked through 82 and this strength in the USD caused a significant selloff in various asset classes.
The most alarming USD related move was a 5% plus drop in gold to below 1,300. Starting with the moves in the FX space, AUD/USD traded sub $0.92 to lows around $0.916 and remains sidelined at $0.92. Any rallies are likely to continue being used as an opportunity to sell.
Japan continues to be the beneficiary out of all this carnage as USD/JPY spiked to ¥98.29 before pulling back below ¥98. In the near term we feel support for USD/JPY will be in the ¥97 region. BoJ Gov Kuroda will be on the wires today and given all the volatility we’ve seen this week, and with the G-8 Summit, he’s likely to throw in some curlers. The single currency will be back in the limelight with a developing story headline suggesting the IMF is preparing to halt Greece payments unless a €3-€4 billion shortfall is plugged and we suspect this will gather momentum today. EUR/USD printed a low of $1.316 before bouncing back above $1.32 and is currently holding its ground at $1.322.
There isn’t much on the economic calendar today, with the region’s current account balance the only data to look out for. We suspect most of the moves in the FX space in the short term will be mainly US dollar driven.