Fedspeak to shape up tapering expectations

Friday’s disappointing payrolls reading set the tone for a weaker greenback, resulting in gains for risk currencies.

December payrolls fell well short of expectations, but the unemployment rate still dropped to 6.7%, from 7% (its lowest reading since October 2008). This was mainly due to a drop in the participation rate which some analysts attribute to extreme cold weather conditions in parts of the US.

While the natural reaction is to feel the Fed might reconsider rapidly winding back on stimulus, this might not be the case due to the weather conditions. Fed member James Bullard has already said he would be disinclined to react to one month’s numbers. Additionally, Bullard said the Fed expects more rapid growth, which should put additional downward pressure on unemployment.

Given what we’ve already heard from Fed member James Bullard, other members speak this week and this should help shape up sentiment about tapering heading into the Fed’s meeting at the end of the month. 

On the US data front, highlights this week include US retail sales, CPI, jobless claims and industrial production, as well as the Fed's Beige Book and a lot of Fed speakers, including Plosser, Fisher and Bernanke.

AUD/USD tests key resistance

AUD/USD was one of the biggest beneficiaries of the US dollar strength that we saw on Friday. The pair is testing 0.90 now as we head into a week in which local jobs numbers is the only major release. Jobs are expected to remain steady, with unemployment at 5.8%. Today we had ANZ job ads and home loans being released locally, but this did not make much of a difference. Perhaps if we get some positive news out of China with a tentative release date for new loans and M2 money supply data then we might see some movement.

There is always a temptation to sell the pair at key levels, and given 0.90 has been a significant level in the past, it could attract fresh selling. Any misses in local or China data will be used as an excuse to sell. On the other side of the equation I feel the drop in the USD was overdone on Friday as treasuries rallied. A potential drop back into the 0.885 region should Fed members reinstall some confidence in the tapering trade.

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