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FX Daily33 .pdf



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Deutsche Bank
Markets Research
Global

Foreign Exchange
FX Spot

Date
6 December 2013

FX Daily
US markets shout – we can handle a
taper
„

The market response to the data was almost more interesting than the
payrolls data itself. Equities, Bonds, Gold, and currency market all sent a
very consistent message to the Fed – ‘we can handle near-term tapering’.

„

Betas suggest the USD is vulnerable to all currencies except the yen in an
environment where equities are going higher and bond yields temporarily
track sideways.

„

The obsession with the timing of tapering detracted from an even more
important message about the timing of a rate hike. The unemployment rate
has been falling at a steady pace of 0.8 to 0.9% per annum for three years,
and there is no reason not to think about a 6% unemployment rate at the
end of 2014, that will either threaten forward guidance or force a change in
forward guidance.

„

Although short-term USD sentiment is vulnerable to favorable risk sentiment,
there is nothing in the latest stronger US data to detract from a bigger
picture multi-month bullish USD view.

Judging from post payrolls commentary, it seems that most market
participants are stuck, singing from the same hymn sheet. Those, like my
colleague Joe Lavorgna, that thought the employment data was the last piece
in the jig-saw needed to secure a December taper, feel more secure about a
December taper. Those who believed in January or March taper may feel less
secure, but seem inclined to hold their ground. The market is split.
Table 1: Financial and Asset prices: Latest versus around the June and September FOMC
Asset values on latest FOMC press conference dates
J une 18, 2013
Sep temb er 17, 2013
La tes t

S&P 500

2 y r y ield

10 y r y ield

1652
1705
1803

0.27
0.38
0.30

2.19
2.85
2.87

BAA- 10 y r
y ield s p rea d
2.93
2.68
2.59

U SD TWI
(b ro a d )
100.9
101.6
102.1

O il s p o t
(WTI)
98.5
105.4
97.5

VIX Ind ex
16.6
14.5
13.7

CVIX3I Ind ex
9.9
8.6
8.2

US real economy data prior to latest FOMC press conference dates

Ma y , 2013
Aug us t, 2013
La tes t

No nfa rm
Unemp lo y me p a y ro lls firs t
relea s e
nt ra te
(000's )
7.6
175
7.3
169
7.0
203

No nfa rm
p a y ro lls firs t
relea s e 3m
a vg (000's )
155
148
193

US
p a rtic ip a tio n
ra te

ISM ma nuf

ISM p rices

63.4
63.2
63.0

49.0
55.7
57.3

49.5
54.0
52.5

Co re CPI 6m
% cha ng e
a nnua liz ed
1.7
1.5
1.7

Source: Deutsche Bank, EcoWin

The market response to the data was almost more interesting than the data
itself! Equities, Bonds, Gold, and currencies all sent a very consistent story of
a market unafraid of tapering, and, unperturbed by uncertainties over the
timing of tapering. This favorable risk response, at the margin, adds to the
risks of an early taper, to the extent that QE is being directed at keeping
financial conditions easy, and markets are saying they are less dependent on
QE.
________________________________________________________________________________________________________________
Deutsche Bank Securities Inc.

6 December 2013
FX Daily: Markets scream - we can handle a taper

On financial conditions, Table 1 above shows that equities are nearly 10%
above where they were when Bernanke delivered his hawkish message at the
June FOMC press conference. Equities and credit spreads have done an
extraordinary job in weathering sharply higher Treasury yields, with 10yr yields
some 65bps above June levels, while BAA - 10y credit spreads have
compressed by nearly 35bps.
When comparing prices relative to those that prevailed before the September
FOMC meeting, the S&P is nearly 100 points higher. Meanwhile, short-end
yields are stunningly back to levels that prevailed before the June meeting.
This is the clearest indication of a market that gets the difference between
tapering and rate hikes. Lastly, bond vol is down, with less fear of an
uncontrolled yield spike higher.
Now look at the real economy data. When Bernanke took a more hawkish
stance in June, ISM was below 50, and the unemployment rate was 7.6%.
The latest payroll numbers are significantly stronger than the payrolls numbers
the Fed had at the June and Sept FOMC meetings when real-time 3m averages
were closer to 150K. Lastly, the 6 month trend in core inflation has barely
budged, although lower oil prices are contributing to some reduction in
pipeline price measures.
The real economy data in combination with the financial data, asks a simple
question of the Fed: If you do not taper in December what are you waiting
for? How many months of smoothed NFP numbers in the 175k-200K do you
need?
On Friday, US financial markets were shouting – ‘we can handle
tapering’.
Because market opinion is still so divided on the timing of a taper, the Fed may
wish to provide pre-FOMC guidance so as not to introduce undesired noise into
the market on December 18th. There is generally greater incentive for the Fed
to pre-signal if the message is bearish (a taper) than if it is bullish.
Unfortunately, before the next FOMC meeting only Lacker, Bullard and Fisher
are scheduled to speak, but none of these policymakers is a logical person to
send a message. Print media is another option.
So where does this leave the USD?
If the Fed does not taper in December it will send an extraordinarily dovish
message which will at least initially only affirm the kind of price action seen
after the latest release. The betas in Figure 1 below show that the USD is
vulnerable to all currencies except the yen, in an environment where equities
go up and t.bonds temporarily go nowhere.
Although short-term USD sentiment is vulnerable to favorable risk sentiment,
past bullish shifts in US rate sentiment have proved temporary and provided
better opportunity to set up longer-term trend trades including, long
USD/commodity FX and particular long USD/Fragile EM positions at better
levels. There is nothing in stronger US data to detract from a bigger picture
multi-month bullish USD view that will eventually impact USD yields. This is in
no small part because the obsession with the timing of tapering has detracted
from an even more important message about the timing of a rate hike. The
unemployment rate has been falling at a steady pace of 0.8% - 0.9% per
annum for three years, and there is no reason not to think about a 6%
unemployment rate at the end of 2014.
This is going to place pressure on the Fed to adjust their forward guidance on
thresholds, even if the October FOMC minutes showed no enthusiasm for such
a cause. In any event, the unemployment rate trend still provides comfort that
short-term rates will become a material USD positive in H2 2014, broadening
the USD bull story to finally include the EUR.

Page 2

Deutsche Bank Securities Inc.

6 December 2013
FX Daily: US markets shout – we can handle a taper

Figure 1: Currency Betas show yen is only currency to weaken against USD in environment where equities going up
and bonds are going sideways.

Source: Deutsche Bank, EcoWin

Deutsche Bank Securities Inc.

Page 3


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