SYDNEY: Asian markets kept their nerve yesterday counting on the Federal Reserve to launch only a modest scaling back of stimulus later in the day, though all assets were vulnerable to any hint of hawkishness from the world’s most powerful central bank.
Expectations are that the Federal Open Market Committee (FOMC) will be measured with any cuts to its US$85 billion (RM275 billion) in monthly asset buying, while also seeking to reassure investors that the day of an actual policy tightening is still distant.
That kept the dollar pinned near a four-week trough against a basket of major currencies, as the euro crept up to US$1.3360 and nearer the week’s peak of US$1.3385.
On the yen, the greenback idled at US$99.20 around the middle of its recent US$98.45 to US$100.62 range.
After months of speculation about the Fed’s intentions, caution ruled in most stock markets ahead of the looming decision, with MSCI’s broadest index of Asia-Pacific shares outside Japan off a slight 0.2%. Shanghai shares eased 0.2%, as did Australia’s main index .
Japan’s Nikkei was the main standout with a jump of 1.35%, after reaching its highest since late July.
Stock futures in Europe pointed to smalls gains of 0.2% to 0.3% for Germany and France.
For the Fed, consensus has congealed around a reduction of US$10 to US$15 billion a month with all purchases ending by mid-2014. Yet, even that cautious timetable would be contingent on the economy performing as well as hoped.
With such an outcome largely priced in, it could lead Treasuries and the dollar to rally modestly. A slower tapering would tend to benefit bonds and stocks but hurt the dollar.
The bigger reaction would likely come if the Fed pulled back more aggressively, as that would lead market to price in an earlier start to rate rises as well.
That would be especially painful for emerging market countries that rely on foreign capital to fund current account deficits, with India and Indonesia among the most vulnerable.
The tension was evident in Jakarta where both shares and the rupiah came under pressure.
Still, dealers warned against a hasty reaction as there were so many moving parts in play.
As well as the tapering, the Fed may choose to alter its threshold for tightening, perhaps by lowering the trigger level on unemployment from the current 6.5%.
It will also publish its first economic forecasts for 2016 and the stronger the picture, the harder it will be to convince markets that any future rise in interest rates will only be slow and measured.
Indeed, the Fed has already had trouble convincing the market that it intends to keep rates near zero until 2015 no matter how much the economy improves.
The decision and economic projections are out at 1800 GMT while Fed chairman Ben Bernanke starts his press conference in a short while. Often markets can react violently to the former, then completely reverse course depending on what Bernanke says.
“We expect Bernanke’s press conference to be dovish. The Fed will want to temper market expectations that tapering will be rapid or that FOMC participants have brought forward their expectations for the first increase in rates,” says Joseph Capurso, currency strategist at Commonwealth Bank of Australia.
“While the dollar may soften after the FOMC meeting, our medium-term view of a stronger dollar is unchanged,” he added, citing higher US yields and the diverging outlook for rates between the US and other rich nations.
While yields on 10-year Treasury notes were a tick lower at 2.84% yesterday, that is up from just 1.62% back in May before the Fed first raised the spectre of tapering. — Reuters
This article first appeared in The Edge Financial Daily, on September 19, 2013.
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