There are good chances that the Fed will taper its bond buys on its meeting on September 18th, but it is a close call, both for markets and the Fed, says Simon Smith of FxPro. It’s important to note August’s payrolls.
In the interview below, Smith also discusses the direction for the UK economy, Japan’s recovery and Greece. Enjoy.
Simon has over seventeen years experience of macro forecasting and investment strategy research. Prior to joining FxPro in May 2010, Simon was a consultant with Thomson Reuters, having spent four years as Chief Economist at Weavering Capital. He has held economic and strategy positions with Standard & Poor’s, together with consultancy firms 4Cast and MMS International. Simon holds an MSc. in Economics from the University of London and a BSc. from Brunel University.
- Is QE tapering in September already priced in? Will the Fed communicate the direction of the September decision towards the meeting?
For the markets, I don’t get the impression that it is fully priced in but also that the Fed thinks it is a done deal that needs communicating ahead of that date. A weak jobs number for August could well server to tip the balance, not least because nominal growth and various inflation measures have been moderating recently. For sure, the Fed is keen to take that first step, knowing the importance of signalling to markets that the current level of asset purchases cannot continue for ever and on balance I still expect this to come in September, but it could be a close call, both for markets and the Fed.
- Greece: The IMF talked about a funding gap and the Bundesbank reportedly talked about a third bailout coming in early 2014. Can this have a big impact on the German elections?
Probably not. We’ve been through periods where Greece has hit the headlines on a daily basis for weeks on end. As such, Merkel’s CDU coalition have a sufficient lead in the polls that would require a full-blown crisis and resolution in Greece to make it a significant issue to impact the result.
- Japanese GDP came out a bit below expectations and the yen is getting stronger. Can the government or the BOJ increase the current efforts to stimulate the economy and push down the value of the yen?
Trading the yen has been the downfall of most FX traders over the years. We’d thought it had all changed towards the end of last year as many reasons were trotted out to justify a weaker currency and they appeared to be working. Once again, we are in a situation of the yen behaving badly (this is a pun on an old UK sitcom called ‘men behaving badly’), which meand defying expectations for further weakness. The BoJ has pretty done all it can. For now, it’s down to the government to convince the economy and particular firms that they mean business, allowing firms to invest and put a broad base underneath the recovery.
- The initial reaction in sterling to Carney’s forward guidance program was positive. Looking forward, can the pound gain more on the optimistic growth forecasts and the improving situation in the UK? Or will the loose monetary policy take its toll on the pound?
I don’t think the story is going to be easy for the UK in the second half of the year. Yes, the data has been improving, but it’s not the sort of recovery we were after. The housing market is doing well (in part thanks to government support), but real incomes are still very depressed and productivity weak. We don’t yet feel in the position that net external trade and investment are going to make up for weakness elsewhere. This is going to make for a difficult backdrop to the pound. Loose monetary policy will put downward pressure, but not as much as the sterling bears would have us believe. Remember, six months ago it was believed that further QE was a done deal, especially with a dovish central bank governor set to take control. How wrong markets were.
Further reading: The Fed needs to be convinced that this time it’s for real