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FXPRIMUS Market Brief of the Week: Investors Continue Seeking Federal Reserve's (Fed) Monetary Policy to Gauge Direction

SINGAPORE, SINGAPORE -- (Marketwired) -- 01/09/14 -- In FXPRIMUS' Market Brief of The Week for 6 January, the brokerage firm's Senior Economist, Jimmy Zhu, looks at the Fed's current monetary policy and possible effects on the market.

Economic Insights

Fed policy will likely dominate sentiment in upcoming months

The Fed decided to pull back its monthly bonds purchases last month, setting the USD and equities more solid. However, treasuries fell sharply on the rising borrowing cost concern. Of course, easy money isn't over yet as inflation remains a good reason for the Fed to continue its mega stimulus program, pledging to keep interest rates at record lows. I estimate that the following few Federal Open Market Committee (FOMC) meetings will track the possibilities below:

1.  The unemployment rate is still too high, so maintaining a highly
    accommodative monetary policy in the upcoming few months is necessary.
2.  With Fed asset purchases, most voting members believe that benefits
    outweigh the cost of Quantitative Easing (QE), since the plan
    contributes to economic growth and improves outlook.
3.  Fed's QE tapering is not a pre-set course. Janet Yellen also said that
    each of the Fed's monetary policy meetings will continue assessing the
    economic outlook and decide whether QE will continue reducing.
4.  Regarding financial stability, Yellen reiterated her view on asset
    bubbles prevention; the best way to stabilize the financial system is
    through regulatory policy, rather than adjusting the current monetary
    policy.

Overall, there shouldn't a significant monetary policy adjustment in first half of 2014.

However, based on Fundamentals, higher borrowing costs on US sovereign debt and the improving economy will help boost the Dollar this year, especially against the Aussie and Yen. It was well proven in 2013. Policy divergence could be one of the main strategies used by currency traders. In 2014, major central banks are set on diverging paths in terms of monetary policy, and the US economy will support a slightly "tightening" view compared to the rest.

The FOMC will probably continue tapering over its next seven meetings before ending the program in December, according to current estimates. If this is the case, the average tapering amount per meeting should be around USD 10 billion.

Looking at available recent U.S. economic indicators, Manufacturing grew in December at the second-fastest pace in more than two years. Another key report will be released this Friday - the Non-Farm Payroll (NFP), which should stay well above 180K.

Let us assume that US fundamentals are really solid, as I mentioned earlier. The challenge for other central banks is that if long-term borrowing costs do rise in the US, they have to ease monetary policy further, given that there are fragile economies elsewhere. Historically, markets are highly correlated, so if we see US rates rise, it will be hard for European rates to stay where they are. The same goes for Australia, New Zealand or even Japan. This offers investors a clear direction to make the correct decision.

The European Central Bank's (ECB) rate decision and press conference will be this Thursday. I do not think another rate cut will arrive this week. However, if deflationary risks mount significantly, Mario Draghi will need to start looking at other options besides the rate cut since the Fed trims down its assets purchases.

Top news this week
U.S. Non Farm Payrolls in December
I expect figures to come in at 198K.

ECB Rate Decision
I expect figures to come in at 0.25% unchanged.

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