Dollar Buckles as Fed Does Not Taper

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Market Drivers for July 31, 2013
Fed – No taper yet.
German labor data beats but retail sales miss
Aussie slumps towards 9000 before rebounding
Nikkei -1.45% Europe -0.11%
Oil $103.50/bbl
Gold $1333/oz.

Europe and Asia:
AUD Private Sector Credit 0.4% vs. 0.3%
JPY Housing Starts 15.3% vs. 15.9%
JPY Nomura/JMMA Manufacturing PMI 50.7 vs. 52.3
CHF UBS Consumption Indicator 1.44 vs. 1.45
CHF KOF Swiss Leading Indicator 1.23 vs. 1.21
EUR German Retail Sales -1.5% vs. -0.1%
EUR German Unemployment Change -7K vs. -1K

North America:
USD ADP Employment Change 200K vs. 179K
USD GDP 1.7% vs. 1.0%
USD Chicago PMI 52.3 vs. 53.7
USD FOMC Rate Decision No taper yet
CAD GDP 8:30 0.2% vs. 0.2%

The Federal Reserve kept the rates and QE unchanged in contrast to conventional expectation that the FOMC might signal some sort of tapering in September, causing sharp volatility in FX as the dollar first weakened then strengthened then weakened again.

Two reports earlier in the day helped spur enthusiasm of dollar bulls as both ADP and GDP numbers printed better than expected. The ADP reading came in at 200K – higher than the 179K originally forecast, while the GDP posted 1.7% gain, much stronger than the 1% eyed.

However, the robust US data failed to impress the FOMC policymakers with the committee essentially staying the course and refusing to commit to a definitive time as t when they would start to taper QE. Instead the FOMC statement repeated much of its language but did admit that the downside risks to the outlook for the economy and the labor market have diminished since the fall.

In short today’s statement from the Fed suggests that policymakers would like a bit more time to fully assess the economic conditions. As we noted earlier, “some analysts have argued that the Fed may not only be looking at US growth but at the global picture as well- especially China where the slowdown in activity has been much more dramatic.US policy makers therefore may not want to compound the problem by curbing stimulus just yet.”

As to FX the dollar eventually started to sell off in reaction the Fed statement as traders fully digested the implications of the FOMC words. The EUR/USD finally broke through the 1.3300 level and may now target the 1.3400 figure while USD/JPY slid below 98.00 after making a half hearted attempt to rally.

Boris Schlossberg
Managing Director

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