The U.S. dollar is trading sharply higher against all of the major currencies this morning on the back of comments from Federal Reserve President Stein. Despite the abundance of U.S. economic data this week, speeches from voting members of the FOMC had the largest impact on currency movements. For the most part, FOMC voters are onboard with the idea of tapering asset purchases this year. Yesterday’s attempts by Dudley and Powell to downplay the market’s expectations for changes in QE by saying that it is data dependent was a bit confusing for some traders but today, Jeremy Stein, who is a voting member of the FOMC this year called Bernanke’s speech last week an “effort to put more specificity around the heretofore less well-defined notion of substantial progress” in the labor markets. This was in reference to Bernanke’s note that monthly bond buying will probably end when the unemployment rate is around 7%.
What really got investors excited however was Stein’s comment that the Fed should “be clear that in making a decision in, say, September, it will give primary weight to the largest stock of news that has accumulated since the inception of the program and will not be unduly influenced by whatever data releases arrive in the few weeks before the meeting.” This specific comment about September sparked speculation that this will be the month when the Fed starts tapering which we also believe is likely because the central bank will not want to suddenly reduce stimulus right before the holidays. The surge in the U.S. dollar represents a further liquidation of dollar funded carry trades and additional re-pricing of FOMC expectations as traders initiate fresh long dollar positions. Fed President Lacker agreed that additional bond purchases increases the risks on exit but he is not a voting member of the FOMC.
This morning’s U.S. economic reports took a backseat to comments from policymakers. Manufacturing activity in the Chicago region grew at a slower pace in the month of June, with the PMI index dropping to 51.6 from 58.7. This contrasts with stronger activity experienced in the NY and Philadelphia regions. Consumer confidence on the other hand was revised higher. The University of Michigan consumer sentiment index settled at 84.1 for June, which was stronger than initially reported but still weaker than the previous month.