Dollar Soared With Yield As Fed Signaled Ending Of QE

Stocks, bonds and commodities tumbled sharply last week, after the Fed indicated that it would taper the asset purchase last this year and even end the program mid-2014. The DOW dropped sharply to as low as 14688.4 before closing at 14799, down -154 pts from prior week, or -1%. The MSCI global market index dropped -2.91%. The fall in the MSCI emerging market index was even steeper, by -5.57%. The U.S. 10 year yield jumped to 2.514%, and the 30 year yield jumped to 3.567%. Both were highest since August 2011. Gold dropped to close at 1297.7, below the 1300 level for the first time since September 2010. The Dollar index rebounded strongly to close at 82.31, compared to last week's low of 80.50. In the currency markets, the dollar was the strongest currency as boosted by strong U.S. yields. The Aussie and Kiwi were hardest hit, both down nearly -4% against the greenback. The Yen followed closely, boosted by surging yields. The Canadian dollar followed.

Our strategy to short the EUR/JPY and GBP/JPY was wrong, as yen crosses were generally higher following the surge in yields. The development suggests that recent correction in the yen crosses has already completed. That's not completely certain, as the USD/JPY, EUR/JPY and GBP/JPY were limited below minor resistance levels of 99.28, 131.29 and 154.22 respectively. The European majors showed sign of topping and reversal against the dollar, but the rebound in the USD/CHF was less than unconvincing so far. The Aussie extended the recent decline against the dollar, but looked oversold. The USD/CAD was strong and should have resumed a larger rise from 0.9633. The EUR/AUD and GBP/AUD showed divergence condition in the 4 hour charts, and might top in near term soon. Momentum in the EUR/CAD and GBP/CAD was solid.

First, we'd avoid yen crosses for the moment even though upside is in favor. We'd prefer to long dollar this week.The USD/CHF and AUD/USD should be avoided. Based on the comparative momentum between the euro, Sterling and Canadian, we'd prefer to long the USD/CAD this week.

To recap some of last week's events, the FOMC meeting turned out to be more hawkish than anticipated, with policymakers seeing 'diminished' downside risks to the economic outlook. The Fed was not worried about the weak inflation level. At the press conference, Chairman Bernanke indicated the intention to complete the tapering process by mid-2014. The Fed's latest set of economic projection showed downward revision unemployment rate and upward revision of 2014 GDP growth estimate.

According to a survey by Bloomberg, after this week's FOMC meeting, economists are expecting Fed to taper the monthly asset purchase target from $85b to $65b in September and end the program in June 2014. A key factor in determining the speed of scaling down the purchase is how fast unemployment rate would drop from the current 7.6% level.

The minutes for the June BOE minutes showed that 6 out of 9 board members voted for leaving the asset purchase program at 375B pounds. The decision to leave the Bank rate at 0.5% was unanimous. BOE Governor Mervyn Kind failed to convince his colleagues in his last monetary meeting; the majority of members preferred to wait and see as recent economic data showed that economic recovery remained stable. The pound slipped while 10-year bond yield rose after release of the minutes.

The SNB kept the three month Libor unchanged at 0-0.25% for the eighth consecutive quarter as widely expected. The EUR/CHF floor was also held unchanged at 1.2. The central bank kept GDP forecast unchanged at 1-1.5% in 2013. The CPI is expected to be at -0.3%, revised down from the prior projection of -0.2%. In a statement, the SNB warned that "appreciation of the Swiss franc would compromise price stability, and would have serious consequences for the Swiss economy." SNB president Jordan pledged to defend the Swiss exchange range with "utmost determination" and he expects Swiss Franc to "fall further over the new few quarters". Jordan also said that "risks for the Swiss economy remain high" and "further developments in the euro area financial and sovereign debt crisis remain uncertain. Tensions can reappear at any moment on global financial markets."

The RBA released the minutes for the June meeting, explaining rationales for the decision to leave the cash rate at 2.75%. The minutes also unveiled that policymakers remained concerned about strength in Australian dollar although it has dropped recently. The Aussie slumped as the minutes suggested policymakers still viewed the current level of AUD remained higher and further rate cut is likely.