Perhaps, it is the end of happy hour. The bartender is still serving but you do not get the two-for-one type deals that had you excited initially.
This is also representative of how we think about the implications for the currency market and the U.S. dollar. Reduced asset purchases should be dollar positive, but we doubt that we will see a strong dollar uptrend until the 0-2Y segment of the U.S. money market begins pricing in expected rate hikes, which is probably more of a 2014 theme.
Key conclusions: (1) Fed QE tapering is dollar positive, (2) Potential for the first cyclical dollar uptrend in years - not driven by market stress, (3
) Timing is difficult, as investors are already very long the dollar, but a window-of-opportunity exists to begin considering 2014 dollar hedges, (4) ‘Capital importers’ such as TRY, ZAR, NZD and AUD should be most at risk from tighter U.S. monetary conditions.
Reduced QE announcement could come in H2 2013
QE tapering is determined primarily by job growth and not the level of the unemployment rate (these two are of course connected). The latest Fed comments indicate that a continuation of the current labor market trend, where job growth has averaged 212,000 per month over the past three months, could be enough to trigger tapering as soon as in September. However, the latest fall in ISM manufacturing speaks against this.
Regardless of the exact timing, we believe it is time to begin thinking about the potential implications for the currency market and the dollar over the medium term.
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