For the first half of 2014 the US unit strengthened marginally -vs- the EUR & CAD, but was appreciably weaker -vs- JPY, GBP, AUD & NZD. The greenback was strongest against the Canadian unit, appreciating by +0.45% while it was weakest -vs- Kiwi, falling by 6.62%.

InstrumentDec 2013_ENDJun 2014_END%_chgUSD_STATUSComment
EUR/USD1.37431.3692(0.37%)UPECB worried about disinflation in Euro Zone
USD/JPY105.31101.33(3.78%)DOWNLack of further stimulus; Safe haven status
GBP/USD1.65571.71063.32%DOWNBOE poised to hike rates as economy improves
AUD/USD0.89170.94335.79%DOWNRBA shifts policy from easing to neutral
NZD/USD0.82140.87586.62%DOWNRBNZ raises rates and retains hawkish bias
Dollar Index80.0479.80(0.30%)DOWN
US10Y_yld3.0282%2.5304%(16.44%)————Dovish FED and inconsistent economic data results in bond bears getting squeezed
GOLD1201.641327.3310.46%————Inflationary hedge and Safe Haven status
S&P5001848.361960.236.05%————Dovish FED emboldens stock bulls
DAX9552.169833.072.94%————Talk of QE boosts stocks
NIKKEI16291.3115162.10(6.93%)————Lack of further stimulus and Sales Tax hike

BOJ & Abenomics:
The “three arrows” of Abenomics – 1) a massive dose of fiscal stimulus for the economy – ¥10.3 trillion came a month after Abe’s return to power in December 2012; 2) an unprecedented monetary boost through massive quantitative easing – became reality once Kuroda became Governor of BOJ; 3) radical structural reforms aimed at generating long term economic growth – with literally no one to oppose him politically, Abe has the time and political savvy to push his agenda through.

Inflation has risen to +1.25% and the BOJ appears confident that its goal of core inflation at +2% will be met by the spring of 2015. The sales tax hike was expected to be, and is, a drag but with unemployment low, a healthy financial sector and improving corporate earnings, the committee seems to feel that the economy can withstand this. This has led to talk that what has been done so far may be enough in and of itself to re-inflate the economy.

USD/JPY has borne the brunt of this reactive approach and currently sits right above the critical support zone between 100.80 – 101.30. A breach of the lower end of the zone could see the Yen strengthen a bit more than the BOJ might like.

ECB & EU’s Disinflation Dilemma:
The ECB is not expected to do anything when they announce the results of their monetary policy meeting on Thursday (6/3) as most expect them to adopt a wait-and-see approach after having cut ratesannounced the impending implementation of a targeted lending operation, and opened the door for potential purchases of asset backed securities(QE) at their last meeting. The hope is that upcoming economic data will start showing signs of a pickup in growth.

If this does not happen then the market will begin pricing in the launch of QE which should take the wind out of the Euro’s sail as the year progresses.

FED & Self Sustaining Economy:
The possibility of “tapering” asset purchases first came to light about a year ago and, after much market sturm und drang, outgoing FED Chairman Bernanke made this a reality when he started the process in his penultimate meeting. The headline number of $10 billion, which was to be split evenly between US treasuries and Mortgage Backed Securities, appeared to signal that the FED believed that the economy was on the path to self sustainability.

The goal, as stated by Bernanke, was to taper stimulus by at least $10 billion at each meeting with the total amount being rescinded by the end of 2014. The caveat to this timeline was that these future acts would be totally dependent on economic data.

This data has been quite inconsistent to say the least. While the unemployment and manufacturing metrics have shown promise, the actual GDP figures have not met the FED’s forecasts. This has forced the FED to downgrade their projections and reiterate that the course of future monetary policy will continue to be one that is “highly accommodative”.

So, tapering should, and probably will, continue at its current pace but any talk of rate hikes has to be viewed as being quite premature at this juncture. The net result of this has seen Yields lower, Stocks up, Gold up & the Dollar mixed to down!


Akhilesh Ganti