Fed 8217 s Symmetric Rhetoric to Boost USD

Like every self-respecting central banker, Chairman Bernanke resorted to the ol’ “one hand & the other hand” style of rhetoric adopted by Alan Greenspan. The only difference this time, the balanced style is the result of Fed’s uncertainty and mixed opinions inside the FOMC, rather than a reluctance at clarity as was the case under Bernanke’s predecessor.

Back towards Symmetric Rhetoric

The Fed’s repetitive references to tapering asset purchases and increasing them are the latest rhetorical tool in guiding market sentiment. As the economy cools off, the doves at the Fed are on a mission to restore a more symmetric rhetoric, following a hawkish narrative prevailing in the first 3 months of the year. The April FOMC meeting was the first one of the year when the Fed mentioned the possibility of raising asset purchases. But the virtual disappearance of activity from the public sector (jobs and spending) had to be offset by consumer spending and, hence the obligatory wealth effect from rising equities.

From RoRo to ToTo

This time last year, the market debate revolved over whether the Fed would shift from Operation Twist to a full-fledged QE3. In Q1 of this year, the discussion shifted towards “the timing of tapering off QE”. Since the April FOMC, the debate has turned to “tapering vs. increasing QE”, which in our view implies a base scenario of maintaining $85 bn in monthly purchases into year-end, accompanied by verbal tweeks (occasional references to exiting, tapering and increasing purchases. The risk-on-risk-off (RoRo) dictating of intermarket movements may not have been always triggered by a single catalyst, but the resulting movements operated on a largely predictable fashion: USD and JPY move inverse to equities and commodities as the latter move in tandem with, European, commodity and EM currencies. Today, the RoRo dynamics may become increasingly triggered by the Taper-on-Taper-off references (Taper on = reduction of QE, Taper off = no reduction) of the Fed until the Eurozone makes its habitual return to the news in the summer.

Only this time, the yen’s occasional gains during rare risk aversion become an opportunity to sell at a higher position, and the reactionary pullbacks in the US dollar from taper off references become a greater opportunity to buy the US currency on the premise the 9-10 year bear market in the greenback has been played out.

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