US GDP Propped by Consumers Euro EM Unwinded

The pullback in US Q4 GDP to 3.2% from 4.1% in Q3 was offset by the highest reading in personal consumption expenditure in 3 years at 3.3%. The improvement in international trade from reduced energy imports coupled with the highest surge in inventories have also helped boost the overall GDP figure.

Going forward, Q1 GDP will require continued participation from consumers in the way of prolonged momentum in retail sales, while the robust energy sector will be vital in further reducing the trade gap component.  Record highs in US energy exports and a 30% decline in oil imports from their 2012 high have been the

Stabilisation ensues across all emerging markets currencies: Turkish lira gaining in 3 of the last 4 days, South African rand erasing more than half of yesterday’s losses and the Russian ruble seeing its daily gain in 2 weeks.

Cooling yields against taper autopilot

Markets may be comforted by the growing notion that more policy clarity and stabilisation will be seen in emerging markets by the time the FOMC meets in March and the Fed would have received two US jobs reports and provide more visibility with regards to the fate of the taper program.

Another potentially positive development is the cooling in bond yields’ upward momentum. This could be interpreted by fixed income traders that the Fed’s normalising of policy may not necessarily be defined as bringing asset purchases to zero but a level at which economic growth reaches and maintains exit velocity of 3.0%.

Yen extends pullback from the post-FOMC rally as market sentiment stabilises on the notion

Euro as counterpart to EM Carry trade

The chart below indicates the biggest declines sustained by emerging market currency from the peak of May 9 (the day WSJ’s Hislenrath published an article suggesting an early taper and prompting EM selloff) is 18-20% by the Turkish lira, South African rand and Brazilian.   More importantly, the trade of selling euros and investing the proceeds in the carry yields of EM currencies is being unwound as seen in the euro’s recent stabilisation despite falling global equity markets. Considering the ECB is unlikely to cut rates in H1 2014, any prolonged selling in EM would provide added support for the single currency above 1.34 and for a gradual return to 1.37. Opting for longs in USDJPY is the preferred path as long as 100.80-90 support is preserved for 105.50 in Q2 (when the BoJ gets serious about implementing its expanded QE).