DailyFX
Dollar Rallies after Fed’s Bernanke Lays Out Taper Timetable
John Kicklighter

  • Dollar Rallies after Fed’s Bernanke Lays Out Taper Timetable

  • Japanese Yen: The Bank of Japan’s Troubles Just Doubled

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Dollar Rallies after Fed’s Bernanke Lays Out Taper Timetable

As the market had expected / feared, the Federal Open Market Committee (FOMC) clarified its intentions to Taper stimulus in the near future – and the dollar rallied for it. Having avoided the extreme avenues of simply reducing the monthly, $85-billion-per-month injections this month and simply ignoring the costs of stimulus; the Chairman Ben Bernanke said that the group can reduce its pace of purchases later in 2013 and end the program altogether in mid-2014…data providing. There are certainly requirements to meet before support is curbed, but for a market running on record levels of leverage and over-extended in its search for yield; the eventual exit is a severe threat to a delicate balance.

Moving forward, the focus will be the timing of a Fed exit. Barring a steep slump in growth or trend higher in the unemployment rate, the group will no doubt make an effort to acclimatize the market’s to eventual reduction in QE purchases. Given Bernanke is likely to end his tenure by the end of January, there is a limited time frame to act (starting in 2013 is late and you don’t make a big policy move for someone else to navigate). September is most likely the month to move. Such an immediate time frame is a direct threat to those that entered markets near their highs or used excessive leverage. Yet, true risk aversion has yet to take. Watch the S&P 500 at 1,600. Few benchmarks measure moral hazard better.

Japanese Yen: The Bank of Japan’s Troubles Just Doubled

With the US central bank signaling the limitations to its constantly expanding stimulus program, the Bank of Japan’s job has just become far more difficult. In the group’s unspoken objective to devalue the yen to help spur export-led growth, the Japanese authority was incidentally relying on the successful encouragement of risk appetite via stimulus efforts of other global policy groups. No other bank was as successful in investor sentiment as the FOMC – that relative accomplishment can be seen in the incredible consistency of the S&P 500’s bullish pace since 2009. Should global investor confidence start to deteriorate in the wake of the Fed’s warnings, trades thin on meaningful return and driven by excessive leverage will come under heavy pressure. That includes carry trades. Historically, the yield income on yen-based crosses is at or near historical lows, yet the pairs are closer to record highs. Can the BoJ hold back this tide? Not if risk aversion builds momentum…

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