We do not expect the Fed to taper until Q1 2014, says JPMorgan’s Yates
The Fed’s delay in September shows they want more confirmation that US economic momentum is firm before altering US monetary policy, according to Sara Yates, Vice President and Global FX Strategist at JP Morgan Private Bank.
The Fed didn’t taper in September and we think they will not now taper until Q1 2014 for three key reasons:
• In our opinion, the Fed’s delay in September shows they want more confirmation that US economic momentum is firm before altering US monetary policy. In other words they want to see a longer run of robust US data. Unfortunately, the partial US government shutdown means that the publication of key data points is delayed. It is also likely to introduce some near term noise into the data. We think they will want time to look through this noise.
• The compromise deal kicks the budget/debt ceiling can down the road. It has not been resolved. The next important dates are the 15th January (when government funds will run out if another deal isn’t reached) and 7th of February (when the debt ceiling extension expires). Going on recent history these discussions could go to the wire. The Fed may prefer to wait for more political clarity before tapering.
Yellen takes over in January. Central Bank chairs do not typically change the direction of monetary policy in their last meetings. Rather they leave it to the new Chair to set the direction for monetary policy.
What does this mean for EM FX?
The delay in tapering is good news for currencies whose economies can leverage off the US cycle (MXN, KRW, PLN). We believe that the push back in tapering has given the US economy more time for growth to broaden and deeper. This is great news for the US economy AND EM economies as it means they will have more opportunity to leverage of the US recovery. For example, just consider the Mexican economy. Despite its NAFTA links to the US, Mexico has not yet been able to successfully leverage off the US growth story. As a result the Mexican manu PMI has hovered around the 50 no-change mark for two quarters, inflation remains well contained and rate cuts are likely. The push back in tapering (and likely rate cuts) makes us more optimistic on the Mexican economy and continues to keep us moderately bullish on the MXN.
We also believe an extended delay will benefit high yielding currencies in the short run. The fall in US yields has had a negative impact on yields globally. This is great news for many EM economies where economic growth has continued to disappoint. Remember just prior to Bernanke’s shock remark about near term tapering, 14 central banks had embarked on a cutting cycle. Within months not only were they facing steeper yield curves, but some were also forced to hike rates to defend their currencies. With no change in US monetary policy likely just yet and Chinese data likely to firm into year end, we expect high yielding currencies to trade sideways toward year end.