FX Week 9 March 2014 |
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Events of the last week have reinforced some of our key FX views while some of our others have been partially undermined or at least challenged. To begin with the positives, the recent data from the US has encouraged our view that the slowdown in the US economy will prove temporary, thus lending support to our forecasts looking for a medium-term USD recovery. Most prominently of course, the February US employment report was surprisingly solid, with 175k non-farm jobs created during the month despite the continuation of bad weather during that month. Although the unemployment rate ticked higher to 6.7% and the hours worked fell, this does not meaningfully take away from the strength in payrolls, which came after two months when they rose on average by only 115k. With other indicators also suggesting reviving momentum it should not be long before the ‘weather effect’ is behind us. That being the case, the Fed looks very likely to keep tapering in coming months, starting next week when another USD10bn reduction in QE is expected. Although tapering has so far had a limited effect in terms of providing the USD with strength, we expect its impact to increase as QE gets closer to being completely wound down, with the market then likely to begin considering the timetable for possible interest rate hikes.
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