FX Daily: Fed looks past disappointing NFP

USD is still supported by Fed taper expectations
Philip Wee09 Sep 2021
    Photo credit: Unsplash Photo

    DXY edged higher to 92.653 from 92.512. Last Friday’s big miss in US nonfarm payrolls (August was 235k vs 733k consensus) did not deter some Fed presidents from supporting a decision to taper asset purchases before the year is out. St Louis Fed President James Bullard is one of them. Based on his view for NFP to average 500k this year, Dr Bullard would not mind NFP slowing to an average 328k in the remaining 4 months of the year from the average 586k in January-August. Dallas Fed President Robert Kaplan, who has downgraded his growth outlook for this year, is also likely to reaffirm his call to start tapering in October when he speaks today. Although Bullard and Kaplan are likely to support a decision to taper at the FOMC meeting on 22 September, they are not voting members.

    The voting FOMC members who support a taper later this year are New York Fed President John Williams and San Francisco Fed President Mary Daly who speaks today. Daly is likely to echo Williams’ view on the “substantial further progress” made on achieving the inflation goal, and the “very good progress” towards maximum employment. The Fed’s Beige Book noted that businesses intend pass the price increases from supply shortages to consumers even though growth has “downshifted slightly to a moderate pace” in July-August from the public pulling back activities because of the Delta-variant.

    Against this ground, the currencies in the DXY are giving back their gains. CAD depreciated to 1.27 per USD this week after it appreciated from 1.29 to 1.25 in the previous 2-3 weeks. At its meeting yesterday, the Bank of Canada signalled a possible downgrade in its 2021 growth forecasts next month because of the fourth Covid-19 wave and supply bottlenecks. Similarly, EUR has returned about half its gains by falling towards 1.18 after its rise from 1.17 to 1.18 in the previous fortnight. The European Central Bank is expected to start a debate on whether to taper its pandemic emergency purchase programme at its meeting today. The surprise will be it does not. The governing council is, however, expected to be patient and wait till December to make any decision or announcement. ECB President Christine Lagarde is likely to reiterate that the Fed is ahead of the ECB in achieving its inflation goals and pulling back stimulus. The ECB’s new monetary policy framework suggests that it will be more determined than the Fed in maintaining favourable financing conditions.



    Philip Wee

    FX Strategist - G3 & Asia

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