'Weak NFP might be overblown, Fed to proceed with taper in January' - Christopher Vecchio, DailyFX

Christopher
Vecchio

PROFILE:
• Current Job:  Currency Analyst for DailyFX.com in New York.
• Career: dual Bachelor of Arts degree in Government & Law and Economics from Lafayette College.

View profile at FXstreet.com

Christopher Vecchio is a currency analyst for DailyFX.com. With a background in political science and law, he focuses on the interrelationships between geopolitical events, macroeconomic trends, and market reactions. Also an active trader, Christopher monitors the markets around the clock.

Do you expect the Fed to taper its monthly asset purchases by an additional 10 billion dollars at the January meeting or will they rather wait until March, when Janet Yellen takes over as Fed Chair?

Yes. The worst thing the Fed can do is to make their policy less transparent. Changing the pace of asset purchases away from $10B would undoubtedly stir volatility. The Fed has also said that it doesn’t look at individual data prints when determining policy, but rather the trend. That would suggest that any concerns over the weak December NFP report might be overblown, and only a string of significantly weak labor market data would deter the Fed from its plans to wind down QE3.

How quickly do you expect the UK unemployment rate to drop to BoE's 7% threshold? What would the central bank do if the level was reached earlier than expected?

I expect the UK Unemployment Rate to drop to 7% early in 2014 – perhaps in the 1Q’14. If the next single month print comes in at 6.9% or lower, the Unemployment Rate – calculated on a three-month rolling basis – would fall to 7.0%. Claimant count rates continue to plunge and would suggest that the labor market is indeed improving at a hastened pace. Considering that UK CPI is at +2.0% y/y right now – the first time inflation has hit the BoE’s target since November 2009 – and it is below the BoE’s forward guidance circuit breaker of +2.5% y/y. A relatively stable, if not cooling price environment, might be the green light the BoE needs to turn up the dovish rhetoric at its February meeting. Indeed, with expectations for a shift in the Bank of England’s forward guidance starting to gather – a lack of policy statement, to lower the Unemployment Rate threshold to 6.5% from 7.0% - produced a rally in the Sterling after the BoE meeting on Thursday.

Which of the EU countries will continue struggling against the crisis in 2014? Where will we see a sustained economic recovery?

The peripheral countries (PIIGS) will continue to struggle as consumption remains low, thanks to disparaging labor market situations. Yes, these markets are starting to improve, but only marginally: on a relative basis to itself a few years ago, the Euro-Zone is much healthier; compared to other developed economies, there is much to be desired. I’m concerned about France in 2014. The French PMI reports from December 2013 showed the weakest readings in several months and an outlook that looked disastrous for future business and employment. If the French economy is suffering under current leadership, leadership that is unlikely to change in 2014, then neither will the current obstructive economic policies change.

Germany remains the safest bet for growth, even if that’s not the sexiest call to make. The November policy decision made clear the ECB’s intent to shape policy solely around Germany (otherwise the main rate would have been cut months earlier). Without German monetary indicators pointing towards deflation, other easing policies – another rate cut, another LTRO – are highly unlikely. With funding costs higher and credit growth remaining weak in the periphery, regional growth truly depends on Germany. A look at recent German trade figures would confirm this belief.

Commodity currencies are taking center stage these days: do you believe AUD and CAD had even more downside ahead this year?

Yes. Domestically, neither economy is performing that well. Australia remains exposed to a slowdown in emerging markets and China, and the engineered mini-financial crisis unfolding in China (rooting out the shadow banking system) is doing no help. Australia is better off than Canada, however, which may be handicapped by an incapable central bank. Deleveraging as a result of the Fed and the BoE winding down their easing programs will reduce demand for higher yielding currencies, particularly in the EM space (to which the AUD and CAD are cousins). The market doesn’t view the BoJ and the Fed in the same terms as a lender of last resort, so on balance, I think that the reduction or perceived reduction of liquidity could lead to more volatility – uncertainty breeds fear. As we’ve seen in the post-2008 years, periods of elevated volatility tend to coincided with periods of weakness in the commodity currencies. Interest rate differentials (ie AU-US 2Y spread) will become more important again (like 2003-2007) as the differentials become more significant.