Fed: Taper is only an accelerator – Deutsche Bank

Sebastien Galy, Macro Strategist at Deutsche Bank, explains that the common wisdom is that Fed tightening combined with tapering could lead to greater volatility but the reality is far more complex, it is more like a driver shifting gear to adjust his deceleration as he coasts to the red light.

Key Quotes

“If he doesn’t he might just have to hit the brakes hard. An unexpected widening of rate differentials may lead the currency to jump without a follow through in terms of trends so that G10 volatility recedes quickly. An expected widening of rate differentials leads to pressure on EM reserves leading potentially to an eventual shift in their policy stance. This may counter-intuitively encourage inflows initially in some of these countries as their currencies remain stable versus the dollar. In a scenario of limited tapering, the shocks in G10 currency volatility are likely limited and of short duration.”