Markets shake off US payroll disappointment – consensus is Fed's taper is here to stay

The start of last week’s trade may have been directed by suggestions that the Fed’s call to tapering QE had been premature in light of the massive miss in the December payrolls reading, but this proved relatively short lived. Consensus is building that the shortfall can be explained away by bad weather and issues with the way the stats are adjusted seasonally, meaning that the timing is right and with some now believing the US economy will post its best growth in 2014 for almost a decade, the timing remains convincing.

USD/JPY

Early last week the direction of this trade was determined very much by the overhang from the non-farm payrolls. This pushed the pair down to levels not seen since mid-December but it was quickly deemed unsustainable and as the bargain hunters moved in, the reversion took hold. However the release of some weaker than expected US economic data once again pushed the bears back into play at the end of last week, but against the longer term paths for respective Japanese and US interest rate policies, there’s scope to see this as overdone. The Yen’s erosion has certainly stalled at the start of 2014, but it’s becoming increasingly difficult to see this as rational.

AUD/USD

The Aussie dollar hit fresh multi-year lows last week off the back of that worse than expected employment data, which in turn raised the prospect of another rate cut from the RBA. AUD/USD failed to breach 0.8750 and the subsequent rebound has been rather modest, adding to the pessimistic outlook. With Australian inflation and consumer confidence readings due mid-week, we could well see further volatility emerging off the back of this and any notable shortfall may act as a catalyst to accelerate the decline.

USD/SGD

Again we saw the Sing dollar find some buyers off that payrolls shortfall last week but the appeal proved limited and we’re bow within a cent of the 2013 highs on the pair. There’s a clear upward channel building since those lows of late October were seen, but presumably at some point the MAS will seek to call time on this. It’s devaluing the SGD denominated assets of the population and as recent data has shown, the strength of the currency isn’t causing any real issues with regard to exports.

Equities

It has been a relatively uneventful week for equities across the globe and Asian markets have been no exception to this. Yes, there have been some outliers but with traders continuing to buy into two key points – benchmark borrowing rates ate going to be increasing but there are no outward signs of economic contraction in the majority of nations – then this is probably par for the course. Granted we are seeing some economic expansion slowing down but China is avoiding the hard landing that many had forecast. Perhaps the bigger problem is the fact that many now see an equity market correction as inevitable – the question is just when this finally comes about…

Key economic points to watch

Australian consumer confidence and inflation data could provide further direction for the Aussie Dollar.

Market holidays

The Sydney market is closed on Monday 27th January for Australia Day

Geopolitical situation to watch

Japanese Prime Minister Shinzo Abe has run into another headache after local elections failed to deliver for him. The move is likely to strain ties with Washington as the outcome could have a bearing on the relocation of a controversial US air base in the country.