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Forex pairs in this Article » EUR/USD (Bali) - According to Greg Gibbs, FX Strategist at RBA, taper will start tonight while he doubts that strengthening policy guidance can be achieved credibly.

Key Quotes

"Our US economics team have long held the view that the taper begins in March, but they have steadily become opened minded to a taper occurring sooner and possibly today on the back of the strong data and fiscal agreement. (Our US Economics teams discuss a range of possible outcomes in their weekly report)."

"My personal view now is that the Fed does start the taper today. The decision to taper is about getting the momentum going in the economy. It is not so much about inflation. The data are strong enough and the Congress appears ready to make a budget deal that will boost confidence. Considering this discussion began in May certainly the market is prepared and delay arguably prolongs uncertainty and would confuse the Fed message at a time where it wants to be more transparent."

"It is better to not make this about personnel change on the FOMC and make it about the process. It is a weak argument to say it is better to wait for next year due to liquidity concerns. The market is operating relatively normally and the Fed has a full blown meeting with press conference and FOMC forecasts. (My guess in $10bn, but it could be $20bn, either equal on Treasuries and MBS, or somewhat favouring Treasuries)."

"The Fed may try and massage rate expectations by setting lower forecasts in their own projection for rates. But it can't just push these around to suit where it would like the curve to be, otherwise they lose credibility too."

"On balance, it looks to be that the curve has largely built in a taper and guidance with 2yr yields low and the curve relatively steep. So the reaction may not be severe. But the risk is that the market is a bit surprised that the taper has begun and yields rise across the curve and are mildly supporting for the USD."
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