Market Volatility Expected To Continue

Fed set to taper

The minutes of Fed Reserve’s latest policy meeting, released on Wednesday, immediately triggered the US Dollar rally against other major currencies. The July meeting minutes did not mention a specific month as to when the central bank is set to reduce the $85 billion-per-month bond purchase plan. However, with the enhanced forward guidance that the economy will pick-up later this year, almost all Fed officials supported tapering asset purchases in any of the next three policy meetings remaining for 2013, leading to strength for the US Dollar.

Economic data front reported on Wednesday included existing home sales for the month of July. According to the data released by the National Association of Realtors, existing home sales increased strongly by 6.5% to a seasonally adjusted annual rate of 5.39 million in July compared to a revised 5.06 million rate in June. Economists had expected July sales to come-in at 5.15 million from an original estimate of 5.08 million rate in June.

Strong PMI data

Earlier on Thursday, PMI data for August, released from China and Euro-zone, showed Chinese manufacturing activity surprisingly swings back to growth and Euro-zone economic activity continues to gain momentum.

The HSBC’s preliminary reading the Chinese manufacturing PMI rebounded from an 11-month low of 47.7 in July to a four-month high of 50.1 in August versus consensus expectation of 48.3.

Meanwhile, the preliminary Euro-zone composite PMI climbed to a 26-month high of 51.7 in August from 50.5 in July, indicating the Euro-zone economic recovery is gaining momentum. Also, the German PMI data reflected continuing expansion in August with the preliminary composite PMI rising to a seven-month high of 53.4 in August from 52.1 in July. The German manufacturing PMI climbed to a 25-month high of 52.0 from 50.7 in July versus consensus expectation of 51.1.

Markets will now turn their attention to the weekly jobless claims and manufacturing PMI, scheduled for release on Thursday. Jobless claims are expected to rise to 329K from 320K reported in the prior week. Further, the Flash version of the US manufacturing PMI is expected show a reading of 54.1, signaling continuing expansion.

• On Thursday, even better-than-expected manufacturing data from China and Euro-zone failed to boost demand for other major currencies versus the US Dollar.
• Further, with majority of the Fed officials comfortable with data-dependent taper plan, every improving economic data from the US is expected lift the US Dollar and infuse additional volatility in the currency market.