Many investors expect the Fed to announce its third round of quantitative easing (QE3) at the Federal Open Market Committee’s (FOMC) meeting this week, but one foreign exchange analyst said conditions in the US economy have actually improved and QE3 may be delayed.
Minutes from the August FOMC meeting as well as a speech from Fed Chairman Ben Bernanke in Jackson Holelast week suggested that if the employment situation does not improve, the Fed will print more money.
Non-farm payrolls for August, released last Friday, showed jobs growing at a slower than anticipated pace and many investors have taken this as a signal the Fed will announce QE3 on Thursday. The dollar index fell 0.7 percent after the jobs figures were released and 10-year interest rates decreased sharply.
But Eimear Daly, a currency analyst at Monex Europe, said that although the headline non-farm payrolls figure was “undoubtedly weak,” it was “nowhere near the weakness in employment seen in the second quarter.”
Friday’s data showed 96,000 jobs were created in the non-farm sector in August compared with analyst expectations of around 130,000. The unemployment rate was 8.1 percent.
But in the second quarter, the monthly average non-farm payrolls figure was 67,000 and unemployment was 8.2 percent, Daly pointed out in a market note. “It was on this data that the FOMC produced August’s extremely dovish minutes that caught the market off-guard and had everyone anticipating QE3,” Daly said.
“The unemployment rate matters and the improvement, no matter how superficial, may be enough for the Fed to put off QE3 for another month. We have seen a recovery in the US since the dovish August FOMC minutes and we are certainly not where we were back in late July. The markets may be jumping the gun when it comes to QE3,” she added.
An announcement from the Fed this week that it would launch QE3 would be very positive for emerging markets, according to Societe Generale strategist Benoit Anne.
“If the bullish signal is confirmed, there is room for further emerging markets foreign exchange appreciation, with EM currencies set to be the best assets in the period ahead, overtaking EM fixed income in the process,” he said.
“A bit of prudence is still warranted given the fat tail risk of the Fed failing to deliver the good news this week, but it is quite clear to us that the undertone for global EM has improved considerably,” Anne said, adding that “the rally will be sizeable” if the Fed does go ahead with QE3.