The Fed have decided on cutting further 10billion USD from their stimulus program. The move was already predicted ahead by the market, and resulted in a mixed trading afterward. USD noted slight moves against its major currencies counterparts. The only suprise on the block is Yen, which is strengthening amidst emerging markets panic. Is this a mark of new trend?

The Fed have decided on cutting further 10billion USD from their stimulus program. The move was already predicted ahead by the market, and resulted in a mixed trading afterward. USD noted slight moves against its major currencies counterparts. The only suprise on the block is Yen, which is strengthening amidst emerging markets panic. Is this a mark of new trend?
effectThe Effect of Second Tapering
The effect of the recent tapering have been surpressed by market expectation and emerging market investors risk-aversion moves. The first tapering back in December 2013 and various statements from the Fed officials have prepared the market for a tapering, and so the impact isn't as startling as a month ago.

EUR/USD weaken slightly 0.10%, but it doesn't seem to be leaving the high it's been in since last week's Flash PMI announcement. GBP/USD too, lowered 0.10%, but was still in sideways. AUD/USD was one pair that's experiencing quite high drop, but it's not that surprising since it's been in bearish against USD since the end of 2013. They may weaken, but not as spontaneously as a month ago when the existence of tapering is still questionable.

For those pairs, big changes may happen in the beginning of next week. On February 3, Europe Manufacture PMI and US ADP Nonfarm Unemployment will direct EUR/USD moves. Reserve Bank of Australia (RBA) decision on interest rate at February 4 will be the crucial point of AUD/USD. While in the next day, there will be PMI releases on China, UK, and US.

Yen, on the other hand, experience significant changes as the result of investors flight from emerging markets. It gained 0.80% against USD even when its peers are struggling. This is the uniqueness of Yen as safe haven currency. Emerging markets investors see Japan as a very good choice to park their funds while waiting for turmoils to die down. However, it could be just panic speaking. To know for sure till when this will go on, we have to check tomorrow's CPI release. It might be good, but it also could be bad.


usd/jpyUSD/JPY chart in M15 timeframe 29-30 January 2014

Capital Flight From Emerging Markets
The ones who get the burnt from tapering are emerging countries. Turkey's central bank overnight decision to upgrade benchmark interest rates from 7.75% to 12% failed to support Lira. The same thing happen to South Africa, Argentina, and India. Such move usually has positive influence on currency rate, but why it doesn't work now?

To understand it, we have to go backward a little bit. Stimulus program under the title of Quantitative Easing 3 (QE3) was announced in September 2013. The program is about massive purchase of bonds by the Fed. That way, the Fed indirectly inject a huge amount of money to the world economy. It was meant to help US economic recovery, but instead, it resulted in excess funds within financial system. In addition, US had a pretty bleak prospect at that time. The two works together in investors mind so that they choose to move their investment to commodities and emerging markets which were in the middle of a rapid growth.   

Now that US economy is being thought of as 'recovered well', the Fed gradually cut the amount of money they inject each month to the economy. On one hand, the flow of excess funds is starting to slow. On the other, investors started to move back to advanced countries as business climate is getting warmer after US and Europe recovery. Emerging countries now scramble over what few foreign investment left for them.
emergingThe situation worsened by dismal economic prospects in emerging countries due to economic-politic instability. Peso was effectively devaluated by skyrising inflation in Argentina. Political unrest in Thailand, corruption scandal in Turkey, and so on, certainly doesn't make those countries more attractive for investors. To pour oil on the fire, the threat of a Chinese credit cruch is still hanging over emerging countries' growth, because the Chinese have been investing quite heavily on some regions.

Central Bank's effort through increasing interest rates, is hoped to support their currency's exchange rates. Nevertheless, its impact on domestic industry is not good. An increase on benchmark interest rates will be  followed by increases on business loans interest rates which is relied by most enterpreneurs and businesspersons in emerging countries. It will escalate production cost, and then surpress national production. This is one of the many reasons why Japan and European Central Bank maintains low interest rates. So, it's not really surprising that investors aren't moved by the policy. In such circumstances, Indonesian Central Bank's decision to hold benchmark interest on 7.50% might be wiser.

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