“Selfie” might be Oxford Dictionaries’ Word of the Year in 2013 but you can’t deny that, at least in the currency world, it’s the word “taper” that holds the crown. Heck, just the word alone was enough to dictate the mighty Greenback’s price action for most of 2013!
The US Dollar Index’s (USDX) price action wasn’t ALL about the Fed, of course. In fact, it was risk aversion due to political problems in Spain, Italy, and Cyprus and the BOJ’s aggressive stimulus plans that boosted USDX by 430 pips in less than two months early in the year.
It wasn’t until the May FOMC statement that sentiments on the Greenback started dominating USDX’s direction. The Fed hinted that it’s “prepared to increase or reduce” its purchases right around the time when Uncle Sam’s economic reports were exceeding market expectations.
The taper frenzy and the resulting dollar rally hit snags in mid-May and early July when the markets questioned the Fed’s mixed signals and taper schedule. Investors further showed their disapproval in September when the Fed, against a lot of calls for it, refrained from a “Septaper” and kept its asset purchases steady.
Luckily for the dollar, currency bulls were firmly in “Team Taper.” They invented terms like “Octaper,” “Dectaper,” and “Septaper-lite” to keep the taper vibe alive. This is probably why USDX found support at its January lows. Then, just a few days before the end of the year, outgoing Fed Chairman Ben Bernanke finally gave what the dollar bulls had waited for and announced the Fed’s $10B reduction in its asset purchases. Guess he didn’t want to be The Grinch last year!
Now here’s a question for you. Now that the Fed has given market players what they wanted, do you think that its taper schedule will still dominate the dollar’s price action or are we going to see new market themes for 2014?