FX Viewpoint 3 Dec 2021 | Faster bond-buying taper in sight – what comes next? | Article – HSBC VisionGo

Faster bond-buying taper in sight – what comes next?
Finance  ·    ·  6 mins read

  • Fed Chair Powell confirmed that the FOMC will discuss faster tapering at the 14-15 December meeting
  • Our economists expect an accelerated taper with a rate hike in Q2 2022
  • We expect the USD to strengthen further in 2022, but in a rather modest way such that there is room for differentiation within EM FX

Fed Chair Powell puts faster tapering on the table

On 30 November, the Federal Reserve (Fed) Chair Powell took a hawkish step, endorsing the suggestion that an accelerated tapering of bond-buying would be debated at the 14-15 December Federal Open Market Committee (FOMC) meeting, and also retiring the description of higher inflation as transitory.

Our economists expect the Fed to end its asset purchase programme by mid-March 2022, paving the way for a rate hike in June

Our macro research team has changed its Fed view to include two rate hikes and quantitative tightening in 2022, and two additional hikes in 2023, as this year’s surge inflation has changed the Fed’s policy outlook. Our economists now expect the FOMC to speed up the tapering of its bond-buying activities so that net asset purchases would reach zero in mid-March 2022, sending a signal to financial markets that rate hikes could be forthcoming as early as Q2 2022. In spite of the uncertainty around the new COVID-19 variant with a high number of mutations, known as Omicron, and the evolution of financial conditions, our economists now expect two 25bp rate hikes in 2022 (in June and September) and two 25bp rate hikes in 2023 (in March and September), taking the federal funds target range to 1.00-1.25%. In the first half of next year, our economists also expect the FOMC to begin discussing and formulating a plan to begin shrinking its balance sheet, one that could eventually be put in place at the end of 2022.

The external backdrop for EM currencies looks challenging in 2022, but there is room for differentiation

In our view, slower global growth momentum and the Fed’s policy normalisation will see the USD appreciating in 2022, but in a rather modest way such that there is room for differentiation within emerging markets (EM) currencies. In EM, we think core balance (i.e., the combination of the current account balance and net foreign direct investment) and prudent macro policies remain important factors to consider – as always. While Omicron currently poses high uncertainties, many EM economies have made progress with vaccinating their population compared to where they were one year ago, so the ‘re-opening’ timelines could also serve as another differentiating factor for EM currencies in 2022. 

We believe the SGD will outperform in 2022, amid hawkish MAS

Overall, we believe some Asian currencies can do reasonably well. When there are heightened global inflation concerns, we believe the SGD will outperform, as the Monetary Authority of Singapore (MAS) typically leans hawkish and directly uses the exchange rate to manage inflation risks.

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