Greenback edges down against the Singapore dollar

Traders remain defensive as the QE3 outcome is proving difficult to predict, says IG Markets Singapore.

IG Markets Singapore said:

As we head towards a critical meeting for the USD traders have been slowly reducing their risk plays this week with uncertainty circulating the Jackson Hole meeting.

Traders started the week confident that the US central bank would announce QE3 when it meets today. As the week has progressed these expectations have been scaled back.

And with them the dollar has strengthened against major currencies. Against the Singapore dollar the greenback held steady at the midpoint between $1.25 and $1.26.

This morning the USD had edged down slightly to $1.2536 although trading has been very thin given Bernanke will give his speech in little over 12 hours’ time.

Traders remain defensive as the QE3 outcome is proving difficult to predict, and how markets will react to any disappointment.

DBS Group Research meanwhile noted:

The Federal Reserve symposium at Jackson Hole is widely expected to disappoint. Fed officials are divided over whether more easing (QE3) is warranted.

Doves are arguing as long as inflation stays below 2%, growth below 2% (QoQ terms saar) is not strong enough to push the economy towards full employment. Hawks, on the other hand, think that housing is recovering nicely and does not need more help, not with long term rates already at new lows.

As long as US data continues to surprise on the upside, as they have done recently, there had been no real fear about the fiscal cliff tipping the US into another recession.

With Operation Twist extended to end-2012 from end-June, communication and not action will be the order of the day. In short, the Fed has scope to continue its wait-and-see approach, and keep open the door for action if needed.

Markets are, meanwhile, getting nervous again as first anniversary of the EU-led sell-off in international financial markets last September approaches.

They recognized that sentiment since then had been supported by the European Central Bank (ECB) and the Fed ensuring sufficient liquidity to prevent another Lehman-style breakdown in the global payments system.

One year later, they also realized that monetary policy had been no panacea for the Eurozone crisis, and also did not prevent the persistent slowdown in the world economy.

Neither is policy support coming from the fiscal front. Politics in Eurozone and America are pushing for austerity and consolidation, putting them on a collision course with central banks over their mandates.

As far as growth is concerned, the three policy levers are not optimally positioned to help. Politics discourages more fiscal spending in the US, and less spending in Eurozone.

Politics also does not want central banks to offer more blank checks to markets. Both Eurozone and America need weaker exchange rates but have witnessed stronger exchange rates against the rest of the world in August instead.

Perhaps it is time to stop looking at the central banks, and pay more attention to the data.