Currencies remained volatile in the past several days, with some of the action attributed to “expected” steps by the FED. The central bank will hold its regular policy meeting in the coming week and many traders have been already trying to predict what the policy makers are going to do. Just as it has been the case for a long time, interest rates are not in focus – virtually nobody expects to see changes in this department. Instead, market talk is centered on tapering of the QE or withdrawing of the additional liquidity that the FED was injecting in markets during prior few years.

Clearly, much like the quantitative easing, its tapering will have an effect on all financial markets. The question is: what effect and how meaningful? Obviously, of most interest to us is reaction of the US Dollar. Unfortunately, at this point, this process is largely academic, or even an exercise in frustration, in spite of what financial media would have us to believe. For all the talk about QE withdrawal and various opinions of “experts” possible reaction of currencies is no more than a guess and not worth speculating about.

That might change once the FED actually starts doing something in that direction. Once we see the scope and potential time frame of tapering, than we might start to develop an educated guess. Reaction of the Dollar after the first actual step from the central bank, will provide valuable clues about what is likely to happen in the future. We must remember that this operation will not be an event, but rather a process lasting years, with many twists and turns. So far, there is only talk and no evidence about it even starting. Risking money on its outcome is, at least for the moment, irresponsible or even foolish.

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The European Central Bank put to rest earlier speculations about negative interest rates. After making a cut to its bench marke last month, the bank deceided to take no action today. In the past couple of weeeks, many market observers were suggesting a dramatic move from the ECB, in form of negative interest rates on deposits. Not this time, but during a press conference Mario Draghi said that the central bank was ready to introduce negative rates. In other words, the issue is not burried yet and likely to come up again. Markets interpreted it as positive for the Euro, which enjoyed a 200+ pips rally. Other currencies joined in, posting strong gains versus the US Dollar.

Friday should be eventful as well, if not in early trading, than late in the day. The monthly Nonfarm Payrolls report is on the calendar today, together with the Unemployment Rate and related numbers. At 170K, analysts expect to see only a modest improvement from last month’s 165K, pointing towards stagnant job market. Results different from the forecast are likely to cause a spike in volatility in most currencies. Let us not forget about similar data from Canada set for release at the same time. The Net Change in Employment is predicted to come in at 15 K, above the prior reading of 12.5K. The Canadian Dollar is always very active in response and today should be no different.

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The big event in early Tuesday trading was the policy meeting of the Reserve Bank of Australia. There were no high expectations, most analysts predicted “no action”, fitting after the interest rate cut last month. Indeed, the RBA left rates unchanged at 2.75%, calling this level appropriate for now. As if expecting soft stance from the central bank, the Australian Dollar had rallied in hours before the announcement, reaching as high as 0.9790.

This advance proved to be premature and the Aussie turned south after the data release. The RBA indicated it could introduce more easing if inflation warranted such step. In addition, there was a warning about high level of the AUD, leading some to believe that another interest rate cut is more than likely in the future. While the AUD-USD avoided a strong selloff, it dropped for the rest of the day, falling to as low as 0.9610 late during the New York session.

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