Dollar Blasts High on Fed's Taper Talk

Bernanke laid out a roadmap to ending QE and the dollar rocketed higher. The US dollar gained around 100 pips across the board while the Australian dollar lagged and fell to the lowest since 2010. Chinese and New Zealand data now prepares to steal the spotlight. 3 of today's trades were stopped out, while 3 remain in progress and 2 await fill. All of today's Premium trades are found in the latest Premium Insights.

Bernanke was clear in his press conference following the FOMC decision. The Fed released forecasts and if the data is broadly consistent with those forecasts, the Fed would begin to moderate QE later this year.

The forecasts are on the optimistic side as Bernanke admitted. The central tendency of Fed members is to 2.3-2.6% growth this year which is substantially faster than the 1.9% consensus. They also see unemployment at 7.2-7.3% at year-end compared to 7.6% currently.

Bernanke outlined that QE would probably be completely around the time unemployment hits 7.0%, which is around mid-2014 according to forecasts.

The market reacted swiftly and the dollar soared. EUR/USD dropped as low as 1.3261 from 1.3406 and USD/JPY rallied to 97.03 from 95.22. The Australian dollar wilted as it took out the three year lows, falling to 0.9722 from 0.9550.

The bond market rushed to the exits with 10-year yields rising 17 bps to a 16-month high. The S&P 500 fell 1.4% to 1629.

The major question now is what will happen to emerging markets as US rates rise. China has shown signs of a credit crunch over the past week and state-run newspapers indicated the PBOC won't provide any relief. HSBC slashed its China growth forecast to 7.4% compared to 8.2% previously. For 2014, they downgraded estimates a full point to 7.4%.

The HSBC China flash PMI for June is scheduled for 0145 GMT. The consensus is for a slight decline to 49.1 from 49.2 but fears about a disorderly breakdown in China are growing.

The earlier data point in the upcoming session is New Zealand first quarter GDP. The consensus is for a 0.5% quarterly rise, which is a substantial slowdown from 1.5% in the December quarter.