The market yesterday was a write-off in terms of price action, as a few sovereign nations managed to squeeze in a national holiday in parts of Europe and in Canada. This week’s US fundamental highlight will be delivered tomorrow – the FOMC Minutes from the May 1st meeting and helicopter Ben’s testimony on the Economic Outlook and Monetary Policy before the Joint Economic Committee, in Washington. On the whole, market price actions over the past few-days indicate that a few investors are becoming a tad nervous ahead of Ben’s speech.
Some investors are anticipating that the release of Wednesday’s FOMC minutes will indicate that both the Fed’s ‘hawks and doves’ are beginning to become “increasingly uncomfortable with the current $85-billion a month asset purchase pace.” The possibility of perhaps varying the monthly QE sizes may reduce the potential for an “outsized market reaction to any given adjustment.” Ideally, it seems that investors are looking for confirmation of the expectations that the Fed is considering a reduction in asset purchases – the primary reason of late for the “mighty dollar” strength specifically against the antipodean currencies and Prime Minister Abe’s Yen.
The main threat to the “greenbacks” gains may be the existing large speculative ‘long’ positions themselves. The current market environment, supported by a strong global equity market and easy monetary policies, certainly has been encouraging investors to add to their ‘long’ positions. Too much of a one directional play usually ends up with the weaker longs or shorts eventually being squeezed and causing minor market panic for a period.
There is a strong possibility that Bernanke will again disappoint the market in his testimony. It would not be a market surprise for Helicopter Ben to again “highlight the mixed tone of recent US data, split between improving employment and rising risk of deflation.” On the other hand, it should not be a huge surprise to see if spot forex try’s to pre-play this scenario and allow the dollar a temporary “bull-run break” until all has been revealed. The heavier odds seem to be favoring Bernanke to temper expectation of QE tapering.
Over the next 24-hours the market gets the privilege to hear a plethora of Fed speakers. With little market data to chew on and with the ongoing market focus on the Fed’s next step, these speeches should attract a great deal of attention – investors are looking for clues and are trying to remain ahead of the Fed’s yield curve.
Yesterday, Chicago Fed Evans said in a speech that the US economy has improved “quite a lot” and that he is optimistic that the labor market has been doing better (Fed’s primary concern) and unemployment is going to continue to go down. Despite wanting to digest a few more months of data, Evans seems “open minded” to discussing adjustment to the pace of bond buying at this meeting, or next. To date, he has been amongst the most vocal of supporters of QE. St. Louis Fed President Bullard (voter and neutral), will speak on “Monetary Policy in a Low-Rate Environment” in Germany later this morning, while the New York Fed President Dudley (voter and dovish) will speak about monetary policy challenges in his hometown.
For a period the dollar got a general boost from weak UK CPI this morning. The year-over-year rate of headline CPI fell to +2.4% last month from +2.8% in March. Even the month-over-month +0.2% gain was much lower than expected and has pushed both the RPI and RPIX measures of inflation to below +3%. It’s no surprise to see that the fall in prices was led by lower petrol prices. However, fundamentally it’s been described as a broad based decline in prices – and certainly something to keep the BoE happy. Policy makers have warned that any cooling in prices may be short lived – “meaning a squeeze on UK residents incomes from meager wage growth and rising prices is set to intensify” – under this scenario, higher prices could threaten the fledgling UK recovery.
In general, softer global economic indicators and UK inflation supports low yields in the UK, and allowing the MPC the flexibility to provide support to the UK’s apathetic recovery. GBP’s (1.5179) sharp retrace lower after the inflation data will probably change most investors strategies. Day trend indicators are pointing south again, implying that investors should expect further sterling weakness.
On the weekend, Japan’s Economy Minister Akira Amari said a further slide in the Yen would have negative effects after the currency’s +21% drop in the past six-months, and signaled concern at the prospect of higher bond yields. He said the government must demonstrate a commitment to fiscal rehabilitation to boost the credibility of government bonds. Approximately +50% of Japanese firms recently polled says Yen has fallen far enough, while +15% want to see a further decline and almost a third would prefer to see the Yen bounce from its 4 ½-year decline. Close to +48% want USD/JPY to stabilize around ¥100, just +7% want Yen to weaken to ¥105 and +8% want ¥110. The USD/JPY continues to hold below ¥103.10 for now, and a deeper setback remains favored prior to the core uptrend resuming.
It’s no surprise to see the 17- member single currency playing in no-mans land ahead of Bernanke’s key testimony tomorrow. The EUR’s weakness has stalled near term, and a recovery is tentatively underway with single currency buyers’ appearing again at the overnight sessions lows. Macro accounts have been selling into the 1.2900-level while looping their profit buys around the 1.2880 mark. Real money buyers have appeared at the session lows, possibly related to Asian Central Banks rebalancing. Investors are expecting the EUR outright to retest the 1.2930 in the short term. However, do not be surprised to see option related trades between large 1.2850 and 1.2900 expiries to make for a boring North American session.
Dean Popplewell, Director of Currency Analysis and Research @ OANDA MarketPulseFX
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