Yellen talked, Capital Markets listened and investors bought equities. It seems that the status quo has been preserved, supported by the market perceptions from Janet Yellen’s testimony that she is not in a rush to begin tapering the Fed’s $85 billion-a-month bond buying program as early as December. The market tension prior to Yellen’s job interview seems to have eased off considerably, again knocking the forex market back into a contained trading range.
During yesterday’s testimony, Ms. Yellen said that the Fed should not withdraw the stimulus too soon in the face of a fragile recovery and the already zero-bound US interest rates. In translation, this suggests a ‘hat tip’ in favor to continue with Bernanke’s current policy stance. Perception is a powerful tool and along with transparency, another priority asset in the Feds armory, investors actions will continue to be coaxed along with rhetoric and current policies. A priority of Yellen’s is that she needs to continue to get the message across that to ‘taper is not to tighten’ – an interpretation that the Fed Funds rate will remain low even after the bond purchases have been pared back.
Interest rate differentials amongst “competing” Central Banks should become more of a market factor when tapering is finally tabled. Different rate regimes are already beginning to have a significant impact on the EUR. A dovish ECB will favor promoting the 17-member single currency as a ‘funding’ currency of choice – a natural threat to one of the JPY priority role perhaps? With all the jawboning from Central Bankers of late, from RBA to the BoJ, it’s a covert obligation of policy makers to weaken their domestic currencies in their own country’s favor without admitting to manipulation. However, with economic stagnation does it become more blatant? We started this year with that theme and the forex market should be closing the year with it. Central Banks have the forex asset class in a stranglehold – contained trading ranges with much “noise” being made in the middle.
From the ECB’s perspective Europe’s recovery has stalled as the regions real GDP rose +0.1% in Q3 compared to +0.3% in Q2. Two of Euro-zones largest members, France and Italy’s GDP both shrank -0.1%. With reports like these it would suggest that Draghi and company could do nothing but continue to be very accommodative in the medium term. Under Japans quantitative easing program policy makers continue to defend the policy that Abenomics is not aimed at “intentionally” manipulating forex values. However, a weaker currency very much favors an export driven economy just like Japan’s.
Now that renewed risk appetite is being supported by Yellen’s testimony comments it should continue to weigh upon the JPY currency. The ‘patience trade’ – short yen outright – is looking to close out this week above the psychological ¥100 benchmark level. It has taken some time for the dollar to scrape its way here, supported by a non-tapering Fed while the yen falls foul to the BoJ’s current easing program. USD/JPY continued to hit fresh 2-month highs above ¥100.40 while Sterling/yen cross at 4-year highs above ¥161 levels. Momentum should continue to favor the short yen trades looking to revisit past July’s highs well north of 101+, however just like before, investors should expect option strategy play to delay its natural progress.
Following Janet Yellen’s relatively uneventful testimony, the ‘mighty’ dollar bulls are confident that they remain in control. Currently, there are no other reasons to suggest otherwise. Dealers and investors will be expecting any near-term pullback in the USD to provide a good opportunity to add to any ‘long’ dollar positions at better levels. In a slow moving market the priority is to improve ones trading average.
No Yellen Just Talking Today 
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