Bernanke largely unraveled the force behind dollar strength, leaving currencies mixed in today’s volatile session. By pointing out the unconvincing strength in the employment market, Bernanke spelled an end to what was shaping up to be another day of strength in the greenback. Among the gainers against the dollar was the yen, rebounding by 1.13%, and the pound and loonie. Even after today’s comments, dollar strength was potent enough to depress the euro, aussie, and kiwi. In other markets, stocks remain uncertain over how to interpret the events of the last few days, closing only one point higher. Commodities have taken a more definitive direction, with oil falling for the fourth straight day and gold seeing the biggest two-day decline in a couple of months.
Bernanke is not convinced
In a speech today, the Fed’s Bernanke candidly spelled out his observations and expectations of the U.S. economy. The bottom line is that Bernanke remains unimpressed by now what seems like a statistical anomaly in last Friday’s Non-Farm Payrolls report. The Chairman of the Fed actually referred to the job market as ‘weak,’ dispelling much of the euphoria that had surrounded the tremendous build-up in NFP. Bernanke reminds us that more evidence is needed before we declare victory in fighting off economic hardship, saying that “we still have some way to go before we can be assured the recovery will be self-sustaining.” This realization will prompt heightened interest on the outcome of Friday’s Retail Sales report. If the latest NFP report is truly indicative of our path to economic recovery, then spending should recover as well. If it does not, clearly there are more substantial complications in the employment market than the NFP was able to quantify. Aside from the jobs front, Bernanke explains that our most likely path will be one of a ‘moderate’ recovery, held back by subdued inflation and tight credit. Nevertheless, we have “moved back from the brink” as “signs of economic recovery have become more widespread.” On monetary policy, Bernanke gave no inclination that he was considering a sharp reversal in his course. He maintains his inclination that rates will remain low for an “extended time”, drawing his lessons from the 1930’s in which policies were tightened too quickly. Still, Bernanke assured that he was giving careful consideration to an exit strategy. All in all, today’s commentary was very telling of where the Fed is headed. Clearly, the course of monetary policy will be kept accommodative because the economy has yet to show maintained evidence of a convincing recovery.
The NFP Changed Things
A closer observation of the effects of last Friday’s Non-Farm Payrolls report is warranted considering that many patterns have completely broken down as a result. With regards to the dollar, we have consistently noticed the fact that, up until last week, good U.S. data meant a rally in risk, not in the dollar. Prior months have shown that signs of improvement on the U.S. front had more implications for the demand for high beta currencies that they did for the greenback. However, this was not the case on Friday. The blow away numbers changed the relationship to mean that strong American data translated into a dollar demand. In addition, there was no V-shaped, knee-jerk reaction this time around, a pattern that we have noticed invariably in price action following the NFP. On 8:30 am EST, on the dot, EUR/USD spiraled into oblivion, as the employment report left no confusion in the mind of traders. We can also observe effects in non-currency markets. For one, equities have held up despite the sharp advance in the dollar. This is counterintuitive since the last six months have been riding on a near inverse relationship between equity rallies and dollar declines. Nevertheless, while stocks did not decline, they did not gain either, remaining very flat over the past couple of days. On the other hand, the decline in gold was fully expected, as investors found a rare opportunity to start unwinding dollar hedges.
EUR/USD: CONVICTION IS BUILDING IN EURO DECLINE
Declines in the euro are intensifying after last week’s spectacular fall. Price action has faced a volatile trading day, seeing earlier losses turn into gains and back into losses. European data was very mixed and offered little indication of where the economy might be heading. Sentix reported that investor confidence rose for the fifth straight month to an eighteen month high. Nevertheless, the index is still negative, posting -5.5 in today’s releases, as Sentix cautions that “there is no reason for euphoria.” The second release from earlier this morning showed that German Factory Orders faced pressure, stemming primarily from a glut in exports. Orders fell to -2.10% from the 0.9% reported last month, while international orders contracted sharply by 3.5%. It is very likely that the effects of a strong currency are to blame. It is has been a long time since we have discussed the risk of credit rating cuts for Euro-zone nations. Unfortunately, the issue has erupted once again in Greece, thanks to their quickly deteriorating fiscal health. S&P noted that the country’s current A- rating has been put on “credit watch with negative implications.” Greece currently has the largest fiscal deficit out of all European Union nations, and if the rating was cut, the ECB might be put under additional pressure to keep extraordinary support available. The main release for tomorrow will be German Industrial Production.
USD/JPY: NEW INCENTIVES MAY REVITALIZE THE YEN
USD/JPY suffers from a strong pullback as traders started to doubt the resiliency of dollar strength. Last week had seen the biggest weekly plunge in the yen in a decade. Therefore, a pullback today does not necessarily indicate the yen is back on track. However, other factors may be falling into place that could stand to keep the yen in its unusually strong territory. It was reported today that the Japanese Tax Commission has chosen to abolish taxes on interest earned on corporate bonds that are purchased by international investors. Such a decision could result in heightened demand for Japanese Corporate bonds. If the estimated effects turn out to be correct, the flow of money into the Japanese economy will be a boosting factor for the yen. No data for the economy has been released today, but more in on the way for tomorrow. We can expect the Current Account, Trade Balance, and Eco Watchers Survey to warrant trader’s attention. The Trade Balance is always an interesting report as it clearly displays the effects the yen is having on trade. Even though the yen has rapidly sold off in the last week, concerns about the currency hurting the economy is still fresh in everyone’s mind.
May The Force Be With You.
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