Forex investors hoping for a less dovish stance by Federal Reserve chairman Ben Bernanke were left disgruntled as he kept the door wide open for more monetary easing. Bernanke, speaking in front of business economists on Monday said that “continued accommodative policies” were needed to continue to boost employment.
Despite acknowledging the “recent genuine” improvement in the US labour market, the Fed chairman signalled that he was in no rush to reverse the Fed’s current policies, and reiterated that very low rates were still needed to ensure the economy continues to recover. Risk appetite soared following Bernanke’s comments and global stocks hit 2012 highs on Monday and Tuesday. The dollar was under pressure after the Fed chairman’s speech, and fell to a four-week low against the euro, while higher-yielding currencies such as the Australian, Canadian and New Zealand dollars gained support. The greenback was weighed as speculation of another round of quantitative easing by the Fed was again on the rise. In reality, Bernanke made no real hints towards a third round of stimulus (QE3), but traders chose to focus on the remarks that an accommodative policy will be needed to sustain growth and tackle high unemployment and took fresh riskier bets.
EUR/USD rose to a four-week high on Tuesday at 1.3386, triggering stop loss buy orders as it extended its rise from Monday’s peak. The single currency was also supported by news that Germany was willing to increase the resources available to fend off the sovereign debt crisis by combining the eurozone’s temporary and permanent bailout funds. It was also lifted on Tuesday after Spain and Italy sold bonds with little difficulty and paid lower borrowing costs.
Expectations on a meeting of European finance ministers scheduled for the end of the week, in which they are expected to agree on a firewall large enough to protect Spain and Italy, helped lessen pressure on their bonds in the wake of Tuesday’s auctions. This bout of pressure is expected to weigh on the greenback in the short-term, especially until speculation of another round of quantitative easing lingers on the United States. However, if data from the US continues to point at a sustained economic recovery, pressure on the buck may ease.
Therefore, the focus has now shifted predominantly on US economic data and more importantly on the US Federal Reserve. The market’s obsession on the euro zone and its debt crisis has faded somewhat. In fact price action in the EUR/USD over the last few weeks has been extremely correlated with moves in US Treasury yields, and better economic numbers have led to expectations that the FOMC will become less dovish. Expectations that were dampened by Bernanke’s comments on Monday but will undoubtedly re-emerge with continued upbeat figures.
Among commodity-bloc currencies, the Canadian dollar was mostly in favour by forex traders so far in the week. The loonie (Canadian one dollar coin) found support as investors believed that the Bank of Canada will beat the Fed in sounding less dovish. It was also favoured among the “riskier bets” as a string of downbeat data from China has hinted at a possible slowdown in the world’s second largest economy, which has weighed on the Australian and New Zealand dollars.
USD/CAD dipped after hitting a three-week high on Friday and closed below recent lows on Monday. It was down to 0.9900 by the time of writing, around 0.60 per cent on the week.
EUR/CHF got lifted higher on Tuesday extending its gains from the previous day after Switzerland’s Economy Minister Johann Schneider Ammann said the floor should be raised to 1.35 - 1.40. The pair surrendered its gains on Tuesday, but fell on the same day, as forex traders appreciated the fact that exchange rate policy in Switzerland is a matter for the Swiss National Bank and it would be up to its board to decide on future policy. It hit a high of 1.2070 early on Tuesday, but was trading around 1.2055 in mid-European trade.
Upcoming FX key events:
Today: EZ Business Climate Indicator, US GDP Annualised & US Core PCE.
Tomorrow: EZ HICP flash, Canadian GDP, US PCE Deflator & US Michigan Consumer Sentiment.
Technical key points:
EUR/USD is bearish, target 1.2500, key reversal point 1.3750.
EUR/GBP is bearish, target 0.80, key reversal point 0.8550.
USD/JPY is bullish, target 85.00, key reversal point 7800.
GBP/USD is neutral.
USD/CHF is neutral.
AUD/USD is neutral.
NZD/USD is neutral.
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Mr Xuereb is a trader at RTFX Ltd.