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US Dollar Seen Higher as Bernanke Disappoints, Euro Crisis Festers

By , Currency Strategist
28 August 2012 07:33 GMT

Major Currencies vs. US Dollar (% change)

20 Aug 2012 – 24 Aug 2012

US_Dollar_Seen_Higher_as_Bernanke_Disappoints_Euro_Crisis_Festers_body_Picture_5.png, US Dollar Seen Higher as Bernanke Disappoints, Euro Crisis Festers

Talking Points

  • All Eyes on Fed Chair Bernanke’s Jackson Hole Speech Amid Stimulus Hopes
  • US Manufacturing Surveys, Beige Book to Set the Tone for QE3 Expectations
  • Euro May Suffer on EU Policymakers’ Dithering as Markets Grow Frustrated

Although correlations have broadly weakened in the late-summer trading lull, sentiment trends continue to look like the leading driver for most major currency pairs. USDJPY is a lone exception, although a strong relationship with the 10-year Treasury bond yield still anchors the pair to risk appetite given the safe-haven status of US debt. This puts familiar big-picture themes – the global economic slowdown and the Eurozone debt crisis – at the forefront once again.

On the growth side of the equation, all eyes will be on Friday’s Jackson Hole symposium and a speech from Fed Chairman Ben Bernanke. The central bank chief used the venue to signal QE2 in 2010 and traders are speculating that the third round of asset purchases may emerge this time around. Last week, a dovish set of minutes from Augusts’ FOMC sit-down fueled bets on imminent accommodation, but dismissive comments from St. Louis Fed President James Bullard quickly poured water to the doves’ exuberance. Bullard said the minutes were dated in light of the improvement in US economic data through July and August, hinting the Fed may not see the landscape as warranting a reboot of asset purchases. US economic data has notably improved relative to expectations recently, reinforcing Bullard’s position.

Faced with these conflicting cues, traders will closely monitor next week’s stock of manufacturing survey data from the Richmond, Kansas City and Chicago Fed branches to set the stage for Bernanke’s speech. The Beige Book survey of regional economic conditions and Augusts’ Consumer Confidence reading will likewise meet with close scrutiny from investors. On balance, an unequivocal nod toward QE3 seems unlikely. Medium-term inflation expectations remain reasonably anchored near the Fed’s target 2 percent rate and borrowing is materially cheaper than it was when QE2 emerged, with Treasury bond yields sitting near record lows. That means the Fed is likely to reserve QE3 as an available tool in its arsenal in the event that the mess in Europe triggers another credit crunch akin to the aftermath of the bankruptcy of Lehman Brothers in 2008.

Turning to the Eurozone, last week’s anticlimactic developments in Greece and further stalling from the ECB on its bond-market support program revealed investors’ frustration with a lack of directional cues – whether positive or negative – from Eurozone officials. Markets may be approaching a juncture where price action forces policy once again, with risk aversion breaking out amid signs of continued dithering. The focus is now on a formal review of Portugal’s EU/IMF bailout program and a set of bond auctions from Spain and Italy (where average yields and bid-to-cover readings will be closely monitored as a gauge of funding stress). With little in terms of a breakthrough likely on the horizon, a round of risk aversion may be brewing to punish policymakers’ foot-dragging.

EURO

US_Dollar_Seen_Higher_as_Bernanke_Disappoints_Euro_Crisis_Festers_body_Picture_6.png, US Dollar Seen Higher as Bernanke Disappoints, Euro Crisis Festers

Source: Bloomberg

Key Event Risk

DAY

GMT

EVENT

EXP

PREV

IMPACT

28 AUG

-

EU/IMF Review of Portugal’s Bailout Program

-

-

Medium

28 AUG

8:30

Spain to Sell 84- and 168-day Bills

-

-

Medium

29 AUG

9:00

Italy to Sell €9B in 6-month Bills

-

-

Medium

29 AUG

12:00

German CPI (YoY) (AUG P)

1.9%

1.7%

Medium

30 AUG

9:00

Italy to Sell €7.5B in 5- and 10-Year Bonds

-

-

High

30 AUG

7:55

German Unemployment Change (AUG)

7K

7K

Medium

31 AUG

9:00

Eurozone CPI Estimate (YoY) (AUG)

2.5%

2.4%

Medium

BRITISH POUND

US_Dollar_Seen_Higher_as_Bernanke_Disappoints_Euro_Crisis_Festers_body_Picture_7.png, US Dollar Seen Higher as Bernanke Disappoints, Euro Crisis Festers

Source: Bloomberg

Key Event Risk

DAY

GMT

EVENT

EXP

PREV

IMPACT

30 AUG

8:30

Mortgage Approvals (JUL)

47.0K

44.2K

Medium

31 AUG

8:30

Nationwide House Prices (MoM) (AUG)

0.1%

-0.7%

Medium

31 AUG

8:30

Nationwide House Prices (YoY) (AUG)

-2.2%

-2.6%

Medium

JAPANESE YEN

US_Dollar_Seen_Higher_as_Bernanke_Disappoints_Euro_Crisis_Festers_body_Picture_8.png, US Dollar Seen Higher as Bernanke Disappoints, Euro Crisis Festers

Source: Bloomberg

Key Event Risk

DAY

GMT

EVENT

EXP

PREV

IMPACT

30 AUG

23:15

Markit/JMMA Manufacturing PMI (AUG)

-

47.9

Medium

30 AUG

23:30

Jobless Rate (JUL)

4.3%

4.3%

Medium

30 AUG

23:30

National CPI (YoY) (JUL)

-0.3%

-0.2%

Medium

30 AUG

23:50

Industrial Production (MoM) (JUL P)

1.7%

0.4%

High

30 AUG

23:50

Industrial Production (YoY) (JUL P)

1.8%

-1.5%

High

CANADIAN DOLLAR

US_Dollar_Seen_Higher_as_Bernanke_Disappoints_Euro_Crisis_Festers_body_Picture_9.png, US Dollar Seen Higher as Bernanke Disappoints, Euro Crisis Festers

Source: Bloomberg

Key Event Risk

DAY

GMT

EVENT

EXP

PREV

IMPACT

31 AUG

12:30

GDP (MoM) (JUN)

0.1%

0.1%

High

31 AUG

12:30

GDP (YoY) (JUN)

2.2%

2.4%

High

31 AUG

12:30

Quarterly GDP – Annualized (2Q)

1.6%

1.9%

High

AUSTRALIAN DOLLAR

US_Dollar_Seen_Higher_as_Bernanke_Disappoints_Euro_Crisis_Festers_body_Picture_10.png, US Dollar Seen Higher as Bernanke Disappoints, Euro Crisis Festers

Source: Bloomberg

Key Event Risk

DAY

GMT

EVENT

EXP

PREV

IMPACT

30 AUG

1:30

Building Approvals (MoM) (JUL)

-5.0%

-2.5%

Medium

30 AUG

1:30

Building Approvals (YoY) (JUL)

6.0%

10.2%

Medium

31 AUG

1:30

Private Sector Credit (MoM) (JUL)

0.4%

0.3%

Medium

31 AUG

1:30

Private Sector Credit (YoY) (JUL)

4.4%

4.4%

Medium

NEW ZEALAND DOLLAR

US_Dollar_Seen_Higher_as_Bernanke_Disappoints_Euro_Crisis_Festers_body_Picture_11.png, US Dollar Seen Higher as Bernanke Disappoints, Euro Crisis Festers

Source: Bloomberg

Key Event Risk

DAY

GMT

EVENT

EXP

PREV

IMPACT

29 AUG

22:45

Building Permits (MoM) (JUL)

3.0%

5.7%

Medium

30 AUG

1:00

NBNZ Business Confidence (AUG)

-

15.1

Medium

31 AUG

3:00

Money Supply M3 (YoY) (JUL)

-

5.7%

Low

--- Written by Ilya Spivak, Currency Strategist for Dailyfx.com

To contact Ilya, e-mail ispivak@dailyfx.com. Follow Ilya on Twitter at @IlyaSpivak

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28 August 2012 07:33 GMT