End of Month Price Action Could be Quite Volatile; PM Kan and Fed Chair Bernanke in the Spotlight

The summer is nearly gone and traders are starting to filter back to their desks. Month end flows ahead of September therefore could take on a new meaning, as market participants gear up for the final stretch of 2010. For the time being however, there are two pressing issues that are waiting for more clarity in Friday trade that could ultimately dictate broader direction in the markets over the coming days. The first is the issue of the Yen, and what exactly if any measures will be taken by Japanese officials to counter the recent strength. The second is what type of outlook Fed Chair Bernanke will give at today’s highly anticipated symposium in Jackson Hole Wyoming.

The announcement from PM Kan that he will be holding a press conference later today, specifically on the topic of fighting Yen strength has been enough to spark some form of Yen selling, and this selling could accelerate on any news of official measures to counteract the Yen appreciation. Japanese FinMin Noda has also reiterated Japan’s resolve to act on FX as needed. In our opinion, the Yen is at a high risk for some form of a material sell-off over the medium-term and although there has been no direct catalyst as of yet, it seems like we are inching closer to one. Technical studies also confirm a Yen bearish bias, with the single currency at multi-year highs against the USD and Euro.

The other hot topic of the day is the upcoming Jackson Hole symposium in which Fed Chair Bernanke will provide some added insights into the direction of monetary policy which should be quite interesting in light of the latest slowdown in the US economy following a slew of softer economic data. Bernanke’s remarks could have a major influence on the direction of the buck, but at this point it is unclear which direction the USD will head. Should the Fed Chair announce that the central bank now has a clear plan on how to counteract the latest slowdown through the implementation of new policies, we are likely to see a sell-off in the USD and rally in equities as market participants feel comforted by the Fed’s actions and look to buy back into risk. However, should the Fed Chair announce that the Fed will increase policy as needed and remain in a wait and see mode, the reaction is likely to be net USD bullish and equity negative as market participants grow increasingly concerned that not enough is being done to counteract the slowdown, resulting in some flight to safety trade.

There is one other possibility, and that is that Bernanke balances his statement and says that the Fed is in a wait and see right now but also concedes that things have been weaker than they had thought, and as such, the Fed is prepared to act if things persist. The market reaction in this scenario is likely to be net USD and equity neutral.

Looking ahead, there are some major data releases due out of the UK and US today that would otherwise dominate trade, but at present are taking a backseat to the broader global macro developments. UK (1.1% expected) and US (1.4% expected) GDP releases are due at 8:30GMT and 12:30GMT respectively, while other noteworthy data includes University of Michigan confidence (70.0 expected) at 13:55GMT.

Written by Joel Kruger

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