Major Currencies vs. US Dollar (% change)
11 Oct 2010 – 15 Oct 2010
The US Dollar started the week on a firm note amid profit-taking action as traders unwound bets linked to speculation about a second-round of US quantitative easing (QE) after Friday’s dovish speech from US Federal ReserveChairman Ben Bernanke. The central bank chief seemingly made the onset of additional stimulus all but certain, saying the Fed sees the case for “further action” and is ready to provide more accommodation with inflation rates too low, the risk of deflation “higher than desirable”, and the labor market recovery “painfully slow”. This effectively shifted the QE conversation from addressing questions of “if” to those concerned with the “when” and “how”, opening a new chapter in the debate and creating room for investors to take some their recent gains off the table.
The week ahead offers plenty of opportunities for markets to take bets on the specifics, with economic data taking a back seat to policymaker chatter. On that end, another busy speaking calendar awaits, with the full hawk-to-dove spectrum of voting members on the Fed’s rate-setting FOMC committee set to hit the wires. We begin on Tuesday with NY Fed President Bill Dudley, Board Member Elizabeth Duke, and the another brief outing from Bernanke. On Wednesday, the Fed will release their regional Beige Book survey, and speech-making resumes on Thursday with St. Louis Fed President James Bullard. Finally, stalwart hawk Tom Hoenig closes out the week on Friday.
On balance, the US economic recovery continues to be viewed as a bellwether for the world at large, making the Fed stimulus debate central not only for the States but risk appetite in general, making it the driving force behind currency market price action once again.
Risk sentiment remains the strongest driver of Euro price action. The economic calendar offers plenty of homegrown event risk as well however, with Germany’s ZEWand IFO surveys of investor and business confidence as well as the preliminary set of region-wide Purchasing Manager Index figures for October taking the spotlight. Economists’ forecasts call for deterioration across the board, reinforcing expectations of a downturn in the second half of the year.
Sentiment has returned in a major way as a driver of British Pound price action with the correlation amid the recent wave of broad-based risk-driven US Dollar weakness. However, monetary policy remains of interest as the Bank of England releases the minutes from its last meeting with the UK central bank in much the same place as the Fed, debating additional QE on an increasingly divided MPC. With that in mind, GBPUSD may once again turn into a barometer for relative easing expectations, with signs of greater gridlock in the UK compared with the US likely to drive the pair higher in the near term. September’s Retail Sales report rounds out the docket.
The Yen is showing a rare inverse relationship with medium-term US inflation expectations (as tracked by the 3-year breakeven rate – the spread between yields on 3-year standard and inflation-adjusted Treasury bonds). This puts the prospect of additional Fed QE at center stage as traders ponder which of the two countries will be better at generating positive price growth. Given Japan’s long track record of deflation, the markets’ money seems to be on the Federal Reserve, meaning more USDJPY weakness is likely ahead as QE details begin to take shape.
USDCAD, AUDUSD, NZDUSD:
The commodity bloc remains closely tied to risk sentiment, putting the issue of new Fed QE measures at the forefront once again. Turning to the economic calendar, the Bank of Canada interest rate decision tops scheduled event risk, with traders and analysts alike leaning toward no change in benchmark borrowing costs this time around according to a Credit Suisse gauge tracking the priced-in outlook and the median forecast of economists polled by Bloomberg.
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