Dollar Consolidates Post-Bernanke; Yen Mostly Weaker Ahead of Elections
ASIA/EUROPE FOREX NEWS WRAP
The Dow Jones FXCM Dollar Index (Ticker: USDOLLAR) is tracking slightly lower this morning as a quiet end to the week – there are no ‘medium’ or ‘high’ rated USD events today – has quelled market volatility, allowing high beta currencies and risk-correlated assets to post modest gains. Overall, while it is clear that the Bernanke testimony didn’t prove to be the dovish knockout punch many were expecting, it wasn’t a major victory for hawks, either.
Notably, Fed Chairman Bernanke stuck to the dovish script for his prepared remarks, despite the fact that the Fed’s overall assessment has improved. But given the fastest rise in long-term interest rates since 1994 – and the >10% increase in mortgage rates from late-May through the end of June – policymakers have been forced to push back against the market. As US economy data continues to improve, policymakers seem positioned to utilize communicative policy to help stress the difference between tapering QE3 versus tightening monetary policy – that is, reducing the pace of easing versus hiking interest rates (the former is less bullish for the US Dollar than the latter).
In context of the Fed commentary this week, the USDJPY is an interesting look here considering that the Japanese diet elections are this weekend. Japanese Prime Minister Shinzo Abe’s LDP party should now have a majority in the legislature overall, making it easier for fiscal and monetary policymakers alike to push through further controversial ‘Abenomics’ measures. I think that an Abe victory has been mostly priced into the USDJPY at this point – it retained ¥100.00 this week – and while that might mean any further upside in the pair is limited, the quicker round two of Abenomics arrives, the greater chance of a weaker Yen.
Taking a look at European credit, further modest strength in peripheral debt amid relief in the Portuguese political gridlock has proved to be only be of minor support for the Euro on Friday. The Italian 2-year note yield has decreased to 1.601% (-3.3-bps) while the Spanish 2-year note yield has decreased to 1.925% (-0.1-bps). Similarly, the Italian 10-year note yield has decreased to 4.379% (-2.8-bps) while the Spanish 10-year note yield has decreased to 4.627% (-1.1-bps); lower yields imply higher prices.
RELATIVE PERFORMANCE (versus USD): 10:40 GMT
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--- Written by Christopher Vecchio, Currency Analyst
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