Bernanke is really in the hot seat today – both in terms of potential market responses and politically, as lawmakers’ attention directed the US Federal Reserve’s way is becoming increasingly glaring. The first Bank of Canada meeting under new governer Stephen Poloz is also on tap today.
The Bank of Japan meeting minutes overnight drew yawns from the market audience as the rhetorical line seems to be “implement what we have promised and it will take some time to judge the success of our policy” while anticipation is more important on the political front with this weekend’s upcoming Upper House elections. There were minor expression of concern by some members, but the unanimous decision was to stay the course on current policy.
Equity markets finally had a negative day yesterday, after a remarkable string of positive days, and bonds are looking well supported. If Bernanke follows up with more relative dovishness today without asset markets bulling sharply higher, this would appear to be the most USDJPY negative outcome. USDJPY bottomed out – you guessed it – right near the Ichimoku cloud area overnight – triple underlining the focus on this indicator, which has dropped several pips today and is closer to the 98.85 level now.
Looking ahead
Bernanke testimony
Remember that Fed chairman Ben Bernanke’s full testimony today will be released at 1230 GMT before he actually presents it at 1400 GMT, followed by what is likely to be a very lively Q&A session, with Bernanke in the hot seat as I’m convinced that Republicans are increasingly making it a part of their party platform to remain critical of the Fed as the “Washington enabler”, with the endless irony that it is Republican constituents (the wealthy) that have benefitted the most, relatively speaking, from Fed policy over the last several years.
What the Fed would like to communicate, in my opinion, is that it is ready to act either way depending on incoming data, but that as things stand right now, it would prefer for bond yields to come back down some while it has no interest at all in driving too much exuberance elsewhere. Can it pull this off? If this message is successfully delivered, USDJPY may offer the most volatility.
Meanwhile, a Bernanke reminder that confirms expectations for tapering and leaves the market to take its guidance from incoming data rather than Fed signals would be more clearly USD positive, with trade selection depending on the asset market response (scary drop in equities could still push JPY higher, but EURUSD or GBPUSD might offer a more straightforward strong USD response in this instance).
Regardless of the message Bernanke delivers, the worst potential outcome in the following days would be a brief squirt of USD weakness followed by strong signs of support. If the USD is going to move to the strong side right away on the heels of the Bernanke testimony, I would look to EURUSD and GBPUSD for the most important signs of a reversal.
GBP – BoE minutes the coup de grâce for sterling?
Today’s Bank of England minutes are much anticipated, as these are from Mark Carney’s first meeting as BoE chief, though they may begin to carry less weight than they did in previous years because of the new openness on the days of the BoE meetings themselves (policy statements, etc. – who knows, maybe even press conferences eventually). Still, the market will be scratching around for clues on where the MPC members are leaning on the policy mix going forward and yesterday’s weak inflation data offers fuel for the dovish camp. Significant developments may be underway in the BoE’s communication policy (guidance like the Fed or Riksbank, etc..) rather than talk of asset purchase plans or other policy options. EURGBP is trying to get comfortable at these lofty heights, something I wonder if it will be able to do much longer as euro troubles are brewing in the background, even if they are doing so with a miraculous lack of concern expressed in markets. As long as the latter remains the case, EURGBP might drift higher as the rally still looks technically fit.
Bank of Canada
A stealthy Bank of Canada meeting has sneaked up on us today, and will definitely take a back seat to Bernanke’s testimony today, but could shift CAD’s relative strength in the crosses depending on the wording of the statement and guidance from Poloz. USDCAD is an interesting pivot area, as a close well below 1.0300 begins to really test the bullish case (from a technical perspective, from a longer term fundamental perspective, I rate USDCAD a strong buy…). The forward relative interest rate spreads haven’t changed a great deal, but Poloz could change that if he drops the language aimed at a “tightening bias”. Why shouldn’t Canada join the competitive devaluation game the rest of the world is so heavily engaged in? Otherwise, Canada’s economic data looks rather steady and the huge spike in WTI crude prices has offered CAD considerable report in recent weeks.
Chart: USDCAD
Three steps forward and then two steps back. Look for volatility today on the BoC decision and Bernanke testimony. No good technical arguments for a rally just yet but let’s look for bullish reversals from lower levels or an outright rally for signs that it is time to look at the long side again.
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Upcoming Economic Calendar Highlights (all times GMT)
- UK Bank of England releases meeting minutes (0830)
- UK Jun. Jobless Claims Change (0830)
- UK May Average Weekly Earnings/Employment Change (0830)
- Switzerland Jul. Credit Suisse ZEW Survey (0900)
- Euro Zone May Construction Output (1000)
- US Fed’s Bernanke’s Semi-annual Monetary policy report released (1230)
- US Fed’s Bernanke testifies before House committee (1400)
- US Jun. Housing Starts/Building Permits (1230)
- Canada Bank of Canada Rate announcement/Monetary Policy report (1400)
- US Weekly DoE Crude Oil and Product Inventories (1430)
- US Fed’s Stein to Speak (1600)
- US Fed’s Beige Book (1800)
- New Zealand Jul. ANZ Consumer Confidence (0100)
- Australia Q2 NAB Business Confidence (0130)
- Japan Jun. Nationwide Department Store Sales (0530)