Dollar Steady Through Fed Chatter, Bernanke And FOMC Minutes Due

The dollar put in for a volatile session thanks to the stimulus speculation Fed commentary stirred, but ultimately the benchmark closed in the green. This restraint may not last for long, however, with Fed Chairman Ben Bernanke set to testify on the economy – and inevitably monetary policy – tomorrow. In the interim, expectations for possibly heavy movement from the markets following Wednesday’s top event risk may have saved the dollar from a more serious tumble…at least temporarily. The Dow Jones FXCM Dollar Index’s (USDollar) drop Monday was the steepest in eight months. This could very well have evolved into a spark for a more prolific correction of the currency’s gains over the past six months – and particularly the previous two weeks. Yet, like each of the previous instances of a 50-60 point decline from the benchmark since September, a lasting bear trend was averted.

As much as the stability for the currency and capital markets disarmed this past session, depending on how sentiment and stimulus speculation fall tomorrow; the headlines could actually help accelerate a dollar retreat. Light on traditional data, Tuesday’s docket was refined to follow what market participants truly care about nowadays: the continued support of assets by the central bank. There were two Fed members on the wires this past session: St Louis Fed President James Bullard and New York Fed President William Dudley. Both are voters (most of the more bombastic comments to cross the wires over past weeks were from non-voters), and I would label them ‘fence-sitters’ – neither strongly supportive of boundless QE3 purchases nor showing favor for a near-term tapering. Dudley maintained his ambiguous position on when a change in the Fed’s policy machine will be needed. The most meaningful remark about needing to revisit the June 2011 ‘exit principles’ is neither dovish nor hawkish.

Bullard’s comments were far more interesting. The statement that he doesn’t see a good case for tapering QE unless inflation rises is far more direct and suggests he won’t vote to curb stimulus at the June 19 meeting. In other words, he has moved more firmly into the ‘dovish’ column. In a vacuum, this would have likely undermined the dollar’s recent surge – a move heavily influenced by early speculation of a moderated stimulus effort, and the changes that entails – but with another round of event risk ahead, its influence was put on hold. On the docket, we have Bernanke set to testify before Congress which is likely to elicit a more definitive opinion from this regular dove. The May 1 FOMC minutes will also be scoured to see whether progress was made on the exit conversation. Status quo in this instance would likely be dollar bearish.

Japanese Yen Rebound Stalls as Amari Muddles Yen Unease, BoJ on Tap
Following his charged comments from Monday, Japanese Economy Minister Amari backtracked towards the government’s uniform and poorly-concealed effort to drive the yen lower. To open the week, the official remarked that much of the excess strength of the currency had been exercised and that the there could be detrimental effects to the economy if the pendulum swung too far in the opposite direction. To cool speculation, Amari this past session noted that he cannot say when the correction well end – rather tame as a counterpoint. This morning, top event risk comes from the Bank of Japan rate decision and Governor Kuroda’s press conference afterwards. Having just introduced a massive stimulus program in early April, it is unlikely that they can scale up much further. If yen crosses are held up on ‘speculation of more’…

Euro Firms as German Growth Outlook Improves, IMF Recommends Stimulus
The euro put in for a market-wide advance Tuesday with notable showings from EURUSD moving back above 1.2900 and EURGBP finally overtaking 0.8500. Looking over the top fundamental developments of the day, there was a mix of bullish and bearish headlines – but the market showed what is was more interested in. A downgrade of the Eurozone forecast by the World Bank and recommendation for more stimulus from the IMF underwhelmed in comparison to the Bundesbank’s upgraded growth forecast for Europe’s lead economy – Germany.

British Pound Tumbles after CPI Data Cools, Will BoE Minutes Signal Stimulus?
Much of the sterling’s individual volatility this year has been founded on the change in monetary policy expectations from the Bank of England. The building speculation that the group would play catch up to the Fed and ECB by the time the new BoE Governor (Mark Carney) took the helm seems to have cooled. However, the matter – and the speculation that follows it – is far from settled. So when the April CPI figures reported core inflation dropped to a November 2009 low, bears moved. If the upcoming BoE minutes talk new stimulus, the trend will build.

Australian Dollar Traders Find Limited Guidance in RBA Minutes
The Reserve Bank of Australia (RBA) is showing a consistency in its refle

ctions on monetary policy. The minutes from the group’s last meetings were very similar to the previous wrap up. The rate cut was deemed appropriate given the growth considerations and subdued CPI outlook. And, even with the familiar lament about the high level of the Aussie dollar, this gives little guidance on the time table of future moves. In the meantime, the market is pricing in one more rate cut over the next 12 months. We are nearing the end of the cutting cycle. Now about risk…

New Zealand Dollar: RBNZ Inflation Outlook Lowest in 13 Years Trouble
Despite the RBNZ’s notice that it had intervened on behalf of the New Zealand dollar (to take the tops off of rallies), the next policy move for the central bank is expected to be a hike – the 12 month swaps outlook is pricing in 20 bps of tightening. Yet, economic statistics have opened the discussion up a little further for easing after the RBNZ’s own 2 year CPI forecast dropped to its lowest since the fourth quarter of 1999.

Gold Cuts its Rebound Short, Fed Headlines Tangible Risk Tomorrow
So much for a strong recovery move developing for gold following its longest series of daily losses in four years. The precious metal ended in the red this past session despite the waver from the US dollar. There must be considerable hesitation from bidding up the ‘alternative store of wealth’ value behind the metal if another Fed member has shown his dovish card, a Japanese official is recanting his ploy to devalue his currency and UK inflation is inviting more stimulus from a policy laggard. Nothing hurts a safe haven like severe volatility.