Markets Quiet As Traders Await Bernanke

The financial markets have been rather quiet this week. The DOW closed at another record high overnight at 15484.26, but that was just a 20pt gain. U.S. treasury yields continued recent consolidation with 10 year yield closing slightly lower at 2.556%. Gold continued to trade sideway below 1300 handle. The Dollar index attempted to recover, but failed to stay on the 83 level. In the currency markets, the dollar is stuck in range against other major currencies. While the USD/JPY did recover on broad based yen weakness, it struggled to break through 100 decisively and gives back some gains today. Traders are all waiting for Fed chairman Bernanke's semi annual testimony to Congress, slated for Wednesday. There was speculation that Fed would start tapering the asset purchase program as soon as in September, and reduce the size from USD 85b to USD 65b. But such expectations were scaled back last week after Bernanke's comment that a highly accommodative monetary policy would be needed for the foreseeable future. We might see more dollar weakness if Bernanke repeats these comments. As for today, the U.S. will release CPI, TIC capital flow, industrial production and the NAHB housing market index.

In Europe, ECB Executive Board member Asmussen said the central bank is seeing "the first positive growth signs". But he also emphasized that "monetary policy will remain expansive as long as is necessary." He also noted that "a currency can only be stable if there is no doubt about its future." The eurozone will release June CPI final today, as well as German ZEW. Also to be released in European session is UK CPI and PPI.

In its minutes of a July 2 meeting, the RBA said that policy makers thought the current policy stance was "appropriate" given the "exchange rate adjustment that was occurring, and with the substantial degree of monetary stimulus already in place". Economic data was "consistent" with the outlook of a little below trend growth and inflation remained consistent with medium term target too. The RBA noted that the "most significant change" was the depreciation of Aussie. Inflation outlook was "slightly higher". But "forecast for inflation remain consistent with the target" and there is still "scope for further easing" when necessary. Interest rate swaps suggested that traders are pricing over 50% chance of another 25bps rate cut from the RBA in August.