Quiet Day For Dollar, Focus On The Fed

With no U.S. economic reports scheduled for release today, it should be another quiet North American trading session. U.S. stock futures are pointing to a lower open and Treasury yields are pulling back slightly as the dollar treads water against all of the major currencies. The greenback is trading higher against the euro and Swiss Franc but lower against the British pound, Japanese Yen and commodity currencies.

This lack of consistency indicates that investors are looking beyond the dollar and Fed tapering, focusing instead on relative growth. A larger than expected decline in industrial production drove the euro lower while stronger U.K. labor market numbers combined with the Bank of England's projection for a faster decline in the jobless rate drove sterling higher. The Australian dollar benefitted from a rise in consumer confidence and the New Zealand dollar rallied after central bank governor Wheeler said interest rates would be increased next year. Canadian house prices also rose at a faster pace last month, lending support to the loonie.

As for the U.S., Federal Reserve President Pianalto spoke this morning and unfortunately did not touch on monetary policy. Fed Chairman Ben Bernanke speaks this evening at 7pm NY Time and it is not clear whether he will discuss monetary policy. He will be speaking to a group of teachers about the central bank's 100-year history and a Q&A session will follow so the impact on the dollar and tapering expectations will depend upon whether these teachers have any interest in asking about the central bank's plans to reduce stimulus.

Janet Yellen Takes The Hot Seat
Meanwhile tomorrow is a big day on Capitol Hill with Senators grilling Janet Yellen during her confirmation hearing. This is the very first time that the mild mannered central banker has testified on Capitol Hill since her 2010 Fed vice-chair confirmation. We have seen Bernanke take the hot seat on numerous occasions and we know that being a central bank governor is never easy. Aside from being a smart and experienced economist, the head of the central bank also needs to be politically savvy. Most speeches by central bank officials are scripted and on Thursday we will get a chance to see how she handles herself live in an environment where she could find herself heavily criticized for her soft views on inflation. Her views in general will carry increased importance if she becomes the new Fed Chairman, so she will have to choose her words carefully because her comments on monetary policy could have a significant impact on the dollar on Thursday. As one of the most dovish members of the central bank, traders should expect Yellen to confirm that Fed will keep monetary policy easy to encourage stronger job growth. Senator Rand Paul has threatened to hold back the nomination but with 45 other Republicans represent, her confirmation is expected to be smooth with few politicians willing to block the confirmation of the first female central bank governor.

Kathy Lien, Managing Director of FX Strategy for BK Asset Management.