Fed Flips the Dollar

Posted on

Market Drivers for July 11, 2013
Volatility continues in reaction to Bernanke remarks
AUD employment shows weakness beyond the headlines
Nikkei 0.39% Europe 0.72%
Oil $106/oz.
Gold $1280/oz.

Europe and Asia:
AUD Employment Change 10.5K
AUD Unemployment Rate 5.7% vs. 5.6%
AUD Full Time Employment Change -4.4K
JPY BOJ Rate Decision – no change
JPY BOJ Monetary Policy Statement
JPY Kuroda Holds Post Meeting Press Conference
NZD Business NZ Performance of Manufacturing Index 54.7 vs. 59
EUR ECB Publishes Monthly Report

North America:
USD Initial Jobless Claims 8:30
UDS Monthly Budget Statement 14:00
CAD New Housing Price Index 8:30

Turbulence continued in the currency markets in the wake of a surprisingly dovish Q and A session from Chairman Ben Bernanke that resulted in a massive sell off in the dollar after the Fed chief quelled any speculation of a quick exit from monetary accommodation.

Speaking in Boston yesterday, Dr. Bernanke stated that the Fed was failing on both front of the mandate as inflation was too low and unemployment too high indicating that monetary accommodation will continue for the foreseeable future. Most notably he warned that “if financial conditions were to tighten to the extent that that they jeopardized the achievement of our inflation and employment objectives, then we would have to push back against that.”

The EUR/USD skyrocketed in the wake of his words rising more than 400 points before pausing for breath. The massive short squeeze occurred during the low liquidity Asian session and no doubt exaggerated the move as traders scrambled to cover their positions. The euro effectively recovered several weeks worth of losses in a matter of hours.

Dr. Bernanke’s dovish slant was particularly surprising given his much more hawkish posture at the FOMC press conference just a few weeks ago and has created tremendous confusion in the market as traders try to ascertain what policy move the Fed will make next. From Dr. Bernanke remarks yesterday it became clear that the Fed does not want the market to “jump the gun” and price in too much tightening too soon.

Yesterday’s Q and A session may have been designed to counterbalance some of that market hawkishness and weaken the dollar which has appreciated rapidly over the past few weeks, nearly reaching yearly highs against the euro. The swift correction in EUR/USD took it all the way to 1,3200, but the pair has since retracted a bit and has settled near the 1.3000 figure which is likely to be the equilibrium figure for the near term.

Elsewhere, the Aussie displayed some relative weakness after the release of the latest employment figures which showed a mixed picture on the labor front. Employment rose by 10.5K in June, but the headline data was deceiving as the gains were all driven by part time jobs. On a full time basis jobs actually declined by -4.4K generating speculation that the RBA may be forced to lower rates again in the wake of slowdown in the labor markets. AUD/USD tried several times to clear the 9300 level, but failed and remains mired at the 9200 level in morning European trade.

In North America today, the calendar is quiet with only the weekly jobless claims on the docket and after yesterday’s fireworks some consolidation may be due. However, with volatility markedly higher, the ranges today could be very wide especially as EUR/USD trades around the key 1.3000 level.

Boris Schlossberg
Managing Director

Leave a Reply

Your email address will not be published. Required fields are marked *