Will Fed Minutes Reverse Bernanke’s Dovish Comments?

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Market Drivers for November 20, 2013
Sparks fly post Bernanke speech, but high beta quickly gives up gains
BOE minutes – no inclination to tighten
Nikkei -0.33% Europe -.07%
Oil $93/bbl
Gold $1271/oz.

Europe and Asia:
EUR GE PPI -0.2% vs. 0.1%
GBP UK BoE minutes no inclination to tighten

North America:
USD Core Retail Sales 8:30
USD CPI 8:30
USD Existing Homes 10:00
USD Fed minutes 14:00

It was an unusually volatile start to Asian trade today, as the early release of Ben Bernanke’s dovish speech caused an instant knee jerk sell off in the dollar today, but most of the gains in high beta currencies evaporated as the day progressed with markets focusing on other matters. Dr. Bernanke reaffirmed his long held view that Fed policy should remain highly accomodative for as long as needed and reiterated the notion that the Fed may not raise rates until the unemployment rate falls well below the 6.5% level.

Although Dr. Bernanke comments remained highly dovish in nature, there was nothing new in his speech and the markets quickly focused on other matters as the rally in high beta quickly lost momentum. In Australia the Aussie came under a fresh round of selling as officials continued to jawbone the pair noting that the high level of the exchange rate was “unhelpful”.
The pair tumbled to a low of 9380 but has since rebounded to 9400 which appears to be its equilibrium level for the time being as traders await more data from China including tonight’s flash PMI report.

The euro meanwhile was pressured all night long as inflation data from Germany continued to raise concerns over deflation. German PPI printed at -0.2% versus 0.1% eyed as lower energy costs and high euro are clearly making an impact. Tonight’s flash PMI data from the region as well as Friday’s IFO report will be key to the unit’s direction over the near term. If data suggests that growth in decelerating, the pressure on European policymakers to ease further – especially in light of highly accomodative Fed – will increase markedly.

In UK today the release of the BoE minutes initially caused a selloff in the pound, as UK policymakers showed little inclination to tighten policy anytime soon despite some of the most positive economic data in the G-7 universe. UK monetary authorities essentially reiterated their position presented at the Inflation report last week noting that they see both upside and downside risks to the economy after a better than expected H2.

Much like the Fed, UK officials stressed that rates will not necessarily rise even if the unemployment targets are reached especially if inflation remains tame. Cable initially sold off on the comments but then recovered to take out stops at the 1.6150 barrier as traders remained optimistic about the UK economy especially on a relative basis.

In North America today the focus will turn back to the economic calendar and later to Fed meeting minutes. In morning session the markets will get a glimpse of the US Retail Sales and Existing Homes sales data and will study those reports with great interest to see if positive impact of lower gasoline prices is offsetting the negative fallout from the political stalemate in Washington DC.

Later in the afternoon however, all eyes will turn to Fed minutes. Although the markets are well prepared for the dovish posture as reiterated by Dr. Bernanke last night, they nevertheless will be eager to see the specifics of the discussion on taper. If minutes reveal that the US policymakers are open to the prospect of an early taper in December, even a modest one, the dollar could get a very quick boost from such news and the high betas could flip around completely with EUR/USD targeting 1.3450, Aussie dropping to 9350 and cable reversing towards the 1.6100 figure in reaction to the news.

Boris Schlossberg
Managing Director

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