Trading commentary
10 February 2010
FX Closing Note: Bernanke talks interest rate hikes "at some point"
John J. Hardy, FX Consultant, Saxo Bank
FX Closing Note: Bernanke talks interest rate hikes "at some point"
Bernanke
Plenty of ups and downs today, first with all of the noise on Greece and now with the Fed's Bernanke out with written testimony (see here for the full text in all of its boring glory) that he was unable to present to Congress today because Washington is buried in snow. The testimony consisted mostly of a recap of the Fed's actions throughout the crisis and a justification thereof, a description of how the Fed's various special facilities have been, are beeing, and will be unwound, and finally, an explanation of the mechanisms the Fed can employ in the future to withdraw liquidity from the system when it proves necessary, such as the use of already tested reverse repos, tri-party reverse repos, special term deposits, outright sales of securities on the Fed's balance sheet, and the manipulation of the interest rate on bank's reserves held at the Fed. Most importantly, however, the market focused on Bernanke's mention of the need "at some point" to "tighten financial conditions by raising short-term interest rates and reducing the quantity of bank reserves outstanding." This sent the USD sharply higher and also saw a sharp correction in interest rates higher across the curve. Later in the day, the USD lost much of its gains as the market pondered whether the USD is still correlated with risk appetite and how strong the statement actually was and whether other central banks might actually raise rates even faster than the Fed in the event that we resume policy tightening the world over.
Plenty of ups and downs today, first with all of the noise on Greece and now with the Fed's Bernanke out with written testimony (see here for the full text in all of its boring glory) that he was unable to present to Congress today because Washington is buried in snow. The testimony consisted mostly of a recap of the Fed's actions throughout the crisis and a justification thereof, a description of how the Fed's various special facilities have been, are beeing, and will be unwound, and finally, an explanation of the mechanisms the Fed can employ in the future to withdraw liquidity from the system when it proves necessary, such as the use of already tested reverse repos, tri-party reverse repos, special term deposits, outright sales of securities on the Fed's balance sheet, and the manipulation of the interest rate on bank's reserves held at the Fed. Most importantly, however, the market focused on Bernanke's mention of the need "at some point" to "tighten financial conditions by raising short-term interest rates and reducing the quantity of bank reserves outstanding." This sent the USD sharply higher and also saw a sharp correction in interest rates higher across the curve. Later in the day, the USD lost much of its gains as the market pondered whether the USD is still correlated with risk appetite and how strong the statement actually was and whether other central banks might actually raise rates even faster than the Fed in the event that we resume policy tightening the world over.
Regardless of what the market thought of the dollar, the clear effect of today's interest rate response to Bernanke's rhetoric was JPY negative, and USDJPY jumped to 90.00 again, without effectively penetrating it. This is an interesting pivot point for the JPY here. Our old, old rule of thumb is that if you see four days of pausing in the market action after a significant impulse (today being the fourth day of indetermination after the recent swoon in USDJPY), there are much higher odds of a reversal. And certainly, USDJPY already looks a little mispriced to the low side already and will look even more so if this reversal in rates is decisive and continues from here.
Chart: USDJPY and US short and long interest rates
The following chart shows USDJPY (white line) and US short (yellow) and long (red) interest rates. Any further rise in interest rates would seem to be USDJPY supportive.
The following chart shows USDJPY (white line) and US short (yellow) and long (red) interest rates. Any further rise in interest rates would seem to be USDJPY supportive.
The Ichimoku cloud clearly in focus here, as is the 55-day moving average likely, as well as the psychological 90.00 level.
Looking ahead
So watch interest rates and of course, risk appetite tomorrow. Both higher rates and higher risk appetite are especially JPY negative, probably most so for the likes of AUDJPY and NZDJPY and may not necessarily be especially positive for the USD, which would look better on a combination of risk aversion and higher interest rates. The other thing to watch for is a further shrinking of Greek interest rate spreads on any potential news about the rest of the EuroZone’s plans to do something about Greece (any solution is likely to be a "tough love" solution that attempts to minimize the moral hazard an all-out bailout would have triggered.) The key short term resistance area for EURUSD remains 1.3840. Euro optimists might say the we have already reached a major target recently, so we might ought to look for a further consolidation of the downtrend with a move to higher resistance before the downtrend resumes further out.
Data on tapSo watch interest rates and of course, risk appetite tomorrow. Both higher rates and higher risk appetite are especially JPY negative, probably most so for the likes of AUDJPY and NZDJPY and may not necessarily be especially positive for the USD, which would look better on a combination of risk aversion and higher interest rates. The other thing to watch for is a further shrinking of Greek interest rate spreads on any potential news about the rest of the EuroZone’s plans to do something about Greece (any solution is likely to be a "tough love" solution that attempts to minimize the moral hazard an all-out bailout would have triggered.) The key short term resistance area for EURUSD remains 1.3840. Euro optimists might say the we have already reached a major target recently, so we might ought to look for a further consolidation of the downtrend with a move to higher resistance before the downtrend resumes further out.
Remember that tonight features the Australian employment data and New Zealand retail sales data, as well as Chinese inflation data. Tomorrow we have the Riksbank (EURSEK at key levels) and then the US initial jobless claims in the North American session, which have been getting even more focus than normal due to a string of rather iffy readings after many had though a firm downtrend in claims had been established.
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