Our Favorite Fed Chairman

Our favorite Fed Chairman, old Ben
Will speak before Congress’ wise men
We’ll hopefully learn
If QE they’ll spurn
Or if they’ll start printing again

The dollar is firmer against most currencies this morning, although the euro is holding its own right now.  It has been a central bank focused day, starting with the BOJ overnight upgrading their economic assessment for the fifth consecutive month, even describing inflation expectations as having started to increase.  Certainly that is their goal, but it remains to be seen if this is mere wishful thinking, or if the data will support these comments.  As it is, they left policy unchanged amid an indication they are comfortable with the current mix.  If the data continues to disappoint, (i.e. inflation remains negative) then look for another boost.  But in the meantime, they will continue to buy 70% of JGB issuance, and the yen will remain under pressure.

In the UK, we saw the minutes of the most recent MPC meeting with no change in the voting status and the general tone of the minutes seeming to be one of hope rather than fear.  The recent pick up in data has been well received by some members, but others are still quite concerned that the recovery is so fragile.  As to the pound, it seems that they are comfortable with the pound falling further, just not in an extreme manner.  Are they going to increase QE?  I still don’t believe so as the data has not indicated the need of late.  But, with new Governor Carney at the helm, he may decide to put his imprimatur on policy at the next meeting.  At the same time as the minutes were released, Retail Sales data came out and the data was horrible, with headline at -1.3% and core at -1.4% month/month.  The pound instantly fell about 0.5 cents and has maintained those losses since.  I guess, the MPC has to be happy with the pound, if not with the Retail Sales data!

Europe has been the least interesting of the spaces overnight, with the euro edging higher on cross driven activity, specifically EURCHF movement.  Comments from SNB President Jordan in an interview indicated that the idea of raising the current EURCHF floor to 1.25, or implementing negative interest rates have both been under discussion.  When the market saw this hit the tape, the CHF fell against both the euro and the dollar, and that seems to be the catalyst for the modest EUR strength.

In the US, we had comments from Bill Dudley overnight, saying that the Fed would need to see the data for at least another 3 to 4 months before deciding if the economy has been able to weather the sequestration spending cuts and the Fed can reconsider monetary policy.  There was certainly no indication that he was ready to stop the QE party at this point.  And later today Chairman Bernanke testifies before Congress on monetary policy, so it will be a perfect opportunity to clarify the Fed’s current thinking on the timing of any exit from QE.  I maintain that they will buy $85 billion/month for the rest of the year, but if we do see better US data, I may need to rethink that process.

We also get Existing Home Sales in the US this morning, with the market looking for 4.99M as the print, up about 1.4% from last month.  However, I don’t believe the dollar will react to this number unless it is a big outlier.

The most notable emerging market of late has been South Africa, where the ZAR has traded to its weakest point in more than 4 years, above 9.60.  A combination of labor unrest and falling prices for gold and platinum seem to be the catalysts.  The ratings agencies have put the country on negative watch, although with a current rating of Baa1, it remains well into investment grade territory.  The reason the Rand hasn’t fallen further is because 10yr yields are about 6.40%, which are awfully attractive in the current bond universe.  So while there is fear over further ZAR weakness, there are still yield hungry investors willing to take the risk in order to earn that yield.  Interestingly, as we open this morning, more emerging currencies are stronger vs. the dollar than weaker, although the movements remain quite small.  Given the dollar’s strength against the majors, this is a bit surprising.  But given the vagaries of daily fluctuations, it is certainly not unprecedented.

Overall, unless the Chairman says something about adding to QE or otherwise quite dovish, I expect the dollar to hold its own all day.

Good luck