FOMC Meeting, QE3, Gold & the USDJPY

If you are looking for a proxy on expectations of from forex traders on what the Fed will at its upcoming FOMC Meeting, you don’t need to look much farther than the USDJPY.  After gathering momentum and hitting 79.00 last week, the pair has been in a nosedive since last Friday’s Non Farm Payrolls release.  The drop was a result of statements from last month’s FOMC Minutes that the Fed was ready to act if the US economy didn’t improve.  These words were then backed up by Fed Chairman Ben Bernanke at Jackson Hole.  As such, going into the Non Farm Payroll report, the overwhelming belief was that a poor figure would tip the scales in favor of Fed actions.  Therefore, with the NFP missing expectations, forex traders have been shorting the dollar in favor of the yen.

Non Farm Payrolls Preview

Coming Up Today

• UK Manufacturing Production
• Canadian Employment Change
• US Non Farm Payrolls

The ECB Meeting came and went yesterday. The big surprise was that Mario Draghi announced that the central bank had cut its GDP forecasts for the EU for 2012 and 2013. All that other bond buying stuff was as expected. In any event, on the news, the EURUSD tanked from about 1.2650 to 1.2560. But, that move was short lived as Forex traders quickly ignored the EU and took their cue from equity traders that were going bananas on the strong ADP Employment change and Initial Claims figures that were released. The news caused the S&P 500 to hit four year highs. As a result, rather than care about the cut in GDP forecasts, Forex traders put their attention on the fact that the ECB was in fact going to expand its bond purchasing program (big surprise!) and positive US news. The change in sentiment triggered an overall risk rally that continues this morning.

 Yesterday’s moves bring us to today’s Non Farm Payrolls. Based on last month’s better than expected data and yesterday’s ADP figure, it’s safe to say that Forex traders are expecting to see another positive result. Two items to watch are the USDJPY and Gold. The USDJPY spiked higher from around 78.40 to a high of 79.00 on the ADP news yesterday. Similariliy, prices of Gold fell as the dollar strengthened against other safe havens. However, until this morning, Gold’s weakness was minimal. As such, prices of Gold could see a sharp rally if the NFP fails to impress and expectations of QE3 entering the market. On the other hand, the USDJPY continues to look like a solid buy on positive US news. Although the Bank of Japan is setting pat itself and isn’t stimulating, it appears like Forex traders are looking for excuses to short the yen.  

Charts to Watch

EURCHF: Back from the dead, the EURCHF has sprung to life over the last few days. Currently the pair traded above 1.2100 this morning and has found support on its way. Traders should keep watching to see if another base forms in the pair to reveal support that was sitting at 1.2000 has climbed higher.

Bernanke Speaks, Gold and the Aussie Could Move

Coming Up This Week

• Canadian GDP
• Fed Chairman Ben Bernanke Speaks

Ready or not it Bernanke time. We and the rest of the financial world have spent the week talking up Fed Chairman Ben Bernanke’s upcoming speech at the Jackson Hole Symposium. We are finally here, and as mentioned on Monday, it been a fairly choppy trading week as many Forex traders are on the sidelines or trimming their trading activities in prelude of the speech. Traders are hoping to hear from the Fed Chairman an update of whether the Fed is ready to apply further monetary stimulus at its upcoming FOMC Meeting. In the Fed’s previous meeting, they hinted to that fact, but doubts have risen of whether they actually will make changes. If Bernanke fails to give much clarity about the matter, we could see a fall in equities and the dollar rally.

FOMC Minutes Preview

In early morning trading, the US dollar is unchanged after trading lower yesterday.  Yesterday’s dollar weakness occurred even as US ISM Manufacturing PMI data was better than expected.  Traders were especially noting to 3.0% in the employment component of the PMI survey.  On the news, US equities quickly moved higher, but the dollar was left out of the rally.  Looking ahead, Forex traders will be awaiting today’s FOMC Minutes release.  The FOMC data comes after traders have received mixed messages from FED members.  Last week saw Chairman Bernanke sounding dovish, and all but signifying that further easing was in the cards.  However, yesterday, Dallas Bank President Fisher stated that although tightening was a long time away, the Fed didn’t need to apply new stimulus at this time. 

Dallas Fed President Contradicts Bernanke

In an interview on CNBC today with Dallas Fed President Richard Fisher, henoted that “it's a little bit premature to talk about tightening.” But, although tightening was still a long time away, Fisher  stated that the FED should refrain from using further stimulus.  These statements suggested that the Fed was planning to sit pat for at least the short term.

Fisher’s words contrasted to last week’s speech from Fed Chairman Ben Bernanke were he said that unemployment levels remained high and that the Fed would need to apply new stimulus to speed up the US’s economic growth.

For traders, Fisher’s interview definitely added to the cloud of uncertainty in the Fed, and we may not get any clarity until the next FOMC Meeting as a result.

QE3 To Be Or Not To Be

The question for traders around the world is just how serious Fed Chairman Ben Bernanke was with his hints that the Fed was going to apply new stimulus to spur faster jobs growth.  After the initial spike in equity and commodity prices on Monday, follow through momentum failed to hold on Tuesday.  As a result, traders are now looking ahead to Wednesday’s Durable Goods Orders report for clues towards the US’s economy.  As a leading indicator of economic activity, a worse than expected Durable Goods figure may “seal the deal” for the Fed and lead to imminent easing actions.  Overall, trading in currencies, commodities, and sticks coukld be range bound over the short term until further clarity towards QE3 emerges.

Bernanke to Markets “The FED is in Charge”

So, pretty much every Forex analyst (us included), spent the weekend writing up trading previews for this week talking about the plethora of US economic data coming out this week.  And how a positive run of economic news may finally cause the FED to lay off on its talk about a possible QE move.  Well, Fed Chairman Ben Bernanke wasn’t willing to wait until the end of this week to make any decisions and was pretty straightforward in his remarks to the National Association for Business Economics (the same members that earlier published a report showing a wide majority against QE).

Art Cashin Talking Oil, US Equities, and Chinese Bond Selling

Anyone who watches even a little bit of CNBC is familiar with Art Cashin.  Art Cashin is the Director of Floor Operations for UBS Financial Services and a regular markets commentator on CNBC.  In a recent interview with King World News, Mr Cashin shares his views on the US equity market, Oil, Bonds, and pretty much everything in between. These are some of his main statements during the interview.

Dollar Continues Rally

Following no monetary policy changes from the FED at yesterday's FOMC Meeting, the Dollar has continued to rally.  Dollar bulls are being encouraged by the central bank's lack of mentioning any hints to an upcoming quantitative easing program.  As a result, the USDJPY has hit an 11 month high and the EURUSD has traded to a one month low.  Also, prices of Gold have fallen as worries of an escalation in US inflation has been removed.