Contributor
Dean Popplewell
Since the start of 2013, central bankers’ rhetoric has been the one dominating factor affecting the foreign exchange (forex) market, and talk, apparently, is what continues to lead capital markets. That gold suffering its first loss in more than 13 years has taken a backseat to central bankers’ silver tongues as the top financial story of the year ought to raise eyebrows. Alas, it has not. Regardless, diminished forex market volume and volatility is the order of the day (and year). Investors should expect this theme to rollover into the New Year. If there’s one positive to come from it all, forex traders can likely stick with last year’s trading plans, at least for the short term.
The ‘mighty’ buck came under renewed threat following ‘helicopter’ Ben Bernanke’s comments yesterday. The outgoing chairman of the Federal Reserve struck a familiar dovish tone while giving a speech at a dinner in Washington last night, prompting the dollar to sink to fresh weekly lows. It has since been able claw some of those losses back. Bernanke’s Tuesday night address signaled easy money remains the order of the day at the Fed, and it’s a perspective that incoming Chairwoman, Janet Yellen, shared during her testimony to the Senate Banking Committee last week. Yellen reiterated that interest rates may remain near-zero for a considerable time after the Fed’s bond-buying exercise ends. Furthermore, he hinted quantitative easing (QE) could remain in place after American unemployment declines to less than +6.5%. Above all, the Fed’s transparent messaging system continues to insist, “Tapering is not tightening.”
For his part, Bernanke continues to imply that the Fed remains extremely data-dependent without a clear outlook for the start of the taper, noting the Federal Open Market Committee (FOMC) would only start to slow bond buys if labor market and inflation align with its projections. His speech yesterday did not directly address the timetable for the Fed’s retreat, but in combination with other recent remarks made by Fed officials, it is clear that policymakers have not ruled out a change in strategy as soon as December. However, data dependency remains questionable. Global banking officials have to get their timing of reducing liquidity spot on otherwise interest rate differentials will undo all of that good work.
ECB, Old Lady Let Doves Fly
Meanwhile, the market has to digest more QE and negative rate talk from the European Central Bank (ECB). It seems that the doors of communication are wedged wide open – “transparent speak.” European officials are implying that they will do anything to fulfill the ECB’s inflation mandate. ECB Executive Board member Joerg Asmussen’s rhetoric has focused on negative interest rates, while Vítor Constâncio, Vice President of the ECB, and ECB Chief Economist, Peter Praet, has been favoring QE talk. Tomorrow and Friday, this market will play host to a plethora of European policy speakers, including ECB chief, Mario Draghi. Do not be surprised to see the ECB reiterate its willingness or readiness to take further actions on low inflation, “providing the rationale to take the deposit rate negative and adopting QE.” It seems that the ECB’s preferred weapon of delivery will be one of surprise – like the last rate cut. The fixed-income market is only tentatively pricing in the possibility of immediate change in policy. The last time they did this they got burnt.
The Bank of England’s (BoE) Monetary Policy Committee (MPC) meeting minutes for November revealed that U.K. policymakers were concerned about the strength of the country’s economic recovery, highlighting risks in the Eurozone, and of over-indebted consumers cutting their spending (a global phenomenon). Despite the pickup in the economy this year, “there were uncertainties in the durability of the recovery.” Any further economic setbacks from the Eurozone will have a direct impact on the U.K.’s progressive recovery. The MPC voted unanimously to keep both the BoE’s main interest rate unchanged (+0.5%) and the bond-buying program at +£375-billion. Officials will not consider raising interest rates until British unemployment falls to +7% from +7.6%. The “Old Lady’s” quarterly forecast showed policymakers do not expect this to happen until around mid-2015.
Fed Speakers in Focus
The Fed will also be expected to leave its footprint on the capital market landscape later today. Investors are looking to the FOMC minutes for any explanation regarding the degree to which policymakers were more comfortable with the prevailing rate environment in October, especially after the October 30 statement “dropped references to elevated mortgage rates and tightening financial conditions.” Investors will be expected to take their cues from this afternoon’s release, but before that there will be a few Fed speakers possibly obstructing progress. The president of the Federal Reserve Bank of New York, William Dudley, (voter, dove) will speak at 10 a.m. EST on the economy, while the president of the Federal Reserve Bank of St. Louis, James Bullard, (voter, dove) speaks on the economy and monetary policy at 12:10 p.m. EST.
Even U.S. fundamental data is not projected to make a big splash this morning. The market expects the October headline consumer-price index (CPI) to be a tad softer on the month, which would bring year-over-year CPI close to a four-year low. The headline and core retail sales are slated to show little has changed month-over-month. The outlier could be existing home sales. Analysts are looking for a similar drop to last month (-3.6%), however this could widen. Despite the fundamental unease, investors remain somewhat bullish on the USD. Any upside surprises in U.S. data could push market expectations in favor of a December tapering decision once again.
This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.
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