Central Banks Statements to Guide Market Direction
Forex markets received some directional guidance mid-week as meeting minutes from the last Federal Reserve meeting brought sell-offs in several well established rallies. Since these trend reversals were inspired by central bank stances (rather than macro data), it remains important to look to these sources at least through the remainder of the summer as there are several key questions thathave net yet been answered. First, we have the US Federal Reserve, which is generally expected to begin removing monetary stimulus in September. Comments this week from Ben Bernanke suggested that this might not be the case, however, and it will be difficult for the US Dollar to gain much traction is these types of statements continue.
In Japan, the central bank elected to make not changes to its bond buying programs at its latest meeting. This is supportive for the Yen currency but there is still dissention within the bank’s voting membership that argues additional stimulus will be needed in order to achieve its 2% inflation target in the next two years. In Europe, the region is mired in recession, and several members of the ECB have suggested that a more accommodative stance will be needed. Similarly, slowing demand for exports in China weigh on the prospects for the Australian economy, and the country’s central bank is widely expected to reduce interest rates at least once more this year. These three scenarios would all be bearish for the respective currencies (EUR, JPY, and AUD) if enacted, so it is clear that rhetoric from central bank members will continue to be the primary element to consider for the remainder of the summer.
The Week Ahead in Forex
Next week will see another relatively limited data docket, as the major event risks in the near term were mostly concentrated in last week’s central bank activity. Looking ahead for next week, we will have additional speeches from Ben Bernanke, the Fed’s Beige Book release, and the meeting minutes from the last Bank of Japan monetary policy meeting. In Europe, we will have monthly Consumer Price Index (CPI) figures released on Tuesday. Given the strength of last week’s moves, forex traders should expect a continuation of the trend positioning seen into the end of last week, as the limited data docket will do little to alter bias in the forex market.
Another element to consider is the tendency for market to slow in volatility during the month of July, as limited liquidity favors smaller price moves. This also means that many forex traders will favor “range bound” trading strategies or one’s that rely on yield rather than valuation changes (i.e. carry trades). Carry trades have to deal with some differences in the current environment, as there are relatively few currencies with elevated interest rates, other than the Australian and New Zealand Dollars. Weakness in both of these currencies is troublesome as well, but there are still prospects for gains for those willing to hold positions through longer time frames.