Forex Markets Guided By US Dollar Moves
Forex markets received directional guidance mid-week as US Federal Reserve Chairman Ben Bernanke gave his semi-annual testimony before Congress. Here, Bernanke’s job is essentially to give his assessment of the state of the economy (both on a national and global level). But what most traders were looking for were additional clues that the Fed is looking to update its publicly stated opinion on quantitative easing stimulus measures. There have been conflicting comments from a few different voting members, with both hawkish and dovish comments given to the financial media. Because of this, it was highly important for forex traders to pay attention to the outcome of Bernanke’s statements in order to get an idea of where currencies will be headed in the next few months.
Overall, the markets interpreted Bernanke’s testimony as dovish, in that there was no suggestion that the Fed plans to directly start phasing out its quantitative easing stimulus programs in September. A good deal of the market was expecting this outcome, so when it did not materialize, the Dollar met significant selling pressure against the Euro. Instead, Bernanke went further in the other direction, actually suggesting that they have has the tools and willingness to raise its pace of asset purchases, effectively pumping more monetary stimulus in the economy. Of course, this is negative for the US Dollar, so it was not surprising to see selling pressure on the currency into the later sessions in the week.
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 on the Congressional testimony from Ben Bernanke. We are still in the midst of earnings season in stocks, and it will be important (even for forex traders) to watch developments here, as there are significant correlations between the stock markets and forex. Looking ahead for next week, we will have Durable Goods orders out of the US, but the wider impact is likely to be seen from voting members of the US central bank. In addition to this, forex traders should look for any developments from the People’s Bank of China, which has removed the rate floor for bank lending.
This, of course is supportive for raw materials demand (on improved manufacturing prospects), and this will be helpful for the commodity currencies (the AUD, NZD, and CAD). These currencies have already seen some lift into the end of last week, and these trends are likely to continue next week unless we see major surprises out of China in the other direction. The commodity currencies have seen a good deal of weakness in the last few weeks, so it still makes sense to buy into these currencies based on their relatively inexpensive prices. These currencies also have higher interest rate yields, which make them good candidates for long term positions. The AUD is still the highest yielder in the majors, and represents the best choice for carry traders.