Fed Will Wait-and-See, China PMI on Deck
The FOMC minutes summed up Bernanke's testimony; more progress is needed in the economy before QE is slowed. The US dollar was the best performer Wednesday while commodity currencies sank. Data from China is in the spotlight with the HSBC China PMI. 2 new EURUSD & 2 new EURJPY have been issued after 4 trades hit all targets, including both EURUSD longs, while EURGBP were stopped out. Access to the latest trades is seen in the latest Premium Insights.
Dollar bears attempted to sell the currency after Bernanke warned against premature tightening but they were quickly stifled and the dollar soared. The price action underlined a point we have made previously – no matter what the news, the US dollar is finding a way to rally.
Some market watchers pointed to a later comment from Bernanke, that the Fed “could scale down purchases within next few FOMC meetings if labor market improvement was sustained” as a tapering signal. We think that's a stretch; Bernanke also mentioned increasing the pace of purchases.
The subtext in recent Fed commentary has been worry about the drag from the sequester. They believe it's only beginning to hit the real economy and will be a headwind. Unless the US can repeatedly generate strong jobs growth or fiscal strings are loosened, it's difficult to imagine the Bernanke Fed tapering in 2013.
A fresh risk to FX is the US stock market, which traced out a bearish reversal Wednesday. One interesting aspect of the S&P 500 decline was that it occurred immediately after the yield on the S&P 500 fell below the yield on the 10-year Treasury note. There is some suspicion that program selling following the crossover caused the turnaround in stocks but in the past relative yields between stocks and bonds haven't had a strong correlation with stock market performance. If it was a program, the loss will likely be erased in short order.