The $1.5 Trillion Question Ahead of Bernanke Speech

The Fed's Evans put a rough timeline on when QE3 could end as EUR/JPY hit a four-year high. On the day, AUD led while CAD lagged in an unusual commodity currency divergence. A Bernanke speech highlights the upcoming session.  

Evans said QE3 buying, counted from January 2013, could total $1.5 trillion in a rough estimate. That would imply, at most, $85 billion/month in buying for the next 6-7 months or an average of $47 billion over the next 12 months. In any scenario where the pace of purchases continues at the current pace through March, it implies a fairly swift taper to zero.

Personally, Evans said he prefers to continue buying at the current pace and expressed some worries about low inflation. That's no surprise given his dovish leanings.

A bigger surprise hit the markets when the ECB's Constancio said quantitative easing is a possibility. EUR/USD quickly fell 30 pips to 1.3490. He qualified his remarks saying QE hasn't been discussed in detail and that Praet's comments remain the baseline but what was most impressive was the resilience of the euro. It quickly bounced to 1.3440 and closed near the highs of the day.

The euro got a technical lift from EUR/JPY as the pair broke the October top to reach a four-year high. There is growing technical evidence that a broad breakout in yen crosses is near.

Coming up later, Bernanke delivers at speech at 0000 GMT in Washington. The risk is that he strikes an  optimistic tone like Dudley did on Monday. Confidence in the economy could signal a taper before the end of his term in January and help USD/JPY through resistance at 100.61.

If he sounds more like Yellen at her confirmation hearing and laments the unemployment situation, it could weaken the US dollar more broadly, especially against EUR, GBP and AUD.

Also on the calendar is New Zealand Q3 PPI at 2145 GMT. Inflation is an issue so the report could swing the high-flying kiwi. Another report is the September Japan all-industry index at 0430 GMT. It's expected to rise 0.4% but it's a report that rarely moves the market.