The currency blog

Last Friday Fed Chairman Ben Bernanke suggested that the bank will do all it can to maintain the US economic recovery and gave an overview of the steps the Fed can take if growth continues to slow. Mr Bernanke said the Fed can provide additional monetary accommodation through unconventional measures if needed, especially if the economic situation continues to deteriorate. The mention of another round of QE had already been priced into the Dollar and so the speech had little impact, but the implications for the Fed stance moving forward will keep the Dollar on the back foot, especially with GDP growth also downgraded to 1.6% on Friday afternoon. This week’s data releases are focused on the US, with the closely watched non-farm payrolls figure out on Friday and the ISM manufacturing index published on Wednesday. The unemployment data is forecast to show a loss of around 100K jobs, but taking into account the recent news flow, the number may be significant lower.

The Japanese government has closely watched the appreciation of the Yen over recent weeks, with some in the market speculating that there may be a line in the sand around 84 versus the USD as the level for direct intervention. Ministers have been actively talking down the currency, but with little effect with the Yen hitting a 15 year high versus the Dollar last week. The announcement on Monday by the BOJ left the markets slightly underwhelemed, when instead of intervention talk, the BOJ announced easing of monetary policy, prompting a further round of Yen strength. This was followed by a large sell off on the Nikkei, down 3.55% in the Asian session and leading European bourses lower this morning. The evaporation of risk sentiment across the markets is driving the flight into less risky assets, witnessed by the dramatic drop in bond yields and the corresponding flight to the traditional safe haven currencies of the Swiss Franc, USD and Japanese Yen.

European consumer confidence reached its highest point in two years as export driven growth helped the Eurozone economy to grow in the second quarter at the fastest pace in four years. This morning, both Eurozone inflation and unemployment figures were exactly as forecast, 1.6% YoY and 9.6% respectively. Thursday sees the monthly ECB meeting. Rates are expected to be kept on hold, but traders will be looking for indications of how the ECB plans to withdraw the extraordinary monetary stimulus in light of the positive data recently.

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