Currency Focus: Weekly FOREX Commentary | 27th August, 2012

Odds of QE3 increase as Bernanke says ‘scope for further action’

U.S markets managed to claw back weekly losses on Friday, bolstered by hopes central banks from both sides of the Atlantic will soon unleash a new wave of policy easing measures. In response to questions from the Chairman of the House oversight committee, Darrell Issa, Fed Chairman Ben Bernanke once again displayed a willingness to enact further easing initiatives. In a written reply dated 22nd August, Bernanke noted “there is scope for further action by the Federal Reserve to ease financial conditions and strengthen the recovery.” Furthermore, responding to concerns on the implications of existing initiatives taken by the Federal Reserve, Bernanke defended Fed policy decisions stating they have “helped to promote a stronger recovery than otherwise would have occurred, and to forestall the possibility of a slide into deflation by putting downward pressure on longer-term interest rates and contributing to broader easing in financial conditions.” Still, the letter failed to provide specifics or if indeed further action is required, given existing programs such as operation twist has yet to fully infiltrate the economy. The letter is in tune with recent Fed commentary with last week’s release of the monetary policy minutes stating “many members judged that additional monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery.”

Central bank source says ECB ‘yield cap’ on the cards

Central bank conjecture remained a key directive for the Euro on Friday, with reports European Central Bank may cap borrowing costs of Europe’s struggling periphery. On the condition of anonymity, Reuters reported a central bank source as saying a yield cap “is one of the options that is currently being discussed in the working groups and will then be handled by the Governing Council." Still, many economists consider this an unlikely scenario, given the stress it would place on the European Central Bank to continually intervene in an effort to keep borrowing costs in-line with predetermined targets or spread differentials. Although rumour and innuendo over exactly what actions the European Central Bank can/will take in their next policy meeting, it appears markets are increasingly taking each rumour and counter rumour with a grain of salt. Meanwhile, Greek Prime Minister Antonis Samaras has taken his rescue mission on the road, meeting with German Chancellor Angela Merkel and French President Francois Hollande in an effort to further secure support from Europe’s flagship economies. In a display of solidarity, both Merkel and Hollande remain steadfastly behind Greece’s efforts to get back on the straight and narrow. “I am deeply convinced that the new Greek government, under the leadership of Prime Minister Samaras is doing everything to solve the problems that Greece is facing,” Angela Merkel said. Hollande has also taken a similar line but have both failed to provide assurances Greece will be given additional time to get their fiscal house in order, with a decision unlikely to be made until the release of the troika report in early October. Greece must “demonstrate the credibility of its program and the willingness of its leaders to go all out all the while making sure that it is tolerable for the population,’’ Hollande noted. Samaras has made clear his agenda is to seek more time to move ahead with budget cuts, stating “We don’t want more aid, but we need breathing space."

Stimulus conjecture to reach critical mass ahead of Fed’s Jackson Hole conference

The week ahead will see global markets transfixed on Friday’s gathering of the world’s central bank elite in Jackson Hole, Wyoming, for the annual Kansas City Fed symposium. In recent years the event has attracted increased attention in light of the common challenges faced by global central banks, as a result of the financial crisis. The meeting is also seen as a platform for leaders to discuss future policy decisions, notably Fed Chairman Ben Bernanke used the event in 2010 to signal a second round of quantitative easing. Markets are clearly looking for Bernanke to elaborate on recent Fed commentary showing a willingness to embark on further easing initiatives should incoming data points fail to show a “substantial and sustainable strengthening in the pace of the economic recovery." Although Fed members have individually displayed their conditional tick of approval should the economy falter, it’s unlikely Bernanke can be any more succinct than his letter to the Chairman of the House oversight committee, Darrell Issa, last week, which stated “there is scope for further action by the Federal Reserve to ease financial conditions and strengthen the recovery.” Nevertheless, speculative activity ahead Friday’s meeting will be high, reflecting the constant changes in expectations as market participants look to each incoming data point to gauge how this may sway the chances of imminent policy easing. Among a host of influential data points due for release, top-tier data on this week’s docket includes a revision to second-quarter GDP on Wednesday, an anecdotal view of economic conditions from the Fed’s beige book on Thursday, alongside the release of July’s personal consumption expenditure data. Data on the health of U.S housing, consumer confidence and factory orders will also be watched closely ahead of the Jackson Hole conference.

Australian dollar at the mercy of U.S easing expectations

In the absence of local market moving releases, we anticipate the Australian dollar’s performance this week will be closely tied to U.S stimulus expectations ahead of Friday’s Jackson Hole symposium. In recent times, a great deal of attention has been paid to the Aussie’s resilience in spite of a marked decline in Australia’s most valued commodity exports. But this fracture in correlative value between declining terms of trade and price action, may be a relatively insignificant theme in comparison to broader, more pressing directives ahead, with U.S quantitative easing expectations front row and centre. Thursday’s rally beyond 105 US cents failed to hold despite respectable gains from U.S equity markets on Friday. The AUDUSD pair closed just shy of 4-week lows on Friday, driven by concerns the ‘once in a lifetime’ mining boom may be fading as Chinese growth comes off the boil. The month of August has also seen the local unit outpaced by its more unlikely counterparts, with Aussie dollar losing over 3-percent against the Euro after forging fresh euro-era highs on August 2. The Australian dollar lead the charge lower against the greenback with Thursday’s less-than-inspiring Chinese manufacturing PMI creating a key inflection point to the downside of 105-figure. Mid-tier directives this week will see the focus remain on China with the industrial profits and leading index on the docket, while local releases include HIA new home sales, private capital expenditure and private sector credit. From a local perspective, market participants are well informed given the recent host of commentary from the RBA, suggesting local directives will take a back seat to central bank expectations emanating from both sides of the Atlantic in addition to the growing possibility of new stimulus initiatives from China.

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