Currency Focus: Bernanke Strikes Delicate Balance On Stimulus

GO Markets - FX Commentary

 
on September 02 2012 7:24 PM
Ben Bernanke
Libor is structurally flawed, Ben Bernanke. Reuters

Bernanke strikes delicate balance on stimulus

Acutely aware of the emphasis markets had placed on his Jackson Hole appearance, the ensuing market reaction suggests Fed Chairman Ben Bernanke successfully walked the tight-rope by displaying a willingness to embark on further non-traditional policy initiatives, without prompting a material shift in expectations. While highlighting both the benefits and limitations of non-traditional policy easing, Bernanke described the Fed's previous easing initiatives as "economically meaningful, and "in their absence, the 2007-09 recession would have been deeper and the current recovery would have been slower than has actually occurred". It is clear, however, Bernanke believes the pace of economic growth remains unsatisfactory, stating "stagnation of the labor market in particular is a grave concern" which could "wreak structural damage on our economy that could last for many years." In short, the speech served as a reminder of the Fed's willingness to embark on further non-traditional policy measures, but the question remains, do we now have clarity the Fed will embark on such measures in the near-term? Not really. We cannot draw any finite conclusions from the speech other than to say the Fed is primed to support the economy, but remain acutely aware of the risks non-traditional measures may provide and will proceed with caution. Nevertheless, one couldn't accuse of the Fed of failing to provide transparency, given markets have been well-informed with a barrage of policy related comment from individual committee members and Bernanke himself. The simply answer is the next FOMC decision will be a line-ball call but will - at the very least - continue to keep the QE3 dream alive.

Non-farm Payrolls central to Fed's modus operandi

The week ahead is as big as it gets from a data perspective with policy meetings from the Euro-Zone, UK, Canada and Australia to be capped off by the much anticipated monthly round of U.S employment data on Friday. U.S stimulus conjecture will remain a key element to U.S dollar moves and risk currencies alike with Friday's non-farm payrolls a critical piece of the puzzle ahead of the Fed's next policy meeting over the September 12-13. The U.S economy is expected to create 130,000 new jobs in August from 163,000 in July with the official unemployment rate expected to remain steady at 8.3 percent.  Also in the frame this week will be health of U.S manufacturing with a final revision to the Markit PMI index and ISM Manufacturing Index on Tuesday. The usual pre-nonfarm build-up with see employment gauges such as the ADP private payrolls and weekly jobless claims act as a precursor to the main event on Friday. In light of Bernanke's failure to provide explicit detail on the possibility of near-term stimulus, the week ahead will see stimulus conjecture remain a primary driving factor with top-tier data points scrutinized in the context of how this will impact the Fed's next move.

A$ at the mercy of global risk trends amid a host of top-tier local directives

Alongside a barrage of key international directives, there's no shortage of event risk from a local perspective with the RBA policy decision, Gross Domestic Product and employment data on this week's docket. Considering the regular commentary from the Reserve Bank in recent weeks, on the surface, one would expect Tuesday's policy decision to carry little in the way of a surprise element, with interest rates expected to remain on hold at 3.5 percent. Nevertheless, investors will be scouring through the ensuing statement for any clues pertaining to how the Reserve Bank see's the local economies prospects in light of further signs China is coming off the boil and how a falling commodity prices (namely Australia's largest export iron ore) may impact on local growth prospects. The recent releases of the RBA policy meeting minutes for August noted tentative signs Chinese growth is "stabilising at a more sustainable pace," while recent interest rate reductions were beginning to infiltrate domestic conditions, in particular the housing market. Overall, it's a huge week for both local and global directives for the Australian dollar, with U.S stimulus conjecture, European Central Bank policy decision as well as a number of top-tier local data points to govern risk trends, and as a high-beta currency the A$ will be one of the first in-line to reflect these outcomes.

European debt crisis at critical juncture as ECB unveils plan of attack

It's been a little over a month since European Central Bank President Mario Draghi inspired a global market rally by vowing to do "whatever it takes to preserve the Euro." In this Thursdays ECB's policy decision we will finally learn exactly "whatever it takes" entails, and critically, if it's enough to get Spain to forgo its sovereignty and agree to a memorandum of understanding in exchange for financial assistance. What we do know is the ECB may intervene in debt markets with a focus on shorter-term maturities, but only in conjunction with Europe's rescue fund, the European Financial Stability Facility (EFSF) or the pending European Stability Mechanism (ESM). To qualify, a country must first seek financial aid and meet "strict and effective conditionality in line with the established guidelines." This will see any measures outlined viewed in the context of just how likely Spain will be to come to the party and officially ask for a sovereign bailout, and more broadly if it's enough to stop the rot across Europe's periphery. Spanish Prime Minister Mariano Rajoy has been reported as saying "If I believe it is good for Europe as a whole, for the euro, and for Spain, I will do it, and if not, not." Spain has already received a bailout for its ailing banking sector, but has not yet joined the likes of Greece, Ireland, and Portugal by seeking a sovereign bailout. Nevertheless, the residual support from the premise of these seemingly grand initiatives by the ECB have seen a significant easing across peripheral debt markets with Spanish and Italian yields retreating from lethal highs. But it's clear the crisis is at a crossroad for the umpteenth time, and a failure on the part of the European Central Bank to at least appease markets, or any reluctance shown from Spain to comply with conditions imposed, will see a month of upside momentum from the Euro promptly wiped away. Amid all the uncertainty, there remains one constant - Germany's reluctance to embark on such non-traditional policy measures, or more specifically the Bundesbank complete objection to such measures. Responding to the prospect of ECB bond purchases and the possibility of the introduction of yield caps, Bundesbank Chief Jens Weidmann said "Such a policy is, for me, too close to a public finance by the printing press, and "We should not underestimate the risk that central-bank financing can be addictive like a drug." Another potential stumbling block on the horizon is the forthcoming German Constitutional Court ruling scheduled on September 12, to determine if the European Stability Mechanism complies with German law.

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