US markets closed the week on a high note on Friday, supported by better than expected economic data and rallying on the back of comments from Fed Chairman Ben Bernanke. In the speech to the annual meeting of central bankers in Jackson Hole, Wyoming, Bernanke did not make mention immediate plans to resuscitate the economy by way of stimulus, however reassuringly stated they have the tools to prevent the US economy to slip into another recession and outlined four possible plans. Dr. Bernanke stated “The issue at this stage is not whether we have the tools to help support economic activity and guard against disinflation. We do.”
Clearly the Fed’s not without the ammunition it needs to kick-start economic growth, however one needs to question the effectiveness of another round of stimulus considering billions upon billions of cash that have been thrown at the economy to date. The question here is not about how many bullets the fed has left, but the calibre as they’ve gone from missiles to ball bearings.
The events of Friday helped investors look to the bright side, US treasury yields were higher and US equities recorded strong gains, albeit still down over the week. This helped sentiment driven currencies such as the Aussie dollar higher following the slightly better than expected GDP with some assistance of some cautious but reassuring words from Fed chairman Bernanke.
US Gross Domestic Product also beat expectations with the economy growing at an annual pace of 1.6 percent in the second quarter although well off the previous quarter’s growth of 2.4 percent. Economists had expected more subdued growth of 1.4 percent.
The US dollar was mostly lower against major counterparts as traders found the courage to move away from safe haven buying. The Euro posted its third session of gains in a row making a convincing climb back through 1.27 the figure against the greenback. After falling to session lows of 1.5440, sterling regained composure as the session drew to a close to finish at 1.5526.
The better market vibe meant good things for the Japanese Yen which recorded losses against the greenback rising back through 85 Yen to finish the day at 85.2 yen. Early last week the Yen reach a 15 year high against the greenback; reigniting speculation that Bank of Japan Intervention may be imminent. In times of adversity the Japanese Yen is seen as the ultimate currency safety-play, however recent times have seen Japanese officials warn against excessive strength of the Japanese Yen. A Strong Yen makes exports become less price-competitive against competing economies, thus hampering an export fuelled recovery. This of course continues to ignite speculation the Bank of Japan are poised to intervene in the currency markets.
Meanwhile, new reports suggest the Bank of Japan will hold an emergency meeting as early as today or tomorrow which coincides with a scheduled government announcement in relation to possible stimulus measures. It looks like they are taking the bull by the horns and trying to create ceiling for Yen price action whilst spurring demand within Japan.