For the last couple of weeks, major crosses have been trading wildly, yet in ranges. Adding to the lack of volume typical of summer, this year the world turmoil and the resulting investor’s hesitation have left currencies mostly directionless by the end of August. Stocks are also in wild mode, having lost in 2 weeks almost a year and a half of gains, only to start a slow recovery since early this Monday. Gold reached a record high at $ 1912/oz to lost around $200 after the pick up.
The Eurozone along with the US are at this point the most troubled economies which means the Euro and the Dollar are seen by market players as weak currencies. The European sovereign debt crisis extends its claws, having pushed France to cut GDP forecast for the next 2 years, and announce tax rises in order to face the slowdown in the region’s growth.
And if that is not enough to keep crosses limited to ranges, this Friday FED’s chairman, Ben Bernanke, will have to deal with the annual Jackson Hole symposium, where last year he set the stage for QE2. Is he ready to announce QE3? Well, that is what several economist around the world expect: the employment situation in the US keeps worsening along with the housing data, the core of the world crisis that started over 5 years ago.
US unemployment rate has remained above 9% since June 2009, and despite the fact that in early 2010 hopes surge on a couple of positive reading just below that level, we jumped quickly back above that mark. The monthly job creations have been erratic since early 2010, pointing for a lack of steady growth, what the economy actually needs to surge. New home sales reached a monthly high of 1120K in 2007, limited below 500K since early 2009, and near the record low posted in March this year at 250K.
Economic data keeps worsening, another recession hangs above the US as a Damocles’ sword, and investors will no doubt scrutinize the comments for any sign of further economic policy action.
All in one however, how much more stimulus is the FED willing to add?
A couple days ago Bernanke announced that his group was very likely to keep taking action to help the sluggish economy suggesting the FED may step in with more measures to help the super slow economic recovery the country in undergoing. In early July, market players bet on dollar weakness after the FED said that they were ready to ease monetary policy further if economic growth and inflation slowed much more. However, as the date of the announcement comes nearer, investors are not that sure the FED’s President will add QE3 right now.
No matter what, the fact is that the markets are expecting a big policy announcement from Fed Ben Bernanke; and no doubt, it's a great opportunity for the Chairman to provide meaningful policy guidance, yet my take is that although while he will keep open the door for additional easing, there is not going to be such thing as a QE3 announcement. A more likely scenario is that the Fed will just keep its $2.8 trillion balance sheet intact for longer than expected, just as it has done with the interest rates, announced to remain low at least till mid 2013.
For the greenback, that will mean more weakness, yet the dollar losses won’t be even across the board: Euro is also weak which suggests the EUR/USD upside will remain limited and range remains, In the meantime, while SNB and BOJ are desperate to weaken their currencies after reaching record highs against the dollar, there are more crosses where we will see ranges, and no much definitions. Regardless short term movements, only AUD and GBP right now have chances to run more clearly and strongly against the weak dollar.
“Jobs are the missing ingredient in the U.S. recovery and the Fed's biggest problem. There is no argument that the U.S. economy is weak and more needs to be done. If the Fed chooses to focus on inflation at the expense of growth, they could turn the U.S. into Japan - where growth and inflation becomes nonexistent. Therefore the main question over the next 6 hours is whether Bernanke will blink today. Given his conservative nature, he we will most likely err on the side of caution which means Bernanke will most likely opt for the least controversial way to lower yields and stimulate the economy.
By
M.Zohaib Gadit
The Eurozone along with the US are at this point the most troubled economies which means the Euro and the Dollar are seen by market players as weak currencies. The European sovereign debt crisis extends its claws, having pushed France to cut GDP forecast for the next 2 years, and announce tax rises in order to face the slowdown in the region’s growth.
And if that is not enough to keep crosses limited to ranges, this Friday FED’s chairman, Ben Bernanke, will have to deal with the annual Jackson Hole symposium, where last year he set the stage for QE2. Is he ready to announce QE3? Well, that is what several economist around the world expect: the employment situation in the US keeps worsening along with the housing data, the core of the world crisis that started over 5 years ago.
US unemployment rate has remained above 9% since June 2009, and despite the fact that in early 2010 hopes surge on a couple of positive reading just below that level, we jumped quickly back above that mark. The monthly job creations have been erratic since early 2010, pointing for a lack of steady growth, what the economy actually needs to surge. New home sales reached a monthly high of 1120K in 2007, limited below 500K since early 2009, and near the record low posted in March this year at 250K.
Economic data keeps worsening, another recession hangs above the US as a Damocles’ sword, and investors will no doubt scrutinize the comments for any sign of further economic policy action.
All in one however, how much more stimulus is the FED willing to add?
A couple days ago Bernanke announced that his group was very likely to keep taking action to help the sluggish economy suggesting the FED may step in with more measures to help the super slow economic recovery the country in undergoing. In early July, market players bet on dollar weakness after the FED said that they were ready to ease monetary policy further if economic growth and inflation slowed much more. However, as the date of the announcement comes nearer, investors are not that sure the FED’s President will add QE3 right now.
No matter what, the fact is that the markets are expecting a big policy announcement from Fed Ben Bernanke; and no doubt, it's a great opportunity for the Chairman to provide meaningful policy guidance, yet my take is that although while he will keep open the door for additional easing, there is not going to be such thing as a QE3 announcement. A more likely scenario is that the Fed will just keep its $2.8 trillion balance sheet intact for longer than expected, just as it has done with the interest rates, announced to remain low at least till mid 2013.
For the greenback, that will mean more weakness, yet the dollar losses won’t be even across the board: Euro is also weak which suggests the EUR/USD upside will remain limited and range remains, In the meantime, while SNB and BOJ are desperate to weaken their currencies after reaching record highs against the dollar, there are more crosses where we will see ranges, and no much definitions. Regardless short term movements, only AUD and GBP right now have chances to run more clearly and strongly against the weak dollar.
“Jobs are the missing ingredient in the U.S. recovery and the Fed's biggest problem. There is no argument that the U.S. economy is weak and more needs to be done. If the Fed chooses to focus on inflation at the expense of growth, they could turn the U.S. into Japan - where growth and inflation becomes nonexistent. Therefore the main question over the next 6 hours is whether Bernanke will blink today. Given his conservative nature, he we will most likely err on the side of caution which means Bernanke will most likely opt for the least controversial way to lower yields and stimulate the economy.
By
M.Zohaib Gadit
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