Dollar Down Ahead Of Bernanke

The dollar declined broadly ahead of Mr. Bernanke’s semi-annual testimony to Congress, which begins today. It was lower against all the G10 currencies and most of the 15 EM currencies that we track. The US economic news supported tapering off QE, yet had no impact on the dollar. (US CPI in June was higher than expected, which would reduce any lingering fears among FOMC members that inflation was too low, and the NAHB housing sentiment index soared 5 points instead of falling 1 as was forecast.) Equities fell despite solid earnings reports and Treasury yields declined despite the higher CPI, so all in all the markets are clearly looking at something else besides the data.

Data is likely to take a back seat today as well as there are three central bank events on the schedule. The main one will be when Fed Chairman Bernanke makes his biannual presentation to the House financial services committee today and the Senate banking committee tomorrow. In his prepared statement he usually hews pretty closely to the latest pronouncement from the FOMC, but then he faces a Q&A with the Congressmen. They will try to pin him down on when the Fed will start tapering off QE, but we cannot expect much beyond what he has already said: “later this year,” assuming all the conditions are met. They will then no doubt ask him questions about whether the economy is likely to meet those conditions. The June payroll figures, which came out after June FOMC meeting took place, were fairly robust; someone may try to get him to clarify whether this has changed the balance of opinion on the FOMC. Also, bond yields have risen since he started talking about “tapering” in late May; he’s likely to be pressed about the effect this may have on the US economy and whether “fear of tapering” could start a feedback loop that stops the process. His recent comments have tended to be dovish and reassuring, hence USD-negative; we’re likely to get more of the same, which I expect will cause USD to weaken somewhat further. A lot of it is already in the price, as the dollar has fallen around 1%-2.5% vs most G10 currencies over the last week (-2.25% vs EUR), but still there is bound to be some reaction.

In the UK, the release of the Bank of England MPC minutes will make interesting reading to see if we can get more detail on the more extensive “forward guidance” that they hinted would be coming in August. Also one wonders just where they think short rates should be. Further details on these matters is likely to be negative for the pound. Finally, the Bank of Canada MPC meets today; nobody expects a change in rates there, but it’s the first meeting under the new Governor so people will be anxious to see what changes there might be in the statement following the meeting. Investors will also pour over the new quarterly Monetary Policy Report to see any changes in the outlook.

As for data, UK jobless claims are expected to be down in June and average earnings for those still in work are expected to be up. The ILO unemployment rate is forecast to remain unchanged at 7.8%. US housing starts in June are expected to be up 5.0% mom, a slight slowing from +6.8% mom in May, but building permits are forecast to rise 1.5% vs the 3.1% fall in May.

The Market

EUR/USD
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• EUR/USD moved higher after breaking above its 200-day moving average, both in daily and 4-hour timeframes. Further move to the upside is to be expected especially if the 1.3200 level is broken. The stochastic is overbought so there is the potential for a pullback. Resistance levels can be found at 1.3200 and 1.3290, support at 1.3065 and 1.3000.

USD/JPY
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• USD/JPY continued to make losses with the stochastic reaching oversold levels. There is a significant support level at 98.40, a level of a previous high and the 200-day moving average (4 hours). A breakout from that could see USD/JPY collapse. Resistance levels come at 100.10 and 100.70, support at 98.42 and 97.00.

USD/NOK
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• USD/NOK had the biggest fall (i.e., NOK gained the most vs USD) of any of the G10 currencies yesterday after bouncing lower from its middle Bollinger Bands level reaching the key 6.000 level. A very important support approaching at 5.9520 which is its 200-day moving average. Stochastic has reached oversold region. Resistance levels come at 6.0920 and 6.1800, support at 5.9529 with a break leading to 5.9000.

Gold

• Gold moving higher yesterday, while it continues to trade within a tight range with 1300.00 level being the key level. Stochastic reaching overbought region. Resistance levels can be found at 1300.00 and 1343.00, support at 1260.00 followed by 1226.50

Oil

• WTI ending lower after breaking below its two week rising trend line and finding support at 105.40. We expect further move to the downside if the current support is broken. Resistance levels can be found at 106.70 and 107.40, support at 105.40 and 103.90.

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