Dollar Rallies After Fed’s Bernanke Lays Out Taper Timetable

As the market had expected / feared, the Federal Open Market Committee (FOMC) clarified its intentions to Taper stimulus in the near future – and the dollar rallied for it. Having avoided the extreme avenues of simply reducing the monthly, $85-billion-per-month injections this month and simply ignoring the costs of stimulus; the Chairman Ben Bernanke said that the group can reduce its pace of purchases later in 2013 and end the program altogether in mid-2014…data providing. There are certainly requirements to meet before support is curbed, but for a market running on record levels of leverage and over-extended in its search for yield; the eventual exit is a severe threat to a delicate balance.

Moving forward, the focus will be the timing of a Fed exit. Barring a steep slump in growth or trend higher in the unemployment rate, the group will no doubt make an effort to acclimatize the market’s to eventual reduction in QE purchases. Given Bernanke is likely to end his tenure by the end of January, there is a limited time frame to act (starting in 2013 is late and you don’t make a big policy move for someone else to navigate). September is most likely the month to move. Such an immediate time frame is a direct threat to those that entered markets near their highs or used excessive leverage. Yet, true risk aversion has yet to take. Watch the S&P 500 at 1,600. Few benchmarks measure moral hazard better.

Japanese Yen: The Bank of Japan’s Troubles Just Doubled
With the US central bank signaling the limitations to its constantly expanding stimulus program, the Bank of Japan’s job has just become far more difficult. In the group’s unspoken objective to devalue the yen to help spur export-led growth, the Japanese authority was incidentally relying on the successful encouragement of risk appetite via stimulus efforts of other global policy groups. No other bank was as successful in investor sentiment as the FOMC – that relative accomplishment can be seen in the incredible consistency of the S&P 500’s bullish pace since 2009. Should global investor confidence start to deteriorate in the wake of the Fed’s warnings, trades thin on meaningful return and driven by excessive leverage will come under heavy pressure. That includes carry trades. Historically, the yield income on yen-based crosses is at or near historical lows, yet the pairs are closer to record highs. Can the BoJ hold back this tide? Not if risk aversion builds momentum…

Euro: Cyprus Backtracks on Bailout Revamp, Troika to Drop IMF?
The last thing policy officials want to do is to set off trigger another flare up in Europe’s ongoing financial struggle. Therefore, it doesn’t surprise that the Cyprus backtracked on its calls to the Troika to soften the requirements on the country’s €10 billion rescue program – as they feared they would be unable to meet the objectives. Today, the government said they are fully committed to the original plan and would need no overhaul. Expect this to be an issue we come back to – but whether or not the market realizes / cares about that now remains to be seen. In other news, Eurogroup President Dijsselbloem suggested the IMF may be removed from the Troika after the crisis is over. As perhaps the most reliable source of funding to the rescue effort, that would be a bold move. Looking ahead to the coming session, there is no rest for active traders. We have timely growth proxies in the June PMI figures and Eurozone Consumer Confidence survey. The Euro-area Finance Ministers meeting will be dissected for any policy suggestions on Cyprus, Greece, Spain, etc. And, keep an eye on bond sales as yields climb.

British Pound: Incoming BoE Governor has a Lot to Digest
The minutes to the Bank of England Governor Mervyn King’s last meeting were released, and they showed that the central bank was once again in the minority (3-6) in his call to increase stimulus. The reticence to increase support to the economy is interesting when we consider that the UK narrowly avoided a triple dip recession; while the US is pursuing a massive, $85 billion-per-month program while experiencing steady but tame expansion. In a world where the largest central banks have far exceeded the BoE’s efforts, there is a monetary policy-led growth disadvantage. That may be the concern that incoming-Governor Marc Carney may bring with him next. The question, though, is whether he can convince his fellow Monetary Policy Committee (MPC) members.

New Zealand Dollar Stumbles after 1Q GDP Miss
Given the shake up in risk trends through the afternoon hours of the New York session, the kiwi dollar was already under pressure. Yet, the selling pressure intensified in the wake of 1Q GDP data enough to actually pushed the New Zealand currency’s decline to outpace that of the hobbled Aussie dollar. While the opening quarter did grow 0.3 percent, it was below expectations and one-fifth the pace of 4Q. Later in the Wellington trading session (2:05 GMT), a government bond auction of 2020, 3.00 percentpaper will measure just how sturdy appetite is.

Swiss Franc Safe Haven Status in Jeopardy with US Tax Fight
It’s official. The Swiss Parliament has rejected a bill that would have allowed the nation’s banks circumvent the nation’s secrecy laws to protect them from US criminal charges. Neither outcome to this policy decision was favorable, but there are different risks to each. Had the government allowed the bill to proceed, it would have eroded the long-term global trust in the country’s renowned banking sector. That role is a fundamental reason the franc is counted amongst the major currencies. Yet, the alternative is to open Swiss banks to US lawsuit that can shut banks down – such a move shuttered the nation’s oldest bank last year – and thereby lead to a national banking crisis. There is still the option for an executive order override. Meanwhile, the upcoming session brings the SNB rate decision and their Financial Stability report. It will be interesting to see if either or both account for the risk related to this political wrangling.

Gold Extends Decline, Eyes April Swing Low after Fed Clears Taper
With the knowledge that the Federal Reserve’s next policy move is likely to be a reduction in its pace of support rather than expansion, gold traders pulled the commodity to its third consecutive daily decline. This is the longest series of declines in a month; but more importantly, the unflattering move is carrying the market’s preferred alternative to traditional fiat currencies back towards its April low. Given the metal’s diminished capacity as a pure safe haven (volatility like that in April is not reserve worthy) or a high return asset (there is no yield in gold); the focus is back on its ability to stand in as a ‘currency’ that isn’t central bank distorted. Yet, since the Fed introduced QE3 in September, gold dropped over 20 percent. Unless a global financial crisis hits, bulls will struggle to retake $1,500 – much less $2,000.