Morning Fundamentals: Reversal of Recent US Strength Imminent?

Two members of the Federal Open Market Committee have weighed into the debate over stimulus with views that will keep investors on their toes. Federal Reserve Bank of St Louis President James Bullard said that the Federal Reserve should continue its bond buying programme for now as the policy has improved financial conditions and will continue to do so and any adjustments will be based on how the economy changes. In contract to this, Federal Reserve Bank of New York President Dudley said that he was not yet certain as to whether the next move by the Federal Reserve should be to expand or to re-duce its bond purchase programme. Dudley said, “because the outlook is uncertain, I cannot be sure which way - up or down - the next change will be.”

Given the balance of the statements overnight, we believe that the market has over estimated the chances of a reduction in the size of stimulus from the Federal Reserve and that a reversal of the recent U.S. strength is imminent. The currencies that have been the biggest losers in the last two weeks, the Japanese Yen and the Australian dollar, are likely to be the biggest beneficiaries of a retracement in the U.S. dollar as investors re-evaluate the chances of the Fed curbing its asset purchases. USD/JPY opens the morning at 102.50 while the Australian dollar is hovering around the 0.9800 level.

U.S. equity markets have risen overnight in response to the Bullard comments that the Federal Reserve should maintain its bond buying programme. The S&P 500 has once again closed at a new record high at 1,669.16 after rising 0.17%. Investors now await Fed Chairman Ben Bernanke's testimony to the Joint Economic Committee of Congress and the release of the last FOMC minutes for the April 30-May 1 meeting. The S&P 500 is almost 150% higher than its 12 year low in 2009 after three rounds of quantitative easing. Goldman Sachs said that the index may rise to as high as 2,100 over the next two and a half years. Earlier in Europe, rose marginally with the DAX gaining 0.19% while the FTSE firmed 0.09%.


EUR/USD behaved as expected over the last 24 hours with the price falling from the opening Asia whistle giving up the gains of the late US session as Asia traders saw a little weakness in the price action. A falling AUD helped the move on expectations of the RBA signalling cuts in the future. And just like that the price rebounded to 1.2895 before more selling during the European morning on weaker than expected English data and weak German PPI numbers.

1.2843 was the recorded low in Europe and this was to be the low point of the day as both Dudley and Bullard signalled no notion of QE being tapered as we expected and have stated here and on Bloomberg TV. Euro broke above the earlier highs to reach 1.2930 before settling at 1.2905. Until Bernanke tells the world that QE is over its still going and tonight $85 billion will remain $85 billion with the end result Euro back towards and possibly above 1.30.

Compass Direction
Short-Term Medium-Term
NEUTRAL BEARISH
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AUD/USD looked happily camped above 0.9800 during the Asia morning until heavy selling about 30 minutes before the RBA release shook the bulls out of their short term positions. However, the RBA were to give little away about the future of the interest rate cycle. The price jumped around but overall a low was set at 0.9750 just after the release and a climb resulted that was to squeeze the short term bears to 0.9840 and meet our major resistance level by the end of the Asia session. European offers on expectations that the AUD was overdone compared to the majors saw range traders selling with the price ending up towards the lows as mixed reports from Fed members directed traffic. All in all the price is closing the US session almost where it left it yesterday. There isn’t much on the data front today with only Westpac Consumer Sentiment and after last months terrible –5.1% we can’t expect too much of a lift. This sideways choppy trading looks set to continue and with an easing of QE unlikely to be signalled by Bernanke tonight and we could see the mid 0.99’s.

Compass Direction
Short-Term Medium-Term
NEUTRAL BEARISH
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