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28 May 2013
Flash: Bernanke and the dollar - Nomura
FXstreet.com (Barcelona) - Nomura strategists note that in the past, the challenge was to predict future Fed statements, but in recent weeks, the challenge included interpreting what the Fed was actually saying.
They begin by commenting that Bernanke's comments during his testimony to Congress last week was a case in point. During the Q&A, they note that there was one sentence which moved the market. The notion that the Fed might start tapering QE at one of its 'next few meetings' was what rocked the boat. It could mean that asset purchases will be scaled back from September, which would be somewhat earlier than we have previously expected. They feel that the implication would be dollar supportive, but presumably negative for risk assets, although tapering is different than ending asset purchases. The team write, “The very concept of tapering has been invented to avert a 'cold turkey' end to QE, as was the case at the end of QE1 and QE2, and this makes it harder to draw firm conclusions about its impact.”
Nevertheless, from a trading perspective, they feel that the pulling forward of tapering reinforces the point that they have been making for a while. That structural dollar strength is the name of the game in the current environment of US growth out performance. When exactly the dollar move will accelerate is hard to say, given that the current US data picture is on the softer side. However, they feel that the trend ahead is potentially so powerful that they believe investors should have structural positions on now. They finish by writing, “We have such exposure in USD/CAD (call spread) and EUR/USD (put spread), and we are looking to add more exposure to this theme. (We are inclined to ignore that positioning indicators are pushing towards relatively extreme levels of USD longs.)”
They begin by commenting that Bernanke's comments during his testimony to Congress last week was a case in point. During the Q&A, they note that there was one sentence which moved the market. The notion that the Fed might start tapering QE at one of its 'next few meetings' was what rocked the boat. It could mean that asset purchases will be scaled back from September, which would be somewhat earlier than we have previously expected. They feel that the implication would be dollar supportive, but presumably negative for risk assets, although tapering is different than ending asset purchases. The team write, “The very concept of tapering has been invented to avert a 'cold turkey' end to QE, as was the case at the end of QE1 and QE2, and this makes it harder to draw firm conclusions about its impact.”
Nevertheless, from a trading perspective, they feel that the pulling forward of tapering reinforces the point that they have been making for a while. That structural dollar strength is the name of the game in the current environment of US growth out performance. When exactly the dollar move will accelerate is hard to say, given that the current US data picture is on the softer side. However, they feel that the trend ahead is potentially so powerful that they believe investors should have structural positions on now. They finish by writing, “We have such exposure in USD/CAD (call spread) and EUR/USD (put spread), and we are looking to add more exposure to this theme. (We are inclined to ignore that positioning indicators are pushing towards relatively extreme levels of USD longs.)”