Central Bankers' Day

The US dollar is firmer against most of the major currencies, but is more mixed against the emerging market currencies. Although the US reports April existing home sales (consensus +1.4%), the focus is on Bernanke's testimony and then the FOMC minutes. 

Essentially we expect the Federal Reserve Chairman to say essentially three things: First, that the Fed has made progress on its thinking of the QE exit strategy. Second, that there will be no imminent tapering off of purchases of long-term assets and that the decision is dependent on the trajectory of prices and the labor market. Third, that fiscal policy and weakness in Europe are headwinds for the US economy and that the Fed cannot yet be assured that economic growth is sustainable. We suspect some late dollar longs are vulnerable if Bernanke hits these points.

The Federal Reserve is not the only central bank in the news today. The BOJ meeting concluded. Although there were no changes in policy, the BOJ did upgrade its assessment of the economy, as the government did earlier this week. The BOJ pointed to the stabilization of exports, capex and stronger housing investment. Officials are still concerned with the volatility of the JGB market and will again meet with dealers next week (May 29) to see if it can be better understood and addressed.

The dollar has fully recovered from the Amari-induced drop. The post-Kuroda bounce took the dollar back to JPY103.00 where it ran out of steam. The key to the North American session may be how the US Treasuries respond to Bernanke. For the past two weeks the US 10-year yield has been mostly in a 1.88%-1.97% range. It is in the middle of that range now, but we think the market has gotten ahead of itself on the tapering off story and look for the yield to come off and this may weigh on the dollar against the yen. That said, dollar pullback will be bought as the market continues to press the underlying trend.

Minutes from the Bank of England's MPC were released. There were no real surprises. The vote remained 6-3 in terms of new gilt purchases. We had thought there was some chance that one of the doves would have switched sides given the recent economic data and the closing window before Carney takes the reins. The real weight on sterling, however, which drove it to $1.5075, its lowest level since early April, was the dismal retail sales. 

The 1.3% decline in April, the biggest in a year, compared with Bloomberg consensus of a 0.1% increase. Soft PMI and BRC reports and weak pay growth figures, coupled with poor weather seemed to have signaled disappointing retail sales. A soft CBI soft trend report added to sterling's misery.  The break of the $1.5120, is sustained on a closing basis, bodes ill for sterling's outlook.  We look for it to return to and take out this year's low, set in March near $1.4830. 

The Swiss franc has continued to weaken.  The euro is at 2-year highs against the Swiss franc.  Although the euro has been appreciating since mid-April, the trend has accelerated.  Yesterday the IMF advocated that the SNB consider a negative deposit rate, if the franc came under new pressure.  The market focused on this more than the IMF's other advice that the SNB should take advantage of franc weakness to unwind some of its balance sheet expansion.  Today the SNB's Jordan indicated that a negative deposit rate and/or a shift in currency cap are still policy options.   Many are talking about the euro rising toward CHF1.30 now that the CHF1.25 has been convincingly breached.   The next big target for the dollar is CHF1.000.