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Wednesday February 8, 2006 - 21:11:20 GMT

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Forex: No Honeymoon Expected for Bernanke

DailyFX Fundamentals 02-08-06

By Kathy Lien, Chief Strategist of

• No Honeymoon Expected for Bernanke
• Another Piece of Bad Data Offsets Hawkish ECB Comments
• British Pound Slides for Fourth Consecutive Day

US Dollar

A 50 pip 24 hour range in the EUR/USD is hardly something to write home about it. Against most of the majors, the US dollar gained back what it lost yesterday and then some. Even though Alan Greenspan is no longer our Fed Chairman, on a day devoid of any economic news, the market can’t help but tune into his comments. Speaking at a client conference for a Wall Street Bank, Greenspan was pretty bullish on the US economy and downplayed the possibility of a burst of the housing market bubble. Instead, Greenspan felt that any easing in house prices will be a gradual one. Such an optimistic view is sure to have helped the dollar recovery today as the greenback also benefits from another slide in oil prices. In fact, crude prices are now trading at monthly lows. Following up on the Federal Reserve, new Fed Chairman Ben Bernanke has announced that the March 28 FOMC meeting will now be a 2 day meeting. There is no need to be alarmed about the change however because Bernanke is simply giving himself more time to work with the entire monetary policy committee at their first meeting. It is quite timely then to highlight some of the comments made by Harvey Rosenblum, the Dallas Fed’s director of research and a 35 year veteran of the Federal Reserve on the “The Fed’s Changing of the Guard.” Rosenblum has worked under what now will be 4 different Federal Reserve Chairmen. He said that Bernanke’s role as a governor within the Federal reserve has given him a chance to establish himself as one of the FOMC’s “intellectual leaders.” The current committee’s experience and comfort working with him should make his transition seamless. However, even so, Bernanke is inheriting an economy that is going to be coming off a tightening cycle. Rosenblum cautions that “Whenever the Fed tightens, whatever financial fragilities there are in the economy are going to get exacerbated. Its possible Bernanke will encounter some financial vulnerabilities that were not necessarily of the Fed’s making, but the higher short-term interest rates will adversely impact some industries that are sensitive to high interest rates. At the same time, the yield curve is flat and actually has the potential to invert. An inverted yield curve has often been a precursor to a recession occurring within a year.” So in summary, he predicts that in all likelihood there will be no honeymoon period for the new Chairman.


By this time, we almost sound like a broken record as German economic data surprises to the downside once again. The country’s current account surplus decreased from EUR8.2 billion to EUR6.3 billion for the month of December. The trade balance fell from EUR13.3B to EUR9.2B. This compares to the market’s forecast for a less than EUR500 million drop in each, but a sharp rise in imports and a corresponding decline in exports caused the trade surplus to narrow more than expected. The jump in imports has primarily been due to a rise in oil prices rather than buoyant consumer demand. Taken together with the weaker industrial production, factory orders, retail PMI, unemployment and consumer spending data that we have received over the past two weeks, the weakness of the European growth continues to be a major concern. Standard and Poor’s warned today that Germany and France is teetering at the bottom of AAA group. However, they remain optimistic that the two country’s initiatives towards fixing their current problems should keep their ratings intact. Despite weaker data, the ECB continues to remain hawkish. When asked whether he thought the market’s pricing for a March rate hike and the possibility of a few more rate hikes was reasonable, ECB Council member Liebscher replied “yes.”

British Pound

After not being able to recover against the dollar yesterday, the British pound racked up losses for the fourth consecutive trading day. Since last Friday, the GBP/USD has fallen over 400 pips. Economic data released this morning was mixed. Industrial production increased a less than expected 0.2 percent while manufacturing production increased a more than expected 0.3 percent. Overall, the growth was still positive which highlights the slow and steady recovery that the UK is currently experiencing. Last evening, the consumer confidence report released by Nationwide was right in line with expectations at 98.0. The Bank of England is scheduled to announce their decision on interest rates tomorrow. Even though no changes are expected, speculation that the BoE could still lower interest rates this year in the context of improving economic data has the market treading carefully with positioning as it tries to determine what is more credible.

Japanese Yen

Yesterday the Japanese Yen, was the day’s biggest winner while today, it was the biggest loser. As we have mentioned, even though a rather respected fund advisory service forecasted an end to the Bank of Japan’s ZIRP relatively soon, we found it quite surprisingly that the market would completely discount the rhetoric of Japanese government officials so quickly, especially since they were the same ones that they have been believing so thoroughly for the past few months. The Bank of Japan is meeting to discuss monetary policy and with near certainty, they will not be making any changes to interest rates or their current account target. Data released overnight was mixed. The Eco Watchers current conditions index fell in the month of January from 55.7 to 52.1. However, the outlook or futures expectations component of the Eco Watchers “man on the street” index actually increased form 53.6 to 56.4.


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