Forex Market Outlook 8/25/11
As we inch closer to the Jackson Hole meeting tomorrow, the market ranges have appeared to narrow, waiting to potentially explode in one direction or another based on what Bernanke has to say. Earlier in the week there was seemingly more sentiment that Bernanke would at least set the stage for further monetary easing dubbed “QE3”, though that sentiment has been waning.
One clear sign is that the price of gold has fallen over $200 in the last two days. Gold had been rocketing higher on fears of inflation and the thought that gold was a safe-haven asset. Part of the extraordinary demand for gold was more likely the result of the mistrust of fiat currencies. In addition to market-based selling in gold, the CME raised the margin requirements for gold by 27% to shake some of the speculators out of the market.
So the currency market ranges have tightened a bit, with a lack of conviction to take on big positions ahead of this meeting, as it really is anyone’s guess as to what is going to happen. What we do know is that there will also be the release of GDP data ahead of the meeting, and one has to wonder if this will impact Bernanke’s statement at all.
I have been joking lately that he actually has two speeches prepared; one for better than expected GDP figures and one worse. (Kind of like how newspapers print two separate headlines in close political election races.) Bernanke is clearly running out of time and the markets have been behaving like selfish children who have been coddled once to often. They will likely be disappointed tomorrow if Bernanke doesn’t deliver.
In other news, Greek 2-year bond yields have reached an all-time highs and the expansion of the EFSF is not a done deal just yet. Norway is asking for collateral from Greece (who doesn’t really have any) and this may spark others to do the same. The vote to enlarge the EFSF is roughly 2 weeks away so it could get dicey between now and then.
Later tonight, Japanese CPI data is expected to show continued deflation which shouldn’t be a major surprise to the markets.
The Pound is lower this morning after CBI sales figures came in lower than expected, ahead of tomorrow’s release of UK GDP figures. Should these figures fall short of expectations, then the BOE may take more accommodative action in the near future.
But all eyes and ears will be on Bernanke tomorrow and thankfully we have all been on vacation from the political rhetoric and constant whining from US politicians. I only wish this hurricane had happened earlier in the week to have ruined their vacations.
I mentioned yesterday that as the trading ranges continue to contract, we are setting up for some “coiled spring” type of volatility breakout. So tomorrow there will likely be a knee-jerk reaction to the speech, and volatility to continue throughout the day. It will take the entire weekend (and maybe then some) for the markets to figure out the immediate impact so Sunday night’s Asian market open could be interesting as well.
I will mostly likely be flat going into the speech tomorrow, unless excellent buying or selling opportunities present themselves today.