On May 22, the Chairman of the Federal Reserve, Ben Bernanke delivered key testimony to Congress, sparking a series of market corrections, all of which involved the unwinding of various large consensus long equity, long bond and short JPY positions. However, his comments making so-called QE3 “tapering” more likely “should” also have resulted in a stronger USD. However, since May 22, only the already overvalued AUD and NZD commodity currencies have weakened vs the USD, with all other G10 currencies outperforming the Greenback. Although surprising, this supports our view that the market is unrealistic in expecting the Fed to downscale current QE3 support, currently running at USD 85bn/month. Based on recent price action together with our belief that the Fed will maintain QE3 until the end of this year (after which we expect measures to be downscaled), USD clearly risks further weakness. Furthermore, positioning data will undermine near-term USD potential if/when the Fed takes steps to correct current market expectations of an early end to QE3. A correction to the current theme is most likely to be seen in the commodity currencies (vs USD). One “market neutral” trade to highlight is long AUD/NZD.
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