Post-Bernanke Dollar Decline
Those hoping for less dovish commentary from Bernanke overnight were disappointed, as the Fed Chairman put the US dollar on the defensive by asserting that “the continued weakness in aggregate demand is likely the predominant factor” behind the increase in long-term US unemployment. He served notice that policy normalisation is some way off via his contention that “the Fed’s accommodative monetary policies, by providing support for demand and for the recovery, should help, over time, to reduce long-term unemployment as well”. This provided a positive kick for risk, with the commodity currencies gaining ground vs the US dollar and yen amid higher equity prices. Among the commodity currencies, we continue to favour the Canadian dollar on the premise that the Bank of Canada might frontrun the Fed in sounding less dovish. With the new fiscal year starting next week in Japan, risks should be skewed towards further yen weakness, as yield-hungry Japanese investors gradually shed their ‘home currency bias’ and the BoJ tees up further easing – April 27 is one potential window for action, coinciding with the release of the Outlook Report. The euro is looking well supported for now, as Eurozone finance ministers prepare a deal to strengthen the region’s financial firewall by the end of the week. Yet, any formal decision to pool the EFSF/ESM to create a EUR940 in cushion should only provide temporary euro support, as such a result has been well telegraphed. We would be wary of any negative response by the ratings agencies to the implications for sovereign contingent liabilities. Despite the recent setback, we remain fundamentally bullish on the US dollar, taking comfort from the fact that Bernanke did not hint at further easing. Our take is that the US recovery will be sufficiently durable to prevent the Fed from adopting QE3, as small firms are feeling better, payrolls should continue to expand, credit activity is improving, core inflation is likely to tick higher, and house prices are stabilising. On the latter, we would not read too much into the soggy January S&P/Case Shiller (SP/CS) Index expected later today. Distressed sales are having an increasingly negative effect on broader measures of home prices such as the SP/CS reading; the rise in non-distressed housing prices provides a more reliable barometer of underlying trends. Today’s US calendar also serves up the Conference Board’s March Consumer Confidence Index and the third of Bernanke’s four lectures at the George Washington School of Business.
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UBS Investment Bank