Bernanke may pave the way for USD recovery vs. low yield G10
All eyes will be on the Wednesday FOMC meeting and press conference this week, as markets look for more guidance on the Fed’s plans to taper asset purchases. Treasury and other fixed income markets rallied this past week and the USD lost ground, seemingly in anticipation of a more friendly message from the Chairman. We think it is unlikely that many market participants are counting on an outright retraction of his previous remarks opening the door to tapering. Rather, the late week rally seems more likely to reflect an expectation that the Chairman will provide reassurance on the speed and extent to which purchases may be trimmed. Our US economist expects the FOMC to provide some guidance on what the Fed needs to see in terms of economic data in order to proceed with tapering. There may also be assurance that the first step down would be modest in size and focused on Treasury purchases rather than MBS. A message like this may be sufficient to maintain the latest improvement in risk sentiment and help put markets on a more stable, lower vol footing. We expect the USD to regain momentum vs. lowyielding G10 currencies against this backdrop, and opened a short Cable recommendation this past week. On Monday, we’ll get some early indications on factory sentiment in June with the release of the Empire Fed survey, which should improve from fourmonth lows. There has been a sizeable lightening up in the long USD positioning according to the latest IMM data (to USD 28Bn from USD 39Bn in the previous week), which could also play into a potential post-FOMC bounce in the USD.
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BNP Paribas