USD: A Two-Way Traffic?

All eyes were on FED chief Bernanke’s speech on Friday and the dollar saw a bit more two-way traffic both before and after. The speech really held nothing new with Bernanke offering some crumbs to both sides of the argument. While acknowledging there appears to be a case for further Fed action, he highlighted the risks and costs to such a path. After mild USD short-covering in Asia Friday, the dollar bears were out in force again as the speech kicked off, driving the EUR to new cycle highs.

“Maybe now we are entering a period a “two-way traffic” with regard to the dollar as we head towards month-end and November 3rd.”

Andrew Timothy Robinson


Bernanke  stated that inflation was too low but QEII may produce an undesired rise in inflation expectations and he also said that the FED could modify its statement to indicate that the FES funds rate will stay low for longer. There were more dovish follow-up comments from Boston’s Rosengren and Chicago’s Evans over the weekend. Rosengren called for early and aggressive action rather than the gradual approach that had been touted while Evans also advocated much more stimulus, adding that it wasn’t even a “close call”.

“After mild USD short-covering in Asia Friday, the dollar bears were out in force again as the speech kicked off, driving the EUR to new cycle highs of 1.4150 and AUD briefly touching parity (first time since the currency was floated back in 1983),” FX specialist and market strategist Andrew Robinson at Saxo Bank writes in his weekly outlook.

“However these moves proved short-lived and subsequent Bernanke comments saw profit-taking/stops triggers re-emerge into the close with the dollar’s rebound a touch more dramatic,” he adds.

Lower bonds (higher US yields) helped the process and the EUR finished the week just above 1.40 and the AUD back down at 0.99.

USDCAD did not spend much time below parity last week either and finished at 1.0116.

US data releases were generally overshadowed by Bernanke’s speech but broadly better than forecast.

US CPI came in at +0.1% m/m in September, slightly below the 0.2% expected and down from 0.3% previously while core CPI hit its lowest level since 1961 (flat m/m and 0.8% y/y).

“On a more positive note retail sales rose 0.6% and the empire manufacturing index was a solid 15.73 from 4.14 last,” Robinson notes.

Michigan confidence was close to expectations (67.9 vs. 68.9) while business inventories rose 0.6%.

“With the dollar’s moves on Friday not particularly encouraging for the Asian start this week, it did not take long for the dollar’s gains to continue at pace with stops triggers in the precious metals a catalyst. There was not much on the data front to drive direction and the stop-hunt dominated activity Monday morning, until all order books were flushed out to the downside.”

“Maybe now we are entering a period a “two-way traffic” with regard to the dollar as we head towards month-end and November 3rd,” the Danish analyst writes.

TO WATCH – UPCOMING WEEK

(All Times GMT)

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