No honeymoon expected for Bernanke

• February 9, 2006
• Kathy Lien

US Dollar

A 50 pip 24 hour range in the EUR/USD is hardly something to write home about
it.  Against most of the majors, the US dollar gained back what it lost two days
ago and then some.  Even though Alan Greenspan is no longer our Fed Chairman, on
a day devoid of any economic news, the market can’t help but tune into his
comments.  Speaking at a client conference for a Wall Street Bank, Greenspan was
pretty bullish on the US economy and downplayed the possibility of a burst of
the housing market bubble.  Instead, Greenspan felt that any easing in house
prices will be a gradual one.  Such an optimistic view is sure to have helped
the dollar recovery yesterday as the greenback also benefits from another slide
in oil prices.  In fact, crude prices are now trading at monthly lows. 

Following up on the Federal Reserve, new Fed
Chairman Ben Bernanke has announced that the March 28 FOMC meeting will now be a
2 day meeting.  There is no need to be alarmed about the change however because
Bernanke is simply giving himself more time to work with the entire monetary
policy committee at their first meeting.  It is quite timely then to highlight
some of the comments made by Harvey Rosenblum, the Dallas Fed’s director of
research and a 35 year veteran of the Federal Reserve on the “The Fed’s Changing
of the Guard.”  Rosenblum has worked under what now will be 4 different Federal
Reserve Chairmen.  He said that Bernanke’s role as a governor within the Federal
reserve has given him a chance to establish himself as one of the FOMC’s
“intellectual leaders.” The current committee’s experience and comfort working
with him should make his transition seamless.  However, even so, Bernanke is
inheriting an economy that is going to be coming off a tightening cycle. 

Rosenblum cautions that “Whenever the Fed
tightens, whatever financial fragilities there are in the economy are going to
get exacerbated. Its possible Bernanke will encounter some financial
vulnerabilities that were not necessarily of the Fed’s making, but the higher
short-term interest rates will adversely impact some industries that are
sensitive to high interest rates. At the same time, the yield curve is flat and
actually has the potential to invert. An inverted yield curve has often been a
precursor to a recession occurring within a year.” So in summary, he predicts
that in all likelihood there will be no honeymoon period for the new Chairman.

Euro

By this time, we almost sound like a broken record as German economic data
surprises to the downside once again.  The country’s current account surplus
decreased from EUR8.2 billion to EUR6.3 billion for the month of December.  The
trade balance fell from EUR13.3B to EUR9.2B.  This compares to the market’s
forecast for a less than EUR500 million drop in each, but a sharp rise in
imports and a corresponding decline in exports caused the trade surplus to
narrow more than expected.  The jump in imports has primarily been due to a rise
in oil prices rather than buoyant consumer demand.  Taken together with the
weaker industrial production, factory orders, retail PMI, unemployment and
consumer spending data that we have received over the past two weeks, the
weakness of the European growth continues to be a major concern.  Standard and
Poor’s warned today that Germany and France is teetering at the bottom of AAA
group.  However, they remain optimistic that the two country’s initiatives
towards fixing their current problems should keep their ratings intact.  Despite
weaker data, the ECB continues to remain hawkish.  When asked whether he thought
the market’s pricing for a March rate hike and the possibility of a few more
rate hikes was reasonable, ECB Council member Liebscher replied “yes.”

British Pound

After not being able to recover against the dollar yesterday, the British pound
racked up losses for the fourth consecutive trading day.  Since last Friday, the
GBP/USD has fallen over 400 pips.  Economic data released this morning was
mixed.  Industrial production increased a less than expected 0.2 percent while
manufacturing production increased a more than expected 0.3 percent.  Overall,
the growth was still positive which highlights the slow and steady recovery that
the UK is currently experiencing.  Last evening, the consumer confidence report
released by Nationwide was right in line with expectations at 98.0.  The Bank of
England is scheduled to announce their decision on interest rates tomorrow. 
Even though no changes are expected, speculation that the BoE could still lower
interest rates this year in the context of improving economic data has the
market treading carefully with positioning as it tries to determine what is more
credible.   

Japanese Yen

Two days ago the Japanese Yen was the day’s biggest winner while yesterday, it
was the biggest loser.  As we have mentioned, even though a rather respected
fund advisory service forecasted an end to the Bank of Japan’s ZIRP relatively
soon, we found it quite surprisingly that the market would completely discount
the rhetoric of Japanese government officials so quickly, especially since they
were the same ones that they have been believing so thoroughly for the past few
months.  The Bank of Japan is meeting to discuss monetary policy and with near
certainty, they will not be making any changes to interest rates or their
current account target.  Data released overnight was mixed.  The Eco Watchers
current conditions index fell in the month of January from 55.7 to 52.1. 
However, the outlook or futures expectations component of the Eco Watchers “man
on the street” index actually increased form 53.6 to 56.4.  

Kathy Lien

Kathy Lien is the Chief Currency Strategist at
Forex Capital Markets. Kathy is responsible for
providing research and analysis for DailyFX,
including technical and fundamental research reports, market commentaries and
trading strategies. A seasoned FX analyst and trader, prior to joining FXCM,
Kathy was an Associate at JPMorgan Chase where she worked in Cross Markets and
Foreign Exchange Trading.

Kathy has vast experience within the interbank
market using both technical and fundamental analysis to trade FX spot and
options. She also has experience trading a number of products outside of FX,
including interest rate derivatives, bonds, equities, and futures. She has a
Bachelors degree in Finance from New York University. Kathy has written for
Stocks and Commodities, CBS Market Watch, ActiveTrader, Futures and SFO
Magazine. She is frequently quoted on Bloomberg and Reuters and has taught
seminars across the country. She has also hosted trader chats on EliteTrader,
eSignal, and FXStreet, sharing her expertise in both technical and fundamental
analysis.