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Federal Reserve president Ben Bernanke spoke during US trade, but he didn’t really provide any ground-breaking information on when the Fed is likely to cut back its bond purchases. Again, the path around tapering is fully data-dependant. However, Mr Bernanke’s comments that the Fed funds rate ‘is likely to remain near zero for a considerable time after the asset purchases end, perhaps well after the unemployment threshold is crossed’, indicate a slightly dovish turn. He had previously said that the rate could be hiked when the unemployment rate was ‘considerably below’ 6.5%.
Bernanke strikes a dovish note
The chairman’s comments around the Fed funds rate certainly seem slightly more dovish than traders had been expecting. However, there have been no moves in forward rate expectations, with the Fed fund future (June 2015) unchanged at 29 basis points. Meanwhile, the US ten-year bond has actually pushed up one basis point to 2.71%.
Impact of the GPIF review
Of course, in the forex market there are always two currencies involved, and while the US dollar has been the key driver behind the recent moves in USD/JPY, the yen has been in focus in European trade. Traders have been looking at the Government Pension Investment Funds (GPIF) review. The importance of this fund as a driver of the JPY can’t be stressed enough, given its sheer size: it controls $1.2 billion in capital. Any rhetoric around the assets it controls naturally has ramifications on the JPY, given the perception of external currency flows.
The GPIF press conference itself hasn’t really been a strong catalyst either way, and the comments have been viewed as a guide rather than a directive for significant change. There was a risk we might see buying in the yen, as expectations were fairly elevated. However, it seems the proposals announced are consistent with a weaker yen over the medium- and longer-term, although there has been some good buying of the yen against the euro. The fund is continuing to look at a higher allocation of capital to foreign markets, while guiding away from deflation-based strategy into something more growth-focused.
Tactically, I like buying dips in the pair to 99.60, while a break of supply of 100.61 will bring out momentum-focused traders. In terms of drivers, at 1.30pm we get retail sales; existing homes sales are released at 3.30pm, and the FOMC minutes will be announced at 7pm (all London times). Traditionally the minutes have verged on the hawkish side, given that they contain the views of the non-voters on the board.