Dollar Bounces as Bernanke Hints at Exit

Boris Schlossberg Director of Currency Research, GFT

• EUR German Final CPI -0.4% vs. -0.4%
• EUR German trade balance 10.6B vs. 12.4B
• EUR French Industrial Production 1.8% better than 0.3% forecast
• GBP PPI Input -0.5% vs. -0.9%
• GBP PPI Output 0.5% vs. 0.1%
• GBP trade balance -6.2B vs. -6.3B

Event Risk on Tap

• CAD Employment Change expected at 10.1K
• CAD Unemployment Rate expected at 8.8%
• CAD trade balance
• USD Trade Balance expected at -32.7B

Price Action

• USD/JPY runs through 89.00 on spec that US rates may rise next year
• AUD/USD at .9022 on some mild profit taking
• GBP/USD loses 1.6000 as selling returns despite hot PPI
• EUR/USD back to 1.4700 on dollar bounce

As the week came to a close in Asia and Europe ,the dollar received a boost from comments by Fed Chairman Ben Bernanke that suggested the Fed is beginning to prepare an exit strategy from its ultra accommodative monetary policy. In remarks made last night, the Fed chairman noted, “"When the economic outlook has improved sufficiently, we will be prepared to tighten the stance of monetary policy and eventually return our balance sheet to a more normal configuration."

Although the Fed chief’s comments broke no new ground, the mildly hawkish tone of the message prompted a short covering rally especially in USD/JPY which spiked to 89.40 on fears that US rates may begin to rise sooner than the market expected sabotaging the dollar carry trade. As we noted earlier however, we believe that the rhetoric from Dr. Bernanke was meant simply to provide some intermediate support to the greenback rather than signal any real Change in policy.

We believe that the Fed will follow its historical precedent and will not make a move in rates until US unemployment rolls print positive for at least several months in a row. Given the fact that US economy continues to shed jobs at -200K pace a turnaround of such magnitude is not likely to occur until well into the h2 of 2010 at best.

The Euro was also hurt tonight by weaker than expected German Trade data which printed at 10.6 Billion versus 12.4 Billion eyed. It’s too early to tell if the higher exchange rates are beginning to hurt Germany’s key export sector, however they are clearly not helping and any further rise in the unit may slow down the pace of recovery in the region. European officials have been generally nonchalant about the relentless rise in the EUR/USD but if the pair climbs above 1.5000 and begins to materially impact export demand, the rhetoric will escalate very quickly.

In North America today, US will also release its trade balance figures with markets anticipating a slight increase to -32.5B from -32B the month prior. The data will be skewed by oil prices, but if the trade data ex -oil shows a significant improvement it will validate the US policymakers attempt to grow the US economy via the export sector. With little else to drive trading today, consolidation appears to be the most likely path with a slight bias towards the buck as profit taking continues.

Currency GMT EST Release Expected Prior CAD 11:00 7:00 CAD Employment Change 10.1K 27.1K CAD 11:00 7:00 CAD Unemployment Rate 8.8% 8.7% CAD 12:30 8:30 CAD Trade Balance -1.4B USD 12:30 8:30 USD Trade Balance -32.7B -32.0B Loading ---> Loading --->