Previous to the North American open this morning, overnight markets were content to continue the “risk on” move started by yesterday’s US Retail Sales release, but was a little more muted. Stock futures opened higher, the EUR/USD took out the 1.23 handle, Oil reached $89 per barrel, and the AUD/USD flirted with 1.03 as investors were positioning themselves for a potential bombshell by Fed Chairman Ben Bernanke, who would be speaking before the Senate Banking Committee.
Before Bernanke had a chance to square up to the microphone though, the Bank of Canada had a monetary policy decision to make. The BoC kept interest rates steady at 1%, and they made virtually no changes to their statement about future policy from the last decision. While they did adjust their growth projections for 2012 and 2013 down slightly, they raised their projections for 2014. While the majority of vital central banks around the world are going in to easing mode, the BoC has decided to remain optimistically stationary; judging by the actions of the rest of the BoC’s peers, that optimism may be a little misplaced. Since they didn’t change anything, the reaction to the news was subtle, only moving the USD/CAD about 15 pips down. Then all eyes were turned toward Washington in anticipation of the big market mover of the day.
Approximately one hour after the BoC announcement, Ben Bernanke’s prepared testimony to the Senate was released. Despite expectations by many market participants that the Fed Chief would yield to calls for QE3, his statement indicated nothing of the sort. He continued to repeat the same line that he did at his monetary policy decision press conference back in June, along with what was released last week in the minutes of that meeting. The Fed is keeping their options open, and QE3 isn’t something that they are rushing to implement any time soon. Within the statement, Bernanke highlighted the modest signs of improvement in the housing market, but was sure to mention the struggles in the manufacturing sector.
Among the risks to the economy that Bernanke outlined are the continued issues in Europe, but also policy of lawmakers. Being a former academic professor, perhaps he felt it was necessary to lay down a little instruction to the Banking Committee members to whom he was speaking, saying (emphasis, my own): “The most effective way that the Congress could help to support the economy right now would be to work to address the nation’s fiscal challenges in a way that takes into account both the need for long-run sustainability and the fragility of the recovery. Doing so earlier rather than later would help reduce uncertainty and boost household and business confidence.” So it appears Bernanke is trying to encourage Congress to avoid the political bickering that resulted in the Debt Ceiling debate and subsequent downgrade of the US credit rating by S&P last summer. By acting now instead of at the last moment, confidence could be restored in the elected officials that they are capable of meeting in the middle instead of always taking a hard line.
The rest of the North American trading session will most likely continue to be dollar positive as more traders exit their QE3 expectation trades. For those who were expecting Bernanke to repeat his sentiment, they will be happy to book profits at previous points of support or resistance on major charts, creating periodic pullbacks. Attention will now probably turn back to the situation in Europe as traders look for any new reasons to sell euros and drag the risk trade down with it.
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