Undoubtedly the outcome of the Federal Reserve’s interest rate decision and chairman Bernanke’s comments in the post-event press conference overshadowed any other data out last week. As expected no changes were made to its interest rate policy, but the real point of interest was the words that Bernanke used with regards to the timing of the possible unwinding of Quantitative Easing (QE).
Bernanke’s comments reflected the Fed’s growing confidence in the sustainability of the economic recovery, he said that if the economy continues to improve the Fed could reduce its $85 billion monthly bond purchases and he also said that the intention was to have bond purchases halted once unemployment slips to seven per cent, which should happen around mid-2014.
Throughout the course of the current month, we see that the US dollar’s gains against the commodity block currencies (AUD, CAD, NZD) by and large offset the losses made against the rest of the majors, but the US dollar gives in mostly to the JPY.
Ahead of the FOMC announcement on June 19, seen against the euro, the US dollar weakened more than three per cent, as EUR/USD rose to 1.3415, but this trend reversed completely post-Fed. Up to the time of writing the currency pair remained supported ahead of the 1.30 levels and has currently resumed 1.31 levels.
For the current week we expect EUR/USD to remain supported in the region of 1.3010/1.2896, while resistance should hold price moves higher at 1.3327/1.3530. Overall for the current month the single currency remains in positive despite the losses seen against the CHF, JPY and GBP.
In the end the Fed’s move was expected but there was speculation and concerns revolving around its timing.
Bernanke’s words have led to a bond sell-off on his inferring that an improved economic recovery could slow down its monthly QE purchases and even equities have felt the pain.
Two Fed officials’ comments earlier last Monday got attention, as they were the first to address the public after last week’s conference. Dallas Fed president Fisher and Minneapolis Fed president Kocherlakota’s comments contrasted; Fisher said tapering would begin this year while Kocherlakota was more neutral when suggesting that QE should be data dependent.
Yet, both seemed to suggest that the Fed was not so far departing from its easing stance, Kocherlakota insisted that the Fed’s recent stance wasn’t because it is becoming more hawkish and Fisher said that the Fed’s stance is not an exit but a dialing stance. So in the end the Fed’s announced tapering does not necessarily imply tightening – even if it seems that investors have difficulty digesting this.
In addition, recent liquidity strains and increased interbank lending rates for Chinese lenders continued to raise investor concerns earlier this week. In response to this, officials from the Chinese Central Bank released comments that it would keep interbank market rates under control.
Bernanke’s comments did not spare the price of gold from moving lower. The Fed’s most recent stance saw the price for the yellow metal slip to lows of $1,269.45 from $1,360.00 levels seen pre-Fed. These recent lows were last seen back in September 2010. Interestingly enough a day after the FOMC outcome UBS downgraded its one-month target to $1,250 from $1,425 and the three- month forecast to $1,350 from $1,500.
What makes gold so vulnerable? As the Fed starts to signal the end of QE the scenario starts to change for gold. Firstly the changes from the Fed will only come into effect if the economy continues to improve and gold tends to perform better in times of uncertainty.
Secondly the tapering of QE means that the supply of cheap money and cheap rates is close to an end and since gold is a non-interest-bearing investment, the opportunity cost of holding the metal starts to become more expensive, if rates of return on other interest bearing investments eventually start to increase.
Thirdly, if the Fed closes the tap on unlimited liquidity, one should expect a stronger US dollar and hence also the price for the yellow metal.
The British pound on the other hand continues to build on its support, the GBP is up +1.54 per cent against the USD, currently trading at 1.5431 and having hit highs of 1.5751 earlier this month. Against the euro the GBP gains +0.92 per cent and currently trades at 0.8474.
Upcoming FX Key events:
Today: German unemployment, UK GDP and EZ consumer sentiment.
Tomorrow: German retail sales & CPI, Canadian GDP and Michigan consumer confidence.
Technical Key points:
EUR/USD is neutral. EUR/GBP is neutral. USD/JPY is bullish, target 105.60, key reversal point 92.50. GBP/USD is neutral. USD/CHF is bullish, target 0.9900, key reversal point 0.9070. AUD/USD is bearish, target 0.8760 key reversal point 0.9520. NZD/USD is bearish, target 0.7500, key reversal point 0.8350.
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Rudolf Muscat is a senior trader at RTFX Ltd.