Wise Money still eyes Bernanke’s views

It’s all about Jackson Hole and ahead of today meeting the US Dollar index is likely to maintain its place in towards the middle end of its recent 73.47 – 75.12 range helped by weaker equity markets.Wise Money still eyes Bernanke's viewsExpectations or hopes that Fed Chairman Bernanke will announce or at least hint at a fresh round of quantitative easing have receded allowing the US Dollar to escape further pressure.

Bernanke will likely keep all options open but there are still some in the FOMC who do not want to embark on QE3.

Although the US Dollar may be saved from a further drubbing the commitment to maintain exceptionally accommodative monetary policy through Q2 2013 has contributed to a relative reduction in US bond yields and in turn is acting to restrain the US currency.

A likely revision lower to US Q2 GDP will not help the USD in this respect.

One currency in particular that is reactive to yield differentials is USD/JPY, which registers an impressively high correlation with US – Japan yield differentials.

Attempts this week by the Japanese authorities to encourage capital outflows and a downgrade of Japan’s credit ratings by Moody’s have done little to weaken the JPY.

Even the usually bearish JPY Japanese margin traders have been scaling back their long USD/JPY positions over recent weeks while speculative investors remain overly long (well above the three-month average) JPY according to IMM data. The risk of a shake out of long JPY positions is high but unless yield differentials reverse renewed JPY weakening looks unlikely in the short-term.

So far this week euro has shown impressive resilience despite weak data in the form the German August IFO business and ZEW investor confidence surveys.

However, there is a risk of euro weakness should Bernanke not hint at QE3, with the currency already trading around the bottom of its multi-day range.

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