Bernanke Testimony Boosts Risk Appetite, EUR/USD, Commodity Currencies |
What was the Key From Bernanke Prepared Statement:
The jump in sentiment was boosted by Bernanke holding out the possibility that the Fed will pursue further stimulus measures if the economy continues to grow at a pace that does not bring down the unemployment rate.
“On the one hand, the possibility remains that the recent economic weakness may prove more persistent than expected and that deflationary risks might reemerge, implying a need for additional policy support. Even with the federal funds rate close to zero, we have a number of ways in which we could act to ease financial conditions further. One option would be to provide more explicit guidance about the period over which the federal funds rate and the balance sheet would remain at their current levels. Another approach would be to initiate more securities purchases or to increase the average maturity of our holdings. The Federal Reserve could also reduce the 25 basis point rate of interest it pays to banks on their reserves, thereby putting downward pressure on short-term rates more generally. Of course, our experience with these policies remains relatively limited, and employing them would entail potential risks and costs. However, prudent planning requires that we evaluate the efficacy of these and other potential alternatives for deploying additional stimulus if conditions warrant.”
As we see above that includes the possibility of further asset purchases – in other words further quantitative easing.
More easing puts more money in the financial system and the financial institutions have been using that extra money to buy stocks and commodities, and Bernanke’s comments should help support investor sentiment. That means that in which the USD is used as a funding currency to purchase higher yielding currencies should continue.
We would need to monitor the employment situation and job growth over the next few months as well as see if the temporary factors that are holding down US growth dissipate as we move through the summer. Another condition would be a decline in underlying inflation and a threat of deflation.
Response in the Financial Markets:
- The S&P500 surged 1% to 1,327, with the DJI up 1.08% or 135 points to 12,582 as of 10:40AM ET.
- European equities extended their gains following the release.
- The EUR/USD hit a fresh daily high after his comments, pushing above 1.41.
- The AUD/USD climbed 90 pips from 1.0680 prior to the release to 1.0770 as it has the highest yield out of the “advanced” economies and with the prospect of higher commodity prices (and some better Chinese data overnight) it was one of the big gainers.
- The GBP/USD moved above the 1.60 level, finding resistance at 1.6050 in the 40 minutes after Bernanke statement.
- Gold extended its climb today, pushing higher after setting a record high earlier today.
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