Forex Investment and Currency Trading

Markets are reacting this morning to a speech from Ben Bernanke, where most notably he has made comments about the US dollar, and it’s ongoing deterioration. This is significant, amongst other reasons for the fact that the Fed is signalling an end to downward policy adjustments, and acknowledging the impact that globalization and US dollar moves have in monetary policy.

Comments:

*BERNANKE SAYS MARKETS HAVE IMPROVED, THOUGH `REMAIN STRAINED’
*BERNANKE SAYS SECOND QUARTER TO BE `RELATIVELY WEAK’
*BERNANKE: FED AND TREASURY `CAREFULLY’ MONITORING CURRENCIES
*BERNANKE SAYS FED `ATTENTIVE’ TO IMPLICATIONS OF DOLLAR SLIDE
*BERNANKE SAYS RATE `WELL POSITIONED’ FOR GROWTH, STABLE PRICES
*BERNANKE SPEAKS ON ECONOMY TO CONFERENCE IN BARCELONA, SPAIN
*BERNANKE SAYS FED CUT RATES `SUBSTANTIALLY AND PROACTIVELY’
*BERNANKE SAYS FED TO GUARD AGAINST JUMP IN PRICE EXPECTATIONS
*BERNANKE SEES RISK RAW MATERIAL COST SURGE WILL BE PASSED ON
*BERNANKE: DOLLAR DROP SPURRED `UNWELCOME RISE’ IN IMPORT COSTS
*BERNANKE SEES `DOWNSIDE RISKS’ UNTIL HOUSE PRICES STABILIZE
*BERNANKE WILL `ACT AS NEEDED’ TO MEET GROWTH, PRICE MANDATES

Comments specifically on the US dollar:

“In collaboration with our colleagues at the Treasury, we continue to carefully monitor developments in foreign exchange markets. The challenges that our economy has faced over the past year or so have generated some downward pressures on the foreign exchange value of the dollar, which have contributed to the unwelcome rise in import prices and consumer price inflation. We are attentive to the implications of changes in the value of the dollar for inflation and inflation expectations and will continue to formulate policy to guard against risks to both parts of our dual mandate, including the risk of an erosion in longer-term inflation expectations.”

Reaction:

• Yield currencies have fallen, but have not fallen as far as other majors such as the Euro, CAD, Yen and GBP. There is talk of a barrier being protected at 0.9500 in the Australian dollar, and there are talk of stop loss sell orders below this level.
• Commodities are lower extending early weakness: oil is now trading down +1%, Gold is down 1% but has recovered slightly from the lows.
• US treasury yields are higher on the comments that policy is accommodative and better than expected data about US Factory Orders.

This is an important speech for the US dollar because the Fed is acknowledging the weakness in the dollar - stating that it has fallen enough and it all comes roughly a week before the next G7 meeting where you would expect further comments to this nature. Recall that we got similar currency comments following the most recent G7 meeting and the reaction was nothing like today’s move. This indicates that the market is taking this seriously. Does it raise the chance of central bank intervention? probably not at this stage because the dollars moves have been very orderly to date.