Hey guys,
Today is day 2 of the Jackson Hole Symposium and the big event of the day is the highly anticipated speech from Bernanke.
The markets have shown a lot of indecision this week, as you see on the 4hr chart below, EUR/USD has tightened up into a wedge. In my opinion this is because traders are just waiting to hear what Bernanke has to say today.
If Bernanke keeps with his track record of destroying the US economy and devaluing the dollar you should expect to see a nice long breakout on EUR/USD. There are a lot of opinions on what Bernanke will say and the kind of impact it will have on the market. With so many different opinions it is almost impossible to predict what will happen. My money is on EUR/USD rocketing up but I am certainly not sure enough in my opinion to trade it.
I read an article this morning in which ING analyst Rob Carnell set out the possible options on what we can expect to hear from Bernanke today.
Remember always that the Jackson Hole speech is not a policy setting speech, and at best, can serve as a useful conduit for Fed sentiment in advance of an FOMC meeting. But just weeks after one of the most riven-with dissent FOMC meetings in history, this seems highly unlikely. However, Bernanke could re-iterate some of the options available to the Fed, noting that they will do “whatever is necessary” to ensure the smooth functioning of markets and return to growth of the economy.
Option 1: Hinting at more QE. Fairly unlikely, at least not until headline inflation begins to dip, as it surely will with energy prices in full retreat. But any actual change in policy would be unlikely until November at the earliest. Further economic weakness and market fragility would be required.
Option 2: The “Twist”. Actually, what is being called a “twist” operation is nothing of the sort. That involved trying to push up short rates whilst bringing long rates down, whilst the Fed would on this occasion merely try to bring long rates down. The Fed’s Bullard has noted that such policies would not ve very effective.
Option 3: Specify targets for longer dated maturities – so for example, say that they will keep the 10Y treasury yield at 2% for 12 months. Achieving that, however, might involve more QE, so unlikely for the same reasons.
Option 4: Specify a price level target – this might require inflation to rise above the normal levels associated with price stability for a short period in order to achieve the target. However, it would be more useful as a tool to combat deflation – which doesn’t exist in the US. Moreover, how to achieve the target? More QE…? Same problems as option 1.
Option 5: Cutting the rate of interest paid on excess reserves: Might help to free up liquidity, especially if a negative rate were employed. Bernanke has in the past suggested that technical difficulties with such an approach make it an unlikely choice.
Option 6: Provide explicit guidance about the continuation of short term policy accommodation. This is already being used. It didn’t seem too effective when the Bank of Canada tried it though. Moreover, when push comes to shove, such commitments are contingent on conditions, and can be broken, as the BoC commitment was.
All in all, we take the view that this speech will not provide the clear guidance for policy that some market participants wish to see, and at best, will contain some general words of comfort and support, without anything material to back them up.
Does that sound like a safe trading environment to you? Trading today is a gamble, so I am taking the day off and enjoying a long weekend.
My tip for today is to stay out the market.