Asian markets were relatively quiet overnight, with little immediate reaction to the latest Bank of Japan minutes and a lack of tier one economic data. Moderate gains were experienced by the Nikkei and Hang Seng indices, but these were muted as traders jockeyed for position ahead of Bernanke’s testimony on monetary policy. The USD was firmer overnight, with USDJPY making a run into the high-99s and the DXY adding a modest 0.10%.
As we move into the European session, the Pound is finding some relief and putting in decent gains against the big dollar after better than expected unemployment numbers and minutes from the last Bank of England meeting that showed Mr. Carney was able to align the MPC and steer the vote 0-9 in favour of an expansion of the asset purchase program.
The two doves on the committee, Fisher and Miles, changed their position and voted with Carney to leave interest rates unchanged at 0.5% and the asset purchase facility at £375bn. A closer look at the minutes reveals that the doves still argued in favour of further stimulus, which makes it likely they wanted to hold off voting their position until the MPC delivers its assessment of forward guidance at the next meeting. The Committee will also be assessing other options of injecting stimulus over the next month, so there is a possibility that forward guidance and an increase in the BoE’s QE could be in the cards for their next meeting.
Sticking with the UK, the number of Britons that lined up for the dole in June fell for an eighth consecutive month, beating the median analyst estimate with a drop of 21k. The jobless rate for May remained unchanged at 7.8%, while average earnings rose slightly by 1.0% from the previous month. GBPUSD is well bid as we head into the North American cross, trying to hold position and establish itself above the 1.5200 handle.
Turning our attention to North America, housing data from the American economy dominated economic headlines this morning. Housing starts for the month of June were down almost 10% to 836k, a vast miss of the 959k that economists had been expecting. Building permits didn’t fare much better, dropping 7.5% from the prior month, with the annualized reading for June printing at 911k. A few months of softer than expected housing data is not enough to assert the recovery in the housing industry may be faltering; however, the data is broadly consistent with the market taking a bit of a breather. On the Canadian data front, foreign investment in Canadian securities slowed over the month of May, with investors abroad only adding $6.7bn of securities to their portfolios. Acquisition of debt securities was down from the $12.8bn registered in April, with inflows reduced to $5.5bn in May.
Just before the opening bell, investors are modestly adding risk to their portfolios, with North American equity futures slightly positive and USDCAD retracing the gains made overnight. The DXY has reversed course and is now moving lower on the worse than expected housing data out of the US. The opening remarks from Bernanke that are released ahead of his testimony have also helped high-yielding assets, with Bernanke set to reiterate to lawmakers that the pace of bond purchases is not on a “pre-set” course and should the economic data be consistent with the Fed’s projections, he sees QE ending by mid-2014. The Loonie is essentially unchanged from yesterday after the opening remarks, with the USDCAD consolidating in the high 1.03s ahead of the Bank of Canada rate decision.
The main event markets are waiting on today will begin at 10:00am EST, as Bernanke takes to Capitol Hill to testify before the House Financial Services Committee on Monetary Policy. Position squaring ahead of the Fed Chairman’s testimony contributed to a broadly weaker USD during yesterday’s session, however the drop of 0.73% in the DXY suggested the currency market were bracing for the possibility of more backtracking from Bernanke on the time frame for the eventual tightening of monetary policy. While the inflation numbers yesterday calmed fears at the Fed they would have to do more to defend the lower-bound of its inflation target, Bernanke has already said that the current unemployment rate most likely understates the weakness of the labour market, and that even if the jobless rate gets to 6.5%, it might be quite some time before the Fed looks to increase the overnight lending rate. A continuation of dovish commentary from Bernanke would most likely flush out stretched USD long positions, with the big dollar offered well across the board. On the other hand, if Ben reinforces the Fed’s inclination to begin tapering this year and finish the additional asset purchases in the middle of 2014 because of structural risks inherent with the continuation of the program, the USD should manage to find its feet and resume it’s upwards trajectory.
While Loonie traders will be watching Ben Bernanke’s testimony to Congress, they will also be parsing the language in the Bank of Canada rate statement to see whether the new governor possess the same hawkish tone on the Canadian economy as his predecessor did. There is no expected change to the overnight rate when the announcement hits the wires at 10:00am EST, however the first rate statement and press conference from Stephen Poloz as head of the central bank will be closely watched. Poloz has been viewed by markets as somewhat of a wildcard in terms of his view on monetary policy, although a speech given just after arriving at the new post was taken with a hawkish slant as the new BoC chief stated that gathering momentum in foreign demand should help lift the confidence of Canada’s export sector. Should the BoC retain the same tightening bias and hint towards the modest withdrawal of monetary stimulus being appropriate at some point in the future, look for the Loonie to firm against the USD. If Poloz backtracks on his earlier statement about the strength in foreign demand, and notes that momentum in this area is facing growing external headwinds, watch for the Loonie to catch some selling pressure.
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