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While the markets continue to wait with great anticipation for the speech by FED Chairman Bernanke at Jackson Hole this Friday, that hasn’t stopped other members of the FED from speaking during the week. The interesting thing about this is that while the FED governors are urging a third round of quantitative easing, the markets are not reacting.  I guess they are convinced that the FED Chair will make his own decision and not be influenced by his fellow governors.  

Speaking in Hong Kong, Chicago FED President Charles Evans was the most vocal, continuing his push for additional easing.  He stated that the FED has gone “past the threshold for additional action”.  He wants the FED to “take action now”.  He believes that the current policy won’t be able to bring down the unemployment rate.  His plan is for an open-ended bond-buying program that would only conclude after there was two or three quarters of improvement in the unemployment rate or if the inflation rate would move above 3%.

Guest post by  Matthew Lifson, Foreign Exchange Trader,  Market Analyst of  Cambridge Mercantile Group.

Cleveland FED President Sandra Pianalto noted that recovery has been “frustratingly slow” and thought that large scale asset purchases could be effective.  But she was also concerned that new programs would not be as effective as past programs.  She didn’t really take a side on which position she favored.  Lastly, Dallas FED President Richard Fisher quoting a paper from William White, a former BIS economist, stated that monetary stimulus operating through traditional channels could end up being less effective than many believe.

 

None of these comments seems to have had an effect on the currency markets.  For most of the overnight session the EUR traded in a quiet range before first moving lower and then bouncing to overnight session highs (1.2530) as I write this at 4:45 am.  USD and JPY strength in Asian trading pushed the EUR down to the supportive low at 1.2465 before bouncing back.  Part of the EUR selloff was blamed on Japanese exporters moving to safe haven currencies, (USD & JPY) after Japan downgraded the country’s economic outlook. While I agree that it seems odd to buy the currency of the country with the downgraded outlook, when traders “take off risk”, they blindly move towards the USD and the JPY.  Adding to the early pressure on the EUR was Q2 Spanish GDP which declined -0/4%, which weakened the annualized number from -0.6% to -1.3%.

 

Just when it looked like the EUR might fall further, we received some positive news out of the EMU, which has reversed the EUR to the above mentioned high of 1.2430, as M3 Money Supply has risen 3.4% in July against a consensus of 3.1%.  In other “EUR” news, we are hearing that there could be details released regarding the new ECB bond buying program at the ECB meeting on September 6.  According to reports the ECB would only be buying bonds with short maturities.  It was also noted in news wires that a joint working group has been formed by German Finance Minister Schaeuble and French Minister Moscovic to focus on the development of a banking union for the Eurozone.  It is hoped that the creation of this banking union would help promote stability in the Eurozone.

 

In other news regarding the EUR, the ECB has asked global regulators to ease the Basel Liquidity Rule. The ECB believes the liquidity coverage ratio, LCR, could hamper efforts to curtail the euro-area debt crisis by making lending harder for central banks.  The LCR was drawn up by the Basel group to help prevent a repeat of the turmoil that followed the 2008 collapse of Lehman Brothers.  The rule forces banks to hold enough easy to sell assets to survive a 30 day credit crunch.  The rule will be reviewed by the Basel committee meeting next month.  The Basel committee is made up of regulators from 27 nations.

 

It looks now as if the EUR will sustain a “bid” tone today through the North American trading session. While all eyes remain on Jackson Hole, the FED does release their Beige Book tomorrow afternoon.  The Beige Book gathers information by FED district on current economic conditions.  There is no doubt the release of this information two days before Chairman Bernanke’s speech will add to the speculation of what he will say.

 

Asian stock markets were mixed overnight, while European markets are lower this morning.  The DOW Futures have bounced back and forth between negative and positive territory so this morning’s opening should be rather flat.