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6/9/06

Market Madness from JDM Cinemascope

The Dollar’s Bullish Return

It was quite a rocky road for the ole currency market this week with a barrage of news and global interest rate decisions tossing the majors around like tumbleweeds. In this week’s edition of Market Madness, we’ll take a quick squint at moderate dollar gains and what’s shaking down with future rate decisions from the European Central Bank.

Is the Fed Going to Shut Up or What?

We saw nothing short of constant chatter from key Fed Policy makers this week, including “Big” Ben Bernanke, St. Louis Fed Reserve President Williams Poole and Atlanta Fed Reserve President Jack Guynn. The important aspects of their statements were that inflationary pressures need to be controlled and future interest rate hikes are likely. Mr. Bernanke stated on Monday that the Federal Open Market Committee would, “Be vigilant to ensure that the recent pattern of elevated monthly core inflation readings is not sustained.” Terming that high inflation readings are “unwelcome,” Bernanke did all but directly signal that a 25 bps bump in borrowing costs is going to happen at their meeting in the last week of June. Similarly, Mr. Poole told the Wall Street Journal that the Fed should have an “upside bias” on rates in order to keep inflationary pressures at bay. Readings of inflation were around the upper levels, enough so that Jack Guynn said it is “bothersome.” All of these speeches and comments came earlier this week in a series of events that prefaced the Frankfurt-based European Central Bank’s rate decision of a 25 bps hike on Thursday.

ECB Rates Going to 3.25 by the End of 2006?

The above mentioned ECB interest rate hike did very little to actually help the 12-nation common currency, although it did show the central bank of the Eurozone is actively taking a look at monitoring speedy growth. While some traders were leaving out hope that perhaps the ECB may take a more hawkish stance on interest rates hiking the benchmark 50 bps, it favored a much more conservative approach at a quarter point. ECB President Jean-Claude Trichet did not say much to give any indication of future hikes, but contrarily revised the growth outlook for the Eurozone to below 2%. One could assume that his rather unusual dovish language butted any euro strengthening. It came as a surprise but followed in line with other Eurozone finance ministers stating that a higher euro rate may hurt their primarily export-based economies. Therefore, the question remains: is the ECB actually going to get to the highly anticipated 3.25% rate by the end of 2006? It seems that data and growth indications from the 12-nation union is going to be a primary fixture in being a rate determinant.

So What are We Looking at Jack?

What basically happened as a result of Fed Policy makers in the headlines and the ECB spiking interest rates was an overall positive week for the dollar. With other global interest rate hikes coming from abroad, emerging stock markets were sent into a full-on twister thus attracting investment into a US market seen as considerably more stable. The dollar touched the 1.26 level versus the euro early on Friday after having opened up around the 1.2950 levels at 8:30 AM EST on Monday. In an otherwise bleak outlook for the greenback earlier last week, it was a surprising comeback and possibly indicated a widely overvalued euro. This being said, long euro positions may still be looking pretty considering the unknowing position of the FOMC in future interest rate spikes. If they did in fact raise rates, this would be the FOMC’s 17th consecutive bump since they started their aggressive monetary tightening policy in 2004. The last Reuters Poll indicated that a maximum EUR/USD level could hit 1.32 in one month. While these forecasts are simply forecasts, the fact of the matter is that there is still sentiment in the marketplace revealing a stronger common currency. It will be interesting to see if the FOMC’s rate decision at the end of June will be anticlimactic in moving the market.

Conclusion

It may still be too early to tell where not only global benchmark interest rates are going to be by yearend, but also where the fraught dollar could be as well. By most indications, people still see a weaker dollar in the imminent future due to surging oil costs, a large US Trade Deficit and narrowing interest rate differentials. This week’s news was strong for the good ole dollar, but who is to say what next week has in store? Stay tuned fans, as the dollar could make a bullish return.

– JDM Cinemascope