Bernanke will be in the hot seat later today as he testifies before Congress on the Bank of America/Merrill Lynch deal


HEADLINES - PREVIOUS SESSION

  • US May New Home Sales out at 342k vs. 360k expected and 344 k in Apr.

  • US FOMC left rate target at 0 - 0.25% as expected

  • New Zealand Q1 Current Account Balance out at -1.247B vs. -1.133B expected

  • New Zealand Q1 Current Account Deficit/GDP Ratio out at -8.5% vs. -8.4% expected and -9.0% ion Q4


THEMES TO WATCH – UPCOMING SESSION

  • Sweden Jun. Consumer Confidence (0715)

  • Sweden May PPI (0730)

  • EuroZone Apr. Industrial New Orders (0900)

  • US Q1 Final GDP estimate (1230)

  • US Weekly Initial Jobless and Continuing Claims (1230)

  • US Fed's Bernanke to testify on Bank of America / Merrill Lynch

  • New Zealand Q1 GDP (2245)

  • UK Bank of England to release Financial Stability Report (2330)

  • Japan May CPI (2330)

Market Comments:

The FOMC statement was very much a fizzle as an event risk, as the new monetary policy statement was mostly a series of tweaks to the existing one. The market reacted most strongly to what was not there perhaps: there was no expansion of the previous asset buying programs the Fed has previously announced and no worry expressed about the steeply rising rates at the long end of the yield curve. This saw US T-notes selling off heavily from a pre-meeting rally and was initially seen as supportive of the greenback since it theoretically means a less profligate expansion of the Fed's money printing than the market perhaps feared. Ironically, however, rising rates lately have been mostly associated with a weaker dollar rather than a stronger one, so there is more than a bit of dissonance in the market at the moment and we will need to see whether tomorrow sees a follow up on the bullish USD reversal or whether the almost daily direction changes within these choppy ranges simply continue...

The weakness in the bond market later in the day after the FOMC meeting put the JPY back on the defensive, though the action there was fairly muted and nothing looks decisive, though EURJPY structural technicals are decidedly ugly as long as the pair stays below perhaps the 135-136.00 area. Demand for a whopping $37 billion in 5-year notes at a Treasury auction ahead of the FOMC Meeting was solid. The Wall Street Journal was out with an article indicating that the new data showing strong foreign bidding at the recent auctions may be overstated due to some recent rule changes as to who may be considered a foreign bidder.

Yesterday, Republican Representative Issa on CNBC accused Bernanke of a "coverup" during the shotgun marriage of Bank of America/Merrill Lynch that took place as world financial markets were going down in flames last September. This very strong wording is extraordinarily inflammatory and it will be interesting to see how Bernanke responds to the grilling he is likely to get tomorrow from hostile congressmen. Our assumption is that this process will stop well short of Bernanke being pushed out of office in shame, but it must be noted that Issa's language was extremely inflammatory.

Looking at New Zealand's Current Account deficit to GDP ratio, we haven't seen much improvement despite the currency's having fallen off a cliff since last fall. This is no doubt due to the fact that commodity prices linked to exports have collapsed as quickly as consumption of imported goods. Just a couple of days ago, Prime Minister Key of New Zealand was complaining that he would like to see exports grow and less consumption of imports and bemoaned the kiwi's resurgence as "undermining" this hoped for development and possibly even threatening "the recovery process". But he doesn't appear any closer to getting his wish until NZDUSD drops well back below 0.6200/50 and NZDJPY closes back below the 60.00 level.

The overriding technical question for the moment is when we are ever going to break out of these ranges that have contained the market in their vice grip for weeks now. In EURUSD, for example, the last four weekly closes have all been in the 1.3950 - 1.4150 range. USDJPY has trade mostly within the 95.00 to 100.00 range for four months now. When will we see a breakthrough from this market, a commitment to a new trend or direction? 1.3750 in EURUSD (and perhaps a bit higher on the daily close) holds the key for any USD bullish scenario and perhaps 1.4150 to start for any potential for a reversion to a weak dollar again.