Market Wrap: Dollar Weighed Down by Dovish Bernanke

Market Overview | Written by ActionForex.com | Feb 14 08 20:41 GMT |
Market Wrap: Dollar Weighed Down by Dovish Bernanke

Dollar gives back earlier gains against the Japanese and weakens generally across the board after Bernanke's Testimony before Senate. While the testimony was brief, the message was clear. "The outlook for the economy has worsened in recent months, and the downside risks to growth have increased." Risks to growth in the US outweigh inflation and further rates are likely from Fed as the Fed needs to provide "adequate insurance against downside risks." Baseline forecast suggest growth in first half will be sluggish even though the change in monetary policy and fiscal stimulus package will support a stronger economy in the second half. Credit conditions could also tighten further. Futures are pricing in a 80% odd of 50bps cut in Mar from Fed and further rate cut by Jun to bring the federal funds rate down to 2%.

Dollar reversed earlier against against the Japanese yen after much better than expected trade deficit in Dec. Trade deficit in US narrowed more than expected by 6.9% from -63.1b -58.8b, better than expectation of -61.0b, thanks to rising exports and falling imports. The goods deficit with China also narrowed 0.6% to 18.8b. Also released today, jobless claims dropped 9k from 357k to 348k near to the 4 week average of 347k. C

After all, AUD/CAD is among the top gainer today, with Aussie boosted by record low unemployment rate of 4.1% in Jan while Canadian dollar was pressured by disappointing trade surplus which shrank to 9 year low of 23.5b in Dec. Other data released include Eurozone GDP which rose 0.4% qoq, 2.3% yoy in Q4, slowed from prior 0.7% qoq, 2.7% yoy but slightly better than expectation of 0.3% qoq, 2.2% yoy. Swiss ZEW tumbled sharply from -32.7 to -55.6 in Feb, much worse than expectation of -35.0. Japanese GDP was much stronger than expected, rising 0.9% qoq, 3.7% yoy.

Looking ahead, New Zealand retail sales is expected to slow to 0.1% mom in Dec. BoJ is widely expected to keep rates unchanged at 0.50%.

Source : Actionforex.com


BOJ Keeps Key Rate at 0.5% on Concern Growth May Slow (Update1)

By Mayumi Otsuma

Feb. 15 (Bloomberg) -- The Bank of Japan kept interest rates on hold amid concern that slowing global economic growth will cut demand for exports and costlier energy and materials will damp spending at home.

Governor Toshihiko Fukui and his colleagues left the overnight lending rate at 0.5 percent, the lowest among major economies, the central bank said in a statement today in Tokyo. The decision, which was unanimous, was expected by all 42 economists surveyed by Bloomberg News.

Fukui, who has called for gradual rate increases since 2006, will probably finish his term on March 19 by leaving borrowing costs unchanged. A report yesterday that showed the economy expanded faster than analysts predicted last quarter failed to allay concern that exports and capital spending, Japan's two main growth drivers, are slowing.

``It's highly likely that Japan's economy will keep decelerating because the strength of business investment may not be sustained and exports are already reflecting downside risks,'' said Kenichi Kawasaki, chief economist at Lehman Brothers in Tokyo. ``The Bank of Japan won't take any policy actions through 2008.''

The yen was little changed, trading at 107.85 per dollar at 12:57 p.m. in Tokyo from 107.86 before the announcement.

Fourth-Quarter Growth

The economy expanded an annualized 3.7 percent last quarter, accelerating from 1.3 percent in the previous three months. Business spending and exports accounted for almost all of the growth as sales to Asia made up for waning U.S. demand.

Investors trimmed bets of a rate cut after the GDP figures. The chance of a reduction in the benchmark rate by December are now 36 percent from 47 percent before the report, according to calculations by JPMorgan Chase & Co. based on overnight interest-rate swaps trading.

Separate reports this month signaled companies may pare investment as the U.S. slowdown spreads and rising oil and commodity costs squeeze profits. Machinery orders, a harbinger of capital spending, fell for a second month in December. Manufacturers plan to cut production in January and February, the government said last month.

Shipments to the U.S., the biggest destination of Japan's exports, dropped for a fourth straight month in December. Federal Reserve Chairman Ben S. Bernanke yesterday indicated policy makers are prepared to lower rates further as the U.S. economy continues to deteriorate.

Fed, ECB

The Fed cut its benchmark rate by 1.25 percentage points last month, the steepest reduction since 1990. European Central Bank President Jean-Claude Trichet this month said uncertainty about growth is ``unusually high,'' fueling speculation of a rate cut in Europe from 4 percent.

Fukui, 72, raised the key rate to 0.25 percent in July 2006 from near zero and doubled it seven months later. He has since said the bank needs to increase borrowing costs as long as the economy extends its expansion, the longest in more than 60 years.

The governor last month said the fact that Japan's rates are low doesn't limit the central bank's ability to cut them if necessary. Board member Kiyohiko Nishimura said on Jan. 31 that the bank is open to any policy option.

Some $6 trillion has been wiped off the value of global stocks since the beginning of the year. Officials from the Group of Seven nations meeting in Tokyo on Feb. 9 said markets will remain volatile and ``downside risks'' persist.

Rather Wait

``While the BOJ has signaled that they could cut rates, they'd rather wait until the turmoil subsides,'' said Yasunari Ueno, chief market economist at Mizuho Securities Co. Still, he added, the chance of a reduction can't be ruled out.

Of 34 economists who gave forecasts through the end of this year, only three predict a rate cut. Nine expect borrowing costs to rise by the end of the year.

``The central bank may not be able to raise rates for a while,'' said Teizo Taya, a former central bank policy maker who's now an adviser to the Daiwa Institute of Research in Tokyo. ``But if the U.S. economy and global financial markets recover earlier than expected, a chance for a rate hike may emerge.''

Taya, whom the Sankei newspaper today reported may rejoin the policy board as deputy governor next month, expects the next rate increase in early 2009. The terms of the bank's two deputies also expire on March 19.

The appointments could be submitted to parliament as soon as Feb. 19, Sankei reported, without saying where it got the information. Deputy Governor Toshiro Muto, 64, is Fukui's most likely heir, according to economists surveyed by Bloomberg News.

The bank will publish its monthly assessment of the economy at 3 p.m. and Fukui will speak at a news conference at 3:30 p.m.

Source : Bloomberg.com