U.S. Dollar Awaits Fed's Speech Blitz

By: Ashraf_Laidi

The week's upcoming blitz of Fed speeches starts with Bernanke's speech about Asia and the crisis (15:00 GMT). All voting members at this year's FOMC are due to speak this week, with the exception of Board Governor Duke and Atlanta Fed's Lockhart. As the dollar accelerates its decline, FX markets are increasingly aware that short of any USD-supporting remarks from non-US policy makers, effective USD stabilization would have to emerge from Fed's managing of inflation expectations (translation: signalling intentions to begin withdrawing excess liquidity by saying it will raise rates when the time is right).

The Fed's speeches will be scrutinized for the extent to which the beginning of the liquidity withdrawal process could ensue and whether any USD boost will emerge.

Last week, the Federal Reserve minutes expressed a "puzzled" FOMC in the face of falling bond yields with some members attributing it to reduced inflation concerns, while others saw it a result of excess reserve balances emerging from the asset- purchases program. Markets are still uncertain about the timing on the Fed's start of reverse repo operations with primary dealers, which could involve raising the penalty rate (fee charged to borrow securities from the Fed) from the current 5-bps to about 20-25 bps.

The USD index nears the key 75.18 level-- the 76.4% retracement of the rise from the March 2008 lows to the March 2008 highs. EURUSD continues to face resistance at the psychological $1.50 figure, which is partly standing as a result of euro weakness emerging against AUD, NZD and CAD. Today's quarterly earnings from Apple (exp $1.42 /share from $1.26/share) and Texas Instruments ($0.39/s from $0.43/s) will be instrumental. Euro traders to scrutinize any remarks from today's Eurogroup meeting (15:00 GMT) for whether any euro-jawboning to emerge from the politicians as warned about by Eurogroup head Jean Claude Juncker.

Sterling once again proves the only loser against the tumbling greenback -- this time due to comments from the Bank of England's Adam Posen signalled an upcoming increase in the bank's £175 billion asset-purchase program when playing down the risk of inflation. While Federal Reserve speakers are attempting to signal the beginning of withdrawing liquidity, the BoE is widely expected to prolong its asset purchase program when it ends next month. Separately, Ernst & Young's Item Club said "There could still be substantial pain" and that the impact of the stimulus programs has been "disappointing". GBP's selling emerged despite the first annual increase in UK home sales since June 2008, according to Rightmove.

GBPUSD proves another 5-week failure at $1.64, now eyeing interim support at $1.6230, with any recovery capped at $1.6320 for the London morning session. Any risk-aversion related buying in USD (such as from US earnings), would see rapid selling in GBPUSD retesting $1.6180. EURGBP bounced off its 0.9080 low reached in Sep 30, now eyeing capped at the 5-day trend line resistance of 0.9200, followed by 0.9250. Interim support stands at 0.9135.

USDCAD failed a rebound at the 1.0430s in the midst of a limited retreat in oil prices as the changeover in US crude contract ensues. Interim foundation stands at 1.0290 for fresh bids attempting to retest 1.0370.

By Ashraf Laidi
AshrafLaidi.com

Ashraf Laidi is the Chief FX Analyst at CMC Markets NA. This publication is intended to be used for information purposes only and does not constitute investment advice. CMC Markets (US) LLC is registered as a Futures Commission Merchant with the Commodity Futures Trading Commission and is a member of the National Futures Association.

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