Bernanke will try to have some cake and will eat it too...

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 Bernanke is really in the hot seat today – both in terms of potential market responses and politically, as lawmakers’ attention directed the US Federal Reserve’s way is becoming increasingly glaring. The first Bank of Canada meeting under new governer Stephen Poloz is also on tap today.

The Bank of Japan meeting minutes overnight drew yawns from the market audience as the rhetorical line seems to be “implement what we have promised and it will take some time to judge the success of our policy” while anticipation is more important on the political front with this weekend’s upcoming Upper House elections. There were minor expression of concern by some members, but the unanimous decision was to stay the course on current policy.

Equity markets finally had a negative day yesterday, after a remarkable string of positive days, and bonds are looking well supported. If Bernanke follows up with more relative dovishness today without asset markets bulling sharply higher, this would appear to be the most USDJPY negative outcome. USDJPY bottomed out – you guessed it – right near the Ichimoku cloud area overnight – triple underlining the focus on this indicator, which has dropped several pips today and is closer to the 98.85 level now.

Looking ahead Bernanke testimony

 

Remember that Fed chairman Ben Bernanke’s full testimony today will be released at 1230 GMT before he actually presents it at 1400 GMT, followed by what is likely to be a very lively Q&A session, with Bernanke in the hot seat as I’m convinced that Republicans are increasingly making it a part of their party platform to remain critical of the Fed as the “Washington enabler”, with the endless irony that it is Republican constituents (the wealthy) that have benefitted the most, relatively speaking, from Fed policy over the last several years.

What the Fed would like to communicate, in my opinion, is that it is ready to act either way depending on incoming data, but that as things stand right now, it would prefer for bond yields to come back down some while it has no interest at all in driving too much exuberance elsewhere. Can it pull this off? If this message is successfully delivered, USDJPY may offer the most volatility.

Meanwhile, a Bernanke reminder that confirms expectations for tapering and leaves the market to take its guidance from incoming data rather than Fed signals would be more clearly USD positive, with trade selection depending on the asset market response (scary drop in equities could still push JPY higher, but EURUSD or GBPUSD might offer a more straightforward strong USD response in this instance).
Regardless of the message Bernanke delivers, the worst potential outcome in the following days would be a brief squirt of USD weakness followed by strong signs of support. If the USD is going to move to the strong side right away on the heels of the Bernanke testimony, I would look to EURUSD and GBPUSD for the most important signs of a reversal.

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News Source: www.cnbc.com