A Forex View From Afar

Another Central Bank Intervention

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Another Central Bank intervention, or simpler Jawboning, is cooking at the Fed–ECB doors.

Mr. Bernanke said in a video-conference at the International Monetary Conference in Barcelona, Spain, that he is "attentive" to the implications of the currency's decline, that the FOMC will "carefully monitor developments in foreign exchange markets" and are aware of the effect of the dollar's decline on inflation and price expectations. At least they acknowledge the dollar decline has an influence over inflation that affects not only the U.S., but mostly the whole world.

This attempt to influence currency markets through jawboning is the second in less then two moths, after Mr. Trichet intervened in the market when the euro broke the 1.60 barrier. The euro fell 700 pips as a consequence of Mr. Trichet saying he and John Pierre Roth at the Swiss National Bank, support the strong dollar, and another ECB Council member saying rates need to be cut(yeah, with inflation at 3.6%?).

Now we have got the second part of the intervention, having Mr. Bernanke saying the US Dollar's value is now being closely watched. I have no doubt about it; everyone is looking at the dollar and especially how much value it lost in the last three years. The printing presses are working hard, one might assume, pumping out Notes and Treasuries.

It will be interesting to see how the currency will react now, given that in the next few days the ECB interest rate decision will hit the wires. I’m pretty sure inflation will be the main event, followed by "growth still in the potential output", "uncertainty in the financial markets had been diminished", "strong money supply growth". All of the familiar stuff. The thing is that overall the ECB press conference usually sounds somehow bullish on the Euro economy, and this was seen today in the strong GDP release. A stronger business cycle leads to a stronger currency, and it seems markets know this pretty well.

Back to the charts, the 1.5300 area, where the 100-day moving average sits, could act as a strong support, given the fact that the euro had already retraced in that area, and bounce higher. Furthermore, always keep an eye on the euro in that it is the biggest of all the major pairs that make up the Dollar Index. The fair value number on the Eur/Usd is at 1.5500, by 09:00 EDT Thursday that may have changed, and if the ECB are still fighting inflation the dollar may need more than jawboning to get it through 74.00 on the Dollar Index, and under 1.5300 against the Euro. It may come, but maybe once oil and gold have dropped 20%, and housing has found a bottom. The trend on the euro is still Long, we'll respect that.

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