A Forex View From Afar

FOMC Members paid in Euros?

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Mr. Bernanke, chairman of the Fed, testified today in front of the Congress regarding the Economic present and future outlook.
The statement didn’t say anything new, just a few interesting lines here and a few others there, but the Q & A session was pretty fascinating.
Among those few interesting lines, some really attracted Thelfb.com trade-desk attention, one article already being out here

Mr. Bernanke talked about growth at a slower pace, specially in Q4 2007 but in the second part of 2008 to recover. The housing market contraction to continue, moderate GDP grow, fiscal policy should be quick and should be temporary, in order to help the markets, and of course all this with the support of consumers.
In general, nothing new, except the sarcasm of requesting backup from the population now.

During his speech, Mr. Bernanke placed a lot of weight on fiscal policy and how they can help the market. At the same time, he said “I do not forecast a recession, but slower growth”. So, why are we cutting Rates at this pace if we aren’t heading towards a recession? It’s just a slow growth, nothing dangerous.

Every nation experience from time to time slow growth, but markets don’t see Central Bankers running as fast as they can, wherever they can, to cool tensions…
Fiscal policies are generally used with monetary policy for the shorter time to take effect, unlike monetary policy which can take 18 months (on average). If we are only slowing, what is whith all this rush for cuts and fiscal policies. We are intrigued…

Another line that definitely caught the market eye was “Outside the United States, however, economic activity in our major trading partners has continued to expand vigorously”. This isn’t a big surprise, traders can take this more as a confirmation. While Mr Trichet talks about rate increase and significant inflationist pressure, it pretty clear that sub-prime haven’t reach so far; neither has Japan been hit too hard; amongst the BoJ, there aren’t any talks about cutting. When asked, Mr. Bernanke replied that “there is no slowdown in growth in Europe and Asia”. Is he long on eur/usd???

Mr. Bernanke sees inflation slowing in the second half of 2008. Pretty much, inflation is now omnipresent in the US, while the Fed is cutting plus adding more money through tax cuts. This view can leave clueless almost any person, expect of course the FOMC members.
Mr. Bernanke said he reached this conclusion by opinion poll, inflation indexed bonds (TIPS) and futures markets.
I wonder if these are the same opinion polls that showed last month the financial industry added jobs, whilst in reality they fired everything they could…TIPS, those bond to reduce inflation-risks measured by CPI, the indicator which leaves the financial markets wordless. And futures market? Mr. Trichet said in his last conference that futures markets aren’t reliable for future predictions.
Just in case someone wonders where this “no inflation expectation” views came from.

The next big step for the FOMC crew is to ask to be paid in foreign currencies, because we don’t see the greenback getting strength for some time

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