It is possible the USD could see 100-basis-point increase without the fund rates being cut. Normally it would take a huge rate cut to get a move such as 100 basis points; however, Bernanke is most likely going to try a different move for forex. The bond market has certainly seen a great amount of interest of late. Asia was in full swing buying up high yield bonds. Even recently many investors headed into bonds instead of the USD because of Syrian troubles. Yet, some feel the bond market was on the wrong foot because of Bernanke statements earlier in the year. It was considered his swerve to right the economy.
Going Back to Forex Talks in May
Bernanke made an announcement in May that quantitative easing would come to an end in 2013. The idea is to phase out the current stimulus and let the economy run on its own power. There was a rather large sell off of U.S. assets at the time of this announcement. Yet even before May, Bernanke was talking about certain bond products, thus the surprise of QE being backed off might not have occurred for many forex investors. It was like suddenly a huge sell off occurred in May and has lasted for several months since. Unfortunately, the Fed has had to withhold the tapering due to other issues.
Bernanke did mention that the term premium would play a huge role in how tapering would begin. It is an important function of the market. Basically, it can show if there is interest in buying or selling bonds. While the talks are important from the past there is one thing for certain: the USA has seen how the talks have driven the bond market in the last few months. The demand for bonds increased on news of tapering, at least in the Asian region. It has changed some of what has happened in the forex market. All that is left is to see if the more recent meeting for the Fed taper will actually provide results or put the tapering on hold yet again.
Two Clear Factors for Forex
Bernanke is likely to get what he wants in terms of the tapering because of his announcements about term premiums. The tapering will start to fall off and the basis points will be gained. Very little may have to be done other than talk, which is something forex is not used to seeing.
Bernanke tends to be very careful with what he says to the media unless he wants to drive his goal home. The talks in March and May solidify this concept since the market definitely reacted.
Many experts are anxiously waiting to see how things will play out given the starts and stops of the tapering talks. Forex pairs reacted negatively due to Syrian issues which meant a hop into safe havens. If the tapering is put on hold again then safe havens will again be sought. Should quantitative easing occur things will most likely look a little better for the USD in the coming months.
Get a free Forex PDF PLUS:
- 14 Video Lessons
- Free One-on-One Training
- A 5000$ Training Account
- In-House Daily Analysis
- Get FULL ACCESS