This text is from blog famous currency strategist Joel Kruger .
DO NOT READ PAST THIS POINT IF YOU ARE A FED DOVE – The most revealing thing about the Fed rate decision yesterday, came in the Q&A session with Fed Chair Bernanke, where the central banker said that the Fed would be prepared to make “adjustments in the flow rate” of asset purchases should economic indicators continue to show signs of health. This is the first time Bernanke has made any mention of adjustments in the flow rate (at least in this venue and context), and to me it sends a message that the Fed is fully prepared to start to scale back its asset purchases should it become more convinced with the recovery.
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OPTIMISTIC BUT EXTREMELY TENTATIVE – The other interesting thing about the press conference in my opinion, is that the Fed Chair clearly acknowledged the recovery in the economy over the past several months and seemed almost wanting to talk QE exit more aggressively were it not for the volatility in markets in recent years and the fear that any commitment of optimism would be wiped out with the next wave of panic and fear. Clearly the Fed has been burned a bit and clearly it wants to be very sure about any decisions it makes with respect to policy reversal. But the reality is that the US economic recovery has been rather convincing, and I think as data continues to show recovery, the Fed will become increasingly convinced that they can start to scale back QE.
TESTING THE WATERS – I truly believe the mention of “adjustments in the flow rate” was a very subtle way of Bernanke testing the waters a bit and coming out of his shell to float the idea of near-term asset purchase reductions, without scaring markets with full on all or nothing exit strategy talk (while at the same time giving the Fed a bit of a hedged way to slowly commit to policy reversal without feeling like it might get burned). I think this is a clever tactic and I think the Fed is slowly signaling the beginning of the end of the ultra accommodation. Ultimately, in the current environment, this should translate into more broad based US Dollar demand. A combination of ongoing stress in the global economy, the prospects for US economic recovery, and a narrowing of yield differentials back in favor of the buck, all should bode well for the Dollar.
READING BETWEEN THE LINES – Some will argue that the Fed was as dovish as ever on Wednesday, but I contend that the Bernanke subtleties in the Q&A session, along with some upgraded monetary policy statement language including; ”return to moderate economic growth” and “labor market conditions have shown signs of improvement,” could very well start to tilt the balance back towards a very long path of more restrictive policy. While the US Dollar could sell off a bit in the short-term, as I don’t expect markets to accept my interpretation, I fully expect any Dollar dips to be extremely well supported over the coming days. I will be looking to aggressively build into existing USD long positions should we see the buck pull back.
