Bob's Currency Focus - 00:20 GMT

EUR/USD

The Vice Chairman of the Fed delivered what will go down as one of the most controversial speeches ever by an FOMC member, when his speech Wednesday in New York single handily pushed Wall Street to its biggest single day gain in 4 years and leading to the largest 2-day stock rally in 5 years. It also sent the dollar into sharp retreat on a day when the currency had just earlier been experiencing a rare period of strength. I do not have the time or space to go through the detail of just what Koln said, but the implicit message taken by financial markets was that the Fed would cut rates and cut them aggressively, if needed, to bail out financial markets. In fact Koln’s speech is riddled with contradictions and his direct market intervention at a time when markets are going through what is a long overdue and ‘reality check’ correction, is nothing short of scandalous. There is a little footnote at the bottom of Koln’s speech ‘These are my views and are not necessarily those of my colleagues on the Federal Open Market Committee’ but this afterthought was either not seen, or it was selectively ignored, by the many armies of frantic marketers that set out on a panic spate of stock buying and dollar selling. What is the point in the FOMC meeting behind closed doors to deliver monetary policy if there is a member of that committee out there getting markets to price in his policy prerogatives before the FOMC has even discussed the issues? Koln believes monetary policy must be ‘nimble’ and designed to placate financial markets.

Koln threw markets on their head Wednesday and EUR/USD was exceptionally volatile and traded in a wide range of 1.4712 to 1.4858, giving up more than a cent late in the day as traders quickly off-loaded dollars as the rate outlook began to rain on the greenback. The odd thing is that markets had already priced in a 0.25% cut in December from the Fed but markets began to see many more cuts over the horizon thanks to that speech in New York. Fed Chairman Ben Bernanke speaks Thursday and what he says will be highly significant. If he backs the remarks made by Koln and delivers the same sentiment, then the dollar will fall further. US GDP revisions for Quarter 3 are expected to show growth in the quarter grew by 4.8%, against the 3.9% reported last month. That is one hell of a growth level for an economy apparently on the brink, but such is the nature of current market sentiment, the data is unlikely to boost the dollar and instead the currency’s direction will be determined by Ben Bernanke’s comments and to a lesser extent by the New Home Sales data at 15:00GMT. We have German and French unemployment data out Thursday also but these are unlikely to impact the market very much unless they surprise very sharply on the downside. We could have another voltiale day of trading Thursday, but with so much rate cut talk about in the US, it is difficult to see how the greenback s going to make much progress. Strategy: We could see some corrective move downwards tonight as markets may be seen as having delivered an exaggerated response to the Koln speech. I would still be inclined to buy the euro though on any dips towards 1.4750, with an initial target price of 1.4860. It is highly possible we might see another run above 1.49 tomorrow, if the euro holds up tonight and the negative rate sentiment against the dollar carries through to Thursday’s European session.

To be continued..