Euro Wastes no Time with Bernanke 8217 s Silence

Bernanke resorts to the familiar method of reiterating the Fed’s willingness to do more if required by the labour market without necessarily signalling any imminent action. Although the speech was not all “more of the same” from Bernanke as he did not list the tools available to the Fed (more asset purchases, altering guidance on policy accommodation and lowering rates paid on reserves), these items were mentioned in the Q&A session.

Euro is the biggest victim of Bernanke’s silence, losing nearly a full cent to reach $1.2205 after Bernanke’s text hit the wires. The single currency faces increasing macro, fiscal and structural challenges deemed required to extend its decline below $1.20 and towards the $1.18 levels of two years ago when eurozone problems were far less pronounced than they are today. Short of an aggressive round of outright asset purchases from the Fed and a third LTRO (this time at 0.75%), the single currency’s days above $1.20 may become numbered. The question then remains, to what extent will any central bank-driven euro bounce remain short-lived? And with a stimulus package from China becoming more imminent, chances for coordinated global interventions become inevitable.

Gold’s underperformance relative to oil since late June (Gold fell 10% vs. oil) reflects markets’ disappointment with Bernanke’s June testimony, which was signalled no immediate signs for any QE. Gold is now hitting new lows for the day at $1572 after Bernanke remained muted on any further outright asset purchases-the very policy action, which proved positive for metals between March and June. Every gold trader is aware of the crucial 100-week moving average (now at 1551) remaining supported since 2008. The path of least resistance remains to sell the rebounds back to $1550s as long as the Fed sticks with Operation Twist. A shock-&-awe coordinated intervention from the world’s central banks is looking like the only solution for gold to reverse its 12-month trendline and regain the $1700 level.

A potential calendar inconvenience for the Fed is that the next FOMC meeting of Jul 31-Aug 1st, occurs two days prior to the release of the July employment report. The last three payrolls reports have shown 3 consecutive monthly readings below 100K. The last time this happened was in May-August 2011, right when Operation Twist was announced. One main difference between then and now is that weekly jobless claims are about 10% below where they were last summer. With jobless claims down 44% from their March 2009 high, they are closer to the 50% peak-to-trough declines seen prior to each of the last three recessions. Should the Fed opt to do nothing at the August 1st meeting and the jobs reports shows no cogent improvement from the last three reports, the month of August may promise to repeat the market damage seen in August 2011, until the Fed save the day with Operation Twist (which was considered as a positive novelty back then).