GBPJPY, Carney & Abe’s Upper House

<p>Fed Chairman Bernanke’s main message is finally getting through to market participants (judging by the diminishing volatility in reaction to the release of his prepared […]</p>

Fed Chairman Bernanke’s main message is finally getting through to market participants (judging by the diminishing volatility in reaction to the release of his prepared testimony).  The message is the following: The scaling down of asset purchases does not necessarily mean a tightening of policy as the Fed plans to maintain policy accommodation as needed.

Today’s testimony reiterates as long as the economy remains on current course for modest expansion, an autumn tapering of purchases would eventually lead to the termination of purchases by next year. Regardless whether this scenario unfolds, what matters is market positioning and interpretation, which play the bigger role here…thereby, traders are unlikely to extend USD weakness beyond 5-7% in a single week as long as the tapering remains on the agenda for 2013.

GBP outperforms on an unexpected 9-0 MPC vote in favour of keeping QE at £375 bn, the first unanimously hawkish vote since October.  Better than expected UK jobs figures also helped GBP and cement expectations that £375 bn purchases shall remain into at least end of Q3. The strategy of siding with GBP longs until the BoE Inflation report is the preferred route, suggesting 1.5330s is a viable ceiling.

Bank of Canada’s new governor Stephen Poloz showed his own dovishness in his first policy decision the when the Bank removed the reference to the “modest withdrawal” of stimulus and spelled out slowing GDP in “China and other emerging markets” as the reason for downgrading its global growth forecast. It raised its 2013 GDP outlook to 1.8% from 1.5%, while trimming its 2014 view to 2/7% from 2.8%.

Favouring EURJPY and GBPJPY ahead of Japan’s Sunday Upper House elections (set to end 6 years of parliamentary deadlock) as a partial hedge if long term shorts in EURUSD as PM Abe obtains support in Sunday’s Upper House elections in carrying out his monetary expansion to combat against deflation.

Join our live webinars for the latest analysis and trading ideas. Register now

GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.