Forex Comment Apr 08

Markets side with Bernanke’s caution over Trump’s rocket

Dollar strengthens after comments from former Fed chief sends bourse in a spin

by Uwe Parpart
Markets side with Bernanke over Trump

(ATF) – The Bernanke "put" used to underpin US markets when the ex-Fed chair administered US quantitative easing. Ben Bernanke’s call on the US economy Tuesday, when he spoke at a Brookings Institution online presentation did the opposite.

While President Donald Trump told bank executives that the economy "will go up like a rocket ship" once the virus is defeated, Bernanke said the "most important determinant" in the crisis' duration is the public health response and the longer any disruption lasts, the harder it will be for the economy to come back.

Bernanke, an expert on the Great Depression, doesn't think we will see a 12-year disruption of economic fortunes, but he certainly does not believe in any rocket ship take-off as the US economy is likely to take an annualised 30% hit in Q2.

Guess who markets believed?

US markets came down from 3.5% gains to just below zero on Bernanke's caution. Asian markets excluding Japan floundered as they did in Europe. (The Japan exception is due to an outsize stimulus amounting to 20% of GDP).

The US dollar (on the DXY) was up to 100.4250 in early afternoon trading in HK and still was holding a gain of 0.21% at 9pm HK time as investors try to digest divergent economic and financial forecasts with sentiment still leaning toward the Bernanke view.

The People’s Bank of China (PBoC) set central parity sharply higher Wednesday morning, at 7.0483. Are they Trump believers? We won't go out on a limb on that one. In the afternoon, the yuan (CNY) eased to the 7.07 range reflecting the stronger USD.

Where's this tug-of-war going?

US futures for now are up and so is support the yuan. We would counsel caution and see no prolonged strengthening in the Chinese currency. The PBoC is widely expected to implement more monetary easing measures shortly and there will be little reason for CNY to strengthen beyond the by now customary 7.05 - 7.10 trading band.