US Dollar: Comments from Fed Chairman Bernanke Could Set a Near Term Bottom (page 1 of 2)

DailyFX Fundamentals 07-17-07

By Kathy Lien, Chief Strategist of DailyFX.com

Carry Trades Take on New Life As Dow Breaks 14,000 (July Seasonality Bonus)

New highs have become a regular daily occurrence in both the currency market and stock market. Today, not only did the Dow Jones Industrial Average rise above 14,000, but GBP/JPY and AUD/JPY also hit fresh 14 and 15 year highs.

In fact, all of the Yen crosses are up strongly today with USD/JPY setting up for a move back towards 124. This is of course contingent upon a break of 122.50, which is moving average and Fibonacci resistance. Once that level is cleared, the July seasonality effect is back in play.

July has proven to be a positive month for USD/JPY nine out of the past 10 years. As long as we close the month above 123, 2007 will mark the tenth out of 11 years that USD/JPY has rallied in July. Seasonality is not 100 per cent reliable, but the frequency of this repetitive price pattern makes it important.

There are many reasons to explain why USD/JPY tends to behave this way in July, including the fact that it is the end of the first quarter in Japan and the beginning of the second half of the year in the US.

Fundamentally, the rise in core producer prices in June and strong foreign purchases of US securities in May has outweighed the drop in headline producer prices. If we get a similar situation of strong core, weak headline in US consumer prices tomorrow, we could see the breakout that we are looking for in USD/JPY.

Federal Reserve Chairman Ben Bernanke will be giving his semi-annual testimony on the economy and monetary policy. Many traders may not want to be short dollars going into the testimony. Meanwhile the surprise drop in the Japanese tertiary activity index last month has only helped to drive the yen lower today. Japanese leading indicators are due for release tonight, but they should not be market moving.

US Dollar: Comments from Fed Chairman Bernanke Could Set a Near Term Bottom

Even though a weak US dollar is good for the economy, Federal Reserve Chairman Ben Bernanke is not expected to say anything that will cause further dollar weakness at tomorrow's congressional testimony.

The stock market is already trading at very high levels, if the Fed loosens the reins on monetary policy, they risk creating an even bigger bubble. The mixed performance of the US dollar today suggests that the market is not sure what to make of today's US numbers.

Headline producer prices dropped in June, but core price growth accelerated. The strong correlation between the headline Producer Price Index (PPI) and Consumer Price Index (CPI) suggests that consumer price growth was also soft last month. For those watching gas prices, the average national price of gasoline dropped from $3.20 down to $2.95 in June.

But we all know that the Fed watches core prices, which still have a chance of surprising to the upside. The inflation reports were not the only mixed signals sent by US data today. Foreign purchases of US assets hit a record high in May, while homebuilder sentiment dropped to a 16 year low.

For the time being, inflation is bigger focus. Tomorrow's housing starts and building permits will shed more light on whether the drop in homebuilder sentiment has translated into actual building activity.

British Pound Comes Within a Whisker of 2.05

The British pound climbed to another 26 year high after consumer and retail prices rose more than expected in June.