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With the
nomination of Ben Bernanke as the next Federal Reserve Chairman, the
reactions of the stock and currency markets may diverge, but for the same
reason.
Though it may be
argued that he was merely carrying a message to markets on behalf of the Fed,
the fact remains that it was Bernanke who made that infamous remark about the
Fed's printing presses in November of 2002; it is a comment from which he
should actively work to distance himself. That high-profile statement has not
been forgotten and it suggests that when in doubt he will lean toward the
side of a loose, inflationary monetary policy. While equities markets may
welcome such a "stimulative" mindset, currency markets will likely
treat Bernanke with great suspicion, particularly with regard to the U.S.
Dollar.
With the Dollar
in a mildly overbought technical condition and the Euro very oversold and
resting on some measure of chart support, this nomination alone could well
lead to a near-term rally in the Euro and corresponding weakness in the USD.
To prevent any such reversal from becoming a longer-term trend, Bernanke
should make a point of talking tough about the course of U.S. monetary
policy.
After underestimating
it all year, markets have come to respect the resolve of the Greenspan Fed's
tightening course, with some believing the Fed Funds rate may go all the way
toward 5% before this cycle is finished. With Bernanke, the market will
expect no such thing. In fact, the currency market will adjust its thinking,
believing that the new Fed chief will not only be quicker to halt rate
increases, but quicker to cut them, as well. To counteract such conclusions
and their negative implications for our not-yet-out-of-the-woods currency,
Bernanke needs to speak clearly in support of the current tightening phase
and his conviction in carrying it forward in order to distance himself from
that printing press comment, which currency traders won't easily forget.
Without such
tough talk (and actual follow-through), the U.S. Dollar's rise in 2005 may
turn out to be nothing more than a counter-rally, after all.
Chip
Hanlon
President, Delta Global Advisors, Inc.
19051 Goldenwest,
#106-116 Huntington Beach, CA 92648 Phone: 800-485-1220
Fax: 800-485-1225 www.deltaga.com
A widely-followed
market commentator, Mr. Hanlon served as the C.O.O at Euro Pacific Capital
prior to taking the reigns at Delta Global. He had previously been the
President of Unfunds, Inc. and spent 7 years prior with Sutro & Company
as a Vice President and the company's Los Angeles Director of Syndicate
Offerings.
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