An unnerving (perhaps) aspect of the big dollar decline of late is that it coincides with a general recognition that the Fed is going to end QE.Next week, April 27, we’re expected to get definitive messaging from the Fed to this effect.
In its latest FX Pulse note, Morgan Stanley wonders if the messaging from the Fed might actually drive the dollar even lower if the information isn’t that clear.
As we outlined a few weeks ago (“The USD after QE2, FX Pulse, 7 April 2011), we believe the USD will be able to stage a cyclical recovery only once the Fed begins to withdraw accommodation, not necessarily when QE2 ends. Of course we have heard from a number of Fed speakers about their individual preferences, which have generated market volatility, but a more cohesive communications strategy would possibly occurrence for the US makes it a surprise.
However, while Chairman Bernanke may again discuss the sequence of steps the Fed will take as it moves to the exit, it is too early to expect signals about the timing of the exit. Thus, the press conference may prove a USD-negative disappointment, given heightened market interest going into the event.
If Jean-Claude Trichet’s press conferences are any indication, Bernanke probably won’t say anything of substance during his, although there’s no reason his style will necessarily be the same as the ECB’s. Still, this idea that perhaps people are looking for too definitive of a message regarding the end of QE seems pretty salient.