Wednesday, June 04, 2008

Bernanke, Rates and the Economy

Federal Reserve chairman Ben Bernanke came out and laid it on the line for all to see. My take on his speech was that:

Rates are low enough, In addition, interest rates are ``well positioned'' to promote growth and stable prices, he said.

The Dollar is definitely on his mind, The Fed is working with the Treasury to ``carefully monitor developments in foreign exchange markets'' and is aware of the effect of the dollar's decline on inflation and price expectations

This is a very telling statement and it is something I have been saying for a while. A weak dollar is inflationary. If the value of the dollar rose it will bring the price of crude down. Crude is the single biggest driver of inflation today. Higher crude prices get filtered through the system and get translated into higher food and material costs. Driving the dollar higher will do alot of good. I think that we have seen a bottom in the dollar against the major currencies. Even when crude made new highs the Euro could not. Now with the potential fear of intervention,``We are attentive to the implications of changes in the value of the dollar for inflation and inflation expectations,'' Bernanke said. The Fed's commitment to price stability and maximum employment ``will be key factors ensuring that the dollar remains a strong and stable currency.'' , I see very little chance that it will mount a new attack on 1.6000.

Commodity currencies should suffer a bit. Canada, Aud, Nzd and Nok to name a few. Latin American currencies I am still on the fence with for now. Although the higher crude is certainly beneficial, the high yields in Brazil and Colombia make their currencies very attractive.

A few trades that I like are

Short Euro (I have had little luck in this currency pair all year but have established a small core short position)
Short Usd/Ars and Ars rates. This trade has worked out well and I continue to have it on for the positive carry effect.
Short Brazil Rates. I think these rates will peak lower then previously anticipated. As such I have begun to exit my long rates position and will be looking to receive.

A few carry fully placed bets and payoff well in these markets.

To read the story from Bloomberg CLICK HERE

Good Luck and Good Currency Trading.



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