DB FX Daily: London The Chairman and FX

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FX Daily: London
The Chairman and FX
Today's Key Data and Events
GBP BoE minutes, 6-3 vote in favor expected (08:30 GMT)
CAD Core CPI for June, 0.1% mom expected (11:00 GMT)
USD Core CPI for June, 0.2% mom expected (12:30 GMT)
USD Bernanke's semi annual testimony (14:00 GMT)

Upcoming Event Risks
July 19 Bernanke's H-H testimony (Day 2)
July 25 Australian Q2 CPI
July 26 RBNZ rate decision

The Chairman and FX
The key event over the day ahead will be the semi annual testimony by Chairman Bernanke. Our US economics team has noted that the average move in bond yields on the day of a semi annual testimony is around 8 basis points (see the US Economics Daily of 16 July and also this week's US Economics Weekly for more detail on our expectations for the testimony).

There is also a solid relationship between movements in US bond yields on the day of the semi annual testimony and various currency pairs - in particular EUR/USD and GBP/USD (see the two charts below). Over the span of our sample (back to 1999) USD/JPY has tended to have less of a relationship with the movement in bond yields on the (first) day of a semi annual testimony than cable or EUR/USD. That said, over the two most recent testimonies the 7-8 basis point falls in 10 year yields were both associated with circa 40 point sell offs in USD/JPY. Given the relatively high correlation between USD/JPY and yield spreads at the current point in time we won't be surprised to again see a fairly tight relationship between movements in US yields and USD/JPY today.

As far as actual expectations for the testimony we expect a broad repetition of the sentiments from the most recent FOMC statement - and in particular retention of the inflation bias. As far as FX markets are concerned the greatest shock out of the testimony would most likely be a very hawkish Chairman opening the door to near term rate hikes. While we don't expect it - and we note that Bernanke's previous testimonies have tended to see bond market rallies (with 10 year yields falling by one, eight and seven basis points) - such a development would be likely to stop dollar weakness and equity market strength in their tracks.