US: Little market reaction to Yellen’s semi-annual testimony - MUFG

Derek Halpenny, European Head of GMR at MUFG, suggests that their sense going into yesterday’s semi-annual testimony from Fed Chair Yellen was that it was the least anticipated testimony that we could recall and the financial market reaction yesterday reflected that.

Key Quotes

“After the FOMC press conference last week and the release of the updated Summary of Economic Projections, there was never going to be much for Chair Yellen to update the markets on. EUR/USD took direction from ECB President Draghi’s comments rather than anything in Yellen’s testimony.

The testimony did reveal a slightly greater air of caution in the FOMC’s deliberations by explaining that only raising the federal funds rate slowly would allow the committee to make a judgement on “whether” growth would pick up, employment growth would rebound and inflation would move up to the target. She did go on to express the view held before that conditions would improve to warrant gradual rate increases but the testimony does perhaps underline the importance of near-term developments in shaping the Fed’s thinking.

The reference to making an assessment on whether the economy is picking up suggests to us that July will be too soon for the FOMC to consider a rate increase – even if there is no Brexit this week. There no doubt will be enough data by September for the FOMC at that meeting to more seriously consider raising rates but the question by then will be whether the Trump vs Clinton presidential election race has started to impact the economy. We currently lean toward September for the next rate increase but acknowledge it could easily shift out to December.

This cautious stance of the FOMC continues to leave the Japanese yen as the currency that can advance further. With crude oil prices back above USD 50pbl, the Canadian dollar and Norwegian Krone can perform well too. But for the yen, you have momentum, a rapidly expanding current account surplus and a falling real yield in Japan, all combining to lift demand. A Brexit vote this week may well open up the potential for intervention but it remains questionable whether it would be coordinated. Any weakness for the yen after a ‘Remain’ vote in the UK may well prove short-lived.”