Fundamental Report – March 21, 2013: Federal Reserve Comments Create Bullish Scenario for High Yielders

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The US Dollar is trading near its highs for the week against the Euro, as the results from the latest Federal Reserve monetary policy meeting were mostly supportive in light of recent uncertainties negatively influencing financial markets. The end result of this week’s main fundamental event showed no change in interest rates and comments from Fed Chairman Ben Bernanke which signaled that target interest rates will remain near 0% until national Unemployment Rates drop below 6.5% or until consumer inflation rises above 2.5%. This essentially means that the Fed will keep policy accommodative for the medium term, and this is a bullish scenario for global stock markets and high yielding currencies.

Current projections from the Federal Reserve suggest that the Unemployment Rate will fall to 7.3% by the end of the year forecasts stood at 7.5% previously). Looking at the broader figures, the US Fed expects GDP rates for 2013 to come in between 2.3% and 2.8%, which is a slight downward revision from the previous forecasts, which showed an upper range estimate of 3%. Investors have taken this information as a positive, as there was no indication that the Fed is overly concerned about any one area of the economy but, at the same time, the Fed is willing to keep interest rates low as a means for supporting growth and protecting against external market shocks (i.e. the debt situation in Europe). Longer term, this means that safe haven currencies like the US Dollar and Swiss Franc will be sold off in favor of higher yielding currencies (such as the Australian Dollar and New Zealand Dollar), as the supportive macro environment supports risk taking over defensive investments.

German IFO Ends the Week

With all the volatility seen in the Euro this week, the next event risk (Friday’s German IFO survey), the EUR/USD could see some renewed selling pressure if the numbers are negative. The ZEW surveys released early in the week came in roughly in line with expectations, so there will be a greater focus on the IFO as a potential market mover. The EUR/USD is now trading firmly below the 1.30 level and a negative result in the IFO will mean that we close here into the end of the week.

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