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Bullard's Comments Spark A Rally in USD/JPY

Last updated 3/29/2011 9:46 AM ET (GMT -5) 1 Comments

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Boris Schlossberg

Director of Currency Research, GFT

St. Louis Fed President James Bullard set off a flurry of USD/JPY buying in early North American trade when he suggested that the Fed may curtail its QE program early. Speaking in Prague Mr. Bullard noted that normalization in U.S. monetary policy will be the key theme this year.

"Because we are so accommodative right now, the FOMC may not be willing or able to wait until every single global uncertainty is resolved before we can begin normalising policy," Mr. Bullard said  during a speech and on the sidelines at a banking conference in the Czech capital."Suppose we didn't purchase the full $600 billion and you only purchased $500 billion, “ Mr. Bullard continued,” you've still got a gigantic balance sheet and you've still got a policy rate near zero, so it would just be a tiny move in the direction of trying to normalise policy, but policy overall would still be in the direction of accommodative."

Mr. Bullard’s remarks, especially about the possibility of limiting QE2 to $500 Billion rather than $600 Billion, had an immediately positive impact on USD/JPY pushing the pair nearly 100 points higher from its Asian session lows to trade near 82.50 at the New York open. Although Mr. Bullard’s comments had a direct impact on the currency market, the reaction in fixed income was considerably more muted as yields on the 10 year bonds remained below 3.50% at 3.45%.

Mr. Bullard’s hawkish views follow on the heels of Friday’s comments from Philly Fed President Charles Plosser who also stated that the Fed may have to begin removing monetary stimulus sooner rather than later. The rhetoric suggests a clear shift of posture from some of Fed policymakers. However, the two men likely remain in the minority as the rest of US monetary authorities  may prefer to wait for stronger signs of sustainable economic recovery on concerns of removing stimulus prematurely.  

To that end this Friday’s NFP report could prove crucial to the near term direction of the pair. If the data meets or beats market expectations of 210K gain in private payrolls, the pressure on the Fed to begin removing stimulus is likely to grow and could push USD/JPY to test its recent highs at 84.00 as market begin to price in the end of QE2.

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Comments (1)

Gogolando

March 29, 2011 at 10:33 AM ET

Im also betting that QE2 will come to and end soon. But if the US Fed stops buyng US debt, who is going to pick up the buying. What will that mean to the bond market?

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About The Author

Boris Schlossberg began his Wall Street trading career more than 20 years ago at Drexel Burhnam Lambert. There, he traded nearly every type of financial product on the market in the U.S., from equities and options to stock index futures and foreign exchange. His innate ability to analyze market information and use it to trade has helped him become an industry-recognized, “go to” trading professional.

These days, whenever the markets move, many organizations turn to Schlossberg for his take on the situation. He is a weekly contributor to CNBC's Squawk Box and a regular commentator for Bloomberg radio and television. His daily currency research is widely quoted by Reuters, Dow Jones and Agence France Presse newswires and appears in numerous newspapers worldwide. Schlossberg has written for publications like SFO magazine, Active Trader and Technical Analysis of Stocks and Commodities. He is also the author of Technical Analysis of the Currency Market and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Kathy Lien. He joined GFT in 2008.