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Bernanke Comments Rattle Treasury Bonds

James Hyerczyk from ForexHound.com at 02/10/10


Treasury futures are trading lower at the mid-session following comments from Fed Chairman Bernanke hinting at an interest rate hike. Although Bernanke did not pinpoint when interest rates would rise, he did propose the Fed’s strategy on ending stimulus and hiking interest rates. Additional pressure is coming from the increased T-Bond and T-Note supply which will hit the market after the Treasury auction. Finally, if the European Union announces its plan to help out Greece, Treasuries are likely to feel more pressure because safe haven investors will begin exiting their positions.

Stock Indices are trading better at the mid-session following a choppy morning. The market seems to be taking its direction from Fed Chairman Bernanke’s comments. This morning, Bernanke proposed strategies for ending stimulus and hiking interest rates. His testimony hinted at an improving economy which is helping to give equity markets a boost.

Look for increased appetite for risky assets to send equity markets soaring once the EU makes its announcement regarding its loan guarantees to Greece.

April Gold is under pressure at the mid-session. The stronger Dollar is triggering a profit-taking break because of the lack of follow-through to the upside following yesterday’s bullish move. If a favorable announcement regarding Greece is reached made today, then look for the Dollar to break and gold to rally.

March Crude Oil is bucking the trend in commodities and trading slightly better. Oversold conditions and speculation that a solution to Greece’s debt woes will be reached today are helping to give crude oil a boost. Stronger stock prices are also helping. The rising Dollar should help to limit gains and may help to turn this market lower by the end of the day.

The U.S. Dollar remained under pressure at the mid-session as the lack of concrete news regarding the European Union’s plan to guarantee Greece’s debt caused investors to remain nervous. The Dollar received an additional boost when Fed Chairman Bernanke hinted that the Fed’s exit strategy included raising interest rates. Since the EU has failed to announce that an agreement has been reached with Greece, traders have been focusing on the testimony of Fed Chairman Bernanke for direction.

All major currencies are down versus the U.S. Dollar at the mid-session after the European Union failed to deliver a resolution to the Greece sovereign debt problem. On Tuesday, currencies led by a rally in the Euro, pressured the Dollar on hopes that the EU and Greece would reach an agreement regarding loan guarantees to ensure Greece would not default on its sovereign debt.

Early trading conditions suggest that traders are growing impatient with the EU foot-dragging, but the markets could turn quickly at even a hint of a resolution. Traders should expect unusual volatility and sudden changes in direction as traders jockey for position ahead of this monumental pact.

If a viable agreement is reached today, then look for the start of a short-covering rally. This will trigger a massive rise in the Euro. On the other hand, a failure to announce a pact today will most likely weaken the Euro as bullish traders will remain nervous holding on to long positions. Any hesitation may also encourage hedge funds and bearish traders to add to their massive short-positions.

If the European Union decides to guarantee Greece’s debt then look for trader appetite for risk to skyrocket. This should trigger strong rallies in equities and commodities. The Australian, New Zealand and Canadian Dollars are likely to benefit the most over the short-run.

The March Swiss Franc is down at the mid-session. The weaker Euro is helping to contribute to this weakness. A move by the EU to shore up Greece’s debt will take the pressure off the Swiss National Bank to defend its currency against rapid appreciation and deflation.

Sovereign debt concerns regarding Greece are helping to keep the pressure on the March British Pound. If a resolution is announced today then, look for the British Pound to rally. Gains could be limited as traders will refocus on the U.K. economy. In addition, some traders are still concerned that the U.K. budget deficit could trigger similar problems the Greece deficit is causing.

The March Japanese Yen is the best indicator as to how investors feel about risk and should be watched closely. The Dollar has been slowly rising versus the Yen the past three days, but not enough to assure traders to take on risk again. The recent action resembles cautious optimism. The Dollar is stronger versus the Japanese Yen today because of comments from Fed Chairman Ben Bernanke calling for higher interest rates.

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