Now, of course, the questions we need to ask are, where we do go from here? What are the implications for the binary plays and other forex trading vehicles next week and during the weeks ahead?

To help figure it out, we can parse the FOMC’s words.

Remember, the FOMC knows traders are paying close attention, so they choose their words very carefully. But even those carefully chosen words are revealing, especially when compared to previous FOMC statements.

Once again, we can use a word cloud — a visual representation of the words in the release.

Here is a word cloud from the FOMC’s decision this week:

Now look at the FOMC’s statement from the same week last year:

What is striking is the increase in the size of the word “inflation.” It confirms that it remains a main area of concern to the FOMC.

Reuters also did a world cloud for Bernanke’s press conference after the meeting. Though he tried to downplay inflation fears, that word crept up a lot. He also maintained that he supports a strong dollar… but the fact that the word is so hard to find in the cloud makes it clear it’s not a priority for him.

So, the Fed is thinking about inflation but not about the dollar. That means we should start betting against the dollar, right? Not so fast…

Remember, our best gains come when we catch the market by surprise. And up till the press conference, doubts about the dollar were merely the prevailing “mood.” Now, thanks to Bernanke, these fears are now structural — with no signs of U.S. growth and tighter money in sight, there is little hope for an increased dollar valuation.

In other words, the consensus is already counting on a weaker dollar. And that will make good contrarian currency plays hard to find.

There is, however, room for surprises in the commodities markets. Commodities are very sensitive to inflation fears, and that means trades that cover crude oil and gold will be excellent candidates. I’ll let you know more about a commodity strategy for May in the future…

Sincerely,
Abe Cofnas
Penny Sleuth

May 5, 2011

Currency in Focus: Reading Between Bernanke’s Lines was originally featured in the Penny Sleuth.

The interview was notable for two reasons – first, because interviews with the Chairman of the Fed were until now almost unheard of, and second, because Bernanke told 25 million viewers that we could see the recession end this year.

“We’ll see the recession coming to an end probably this year. We’ll see recovery beginning next year. And it will pick up steam over time,” he told Pelley.

But Bernanke was quick to qualify his projections: “We won’t be back to full employment. But we will see, I hope, the end of these declines that have been so strong in a last couple of quarters.”

Those are strong words for anyone who sits in Washington’s inner circle, but it’s important to remember that Bernanke hasn’t been a Washingtonian for long. And despite allegations that he’s been too generous with the financial industry, Wall Street is equally as foreign to him.

Bernanke spent the majority of his professional career as an academic, first as a professor at Stanford, NYU and MIT, then as the Chair of Princeton’s Economics Department.

During the interview, 60 Minutes stressed Bernanke’s small-town upbringing. They reminded America that Dr. Ben Bernanke, PhD grew up in the middle class in Dillion, South Carolina. And with no shortage of made-for-TV irony, the cameras met with Bernanke at his childhood home in Dillon, a rancher that’s in foreclosure because the current owners couldn’t make the payments.

But frills aside, what Bernanke said last Sunday night was important for investors to remember.

He pointed out that we’re not going to see any sort of an economic recovery until the financial system gets itself in order. While that doesn’t mean that the stock market has to make sense again, it does mean that our nation’s banks have to get their acts together before things get straightened out.

“The lesson of history is that you do not get a sustained economic recovery as long as the financial system is in crisis. We’ve seen some progress in the financial markets, absolutely. But until we get that stabilized and working normally, we’re not gonna see recovery. But we do have a plan,” he said.

One of the biggest elements of that plan is the “Bernanke Doctrine,” which Chairman Bernanke laid out right after he was sworn in as Fed Chairman back in 2002. In his seven-tiered plan, Bernanke emphasizes a systematic approach to avoiding deflation – one of the biggest concerns that we could face in a recession.

At present, the Bernanke Doctrine is in full effect, and as a result, we’re actually seeing modest inflation right now – up 0.4% in February according to Department of Labor numbers released today. Among other things, that small amount of inflation means that consumers aren’t being pressured by a lack of liquidity in the money supply.

If Bernanke has been this sharp so far on deflation, maybe his seemingly optimistic predictions aren’t so off-the-wall. After all, who has a better pulse on the economy than our nation’s chief economist?

As economic fundamentals begin to show themselves in the coming months, we’ll see if Ben’s hypothesis holds up.

Cheers,
Jonas Elmerraji

March 18, 2009

Berknanke’s Big Bet was originally featured in the Penny Sleuth.