Currency in Focus: Reading Between Bernanke’s Lines

Ben Bernanke and the Federal Open Market Committee deserve more than a thank you for last week. Their deft juggling of the fears that drive the market — inflation, slow growth, a weak dollar, etc. — has made way for some attractive trading opportunities of late.

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. Check out Wall Street’s 5 Most Profitable Penny Stock Patterns Report.

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