Bernanke battles ‘depression’?

It’s a given that the Fed will implement the lowest borrowing cost in US history by this afternoon. Bernanke and Co. will now have to shift to their ‘balance sheet’ to implement monetary policy. Never been done before and the key to this strategy’s success will be ‘transparency’, more communication is warranted with capital markets. If the Fed cannot communicate clearly a new strategy of manipulating the money supply, what ever remaining ‘respect’ will be lost and then the path will lead past a ‘recession to depression’!

The US$ is mixed in the O/N trading session. Currently it is higher against 9 of the 16 most actively traded currencies, in another ‘whippy’ trading range as traders speculate that the Fed will cut rates close to ‘zero’ this afternoon.

Forex heatmap

Yesterday, the first of this month’s regional manufacturing surveys came in stronger than expected (-25.8 vs. -27), but still provides compelling evidence of a retreating manufacturing sector via the Empire State manufacturing index. Many sub-components are pointing to the weakest manufacturing conditions in the US in nearly 30-years. But it’s worth noting that new order’s, shipments, inventories, and employee’s readings all improved compared to last month, but all of them still signal contracting. While prices started to decline last month in the Philly Fed and both the ISM manufacturing and non-manufacturing reports, prices in NY took an extra month before the contraction began. The trend is towards ‘disinflation’ across the board (CPI is also falling m/m providing Bernanke and Co. more ammo to cut deep later today). Other data also surprised to the upside yesterday, US Industrial production came in better than expected for last month, falling -0.6% m/m vs. expectations of a -0.8% decline. It’s worth noting that Oct. growth rate was also revised up to +1.5%, m/m. While manufacturing production fell as expected, with weakness widespread, utilities and mining rose. Auto production fell -2.8% in Nov. while machinery dropped -2.4% and computer/electronics declined -1.2%. Capacity utilization failed to inspire falling more than expected to 75.4% vs. 75.5%.

The US$ currently is higher against the EUR -0.35%, GBP -0.54% and lower against CHF +0.15% and JPY +0.39%. The commodity currencies are weaker this morning, CAD -0.43% and AUD -0.07%. Is the CAD dollar guilty by association to its southern neighbor? Not just yet. The loonie advanced yesterday as its US counterpart declined against most major currencies and crude oil prices rose, thus increasing the currency’s appeal. It’s not necessarily the genuine strength of the loonie but the demise of the greenback that has given the CAD$ a temporary boost. Year-to-date the currency has shaved 19% off its value against its largest trading partner as a global recession reduces demand for commodities, which generate about 50% of the country’s export revenue. Last week Governor Carney from the BOC delivered an unexpected ‘deep interest rate’ cut. The market expected 50bp, the economy warranted 75bp and Carney pushed rates to a new 50-year low of 1.5% vs. 2.25%. In his communiqué he signaled that more action may be needed as economic growth sputters in a ‘broader and deeper’ global slump. This week we will have OPEC production cut decisions, perhaps this will once again provide support for the loonie short term. With the general malaise of the greenback, it’s difficult to want to own that currency in the short term. On a cross related basis the loonie has faltered and traders continue to want to sell the CAD$ on strength. With liquidity issues becoming more pronounced, one should expect violent trading ranges to remain until the New Year.

The AUD found some O/N support as traders continue to speculate that the Fed will ease 50bp today and by default provide some support for higher yielding currencies. With global equities remaining in positive territory coupled with robust commodity prices had traders remaining better buyers on pull backs for the moment and shying away from the greenback as a safe heaven asset class (0.6700).

Crude is higher O/N ($44.86 up +36c). Crude prices got another shot in the arm yesterday after OPEC’s Secretary-General El-Badri said the group needs to make a ‘sizable’ output cut later this week in Algeria. It is expected that they will collectively cut production by +2m barrels a day or another -7.3%. The market expects them to come out with a strong statement and also have Russia in their corner. In Oct. they reduced production by -1.5m barrels a day. OPEC has already asked Russia to reduce output by +200k to +300k barrels a day to help push prices towards their desired price target of $75. Last week we saw the ‘black stuff’ appreciate 13%, the biggest weekly gain in nearly 4-years as both investors and speculators believe that OPEC’s action will boost prices. The Saudi oil minister said that the Kingdom had delivered the output cuts promised to OPEC (last month). The market has taken this as a sign that world supplies are smaller than traders believe. The Kingdom pumped +8.493m barrels a day in Nov., in line with its OPEC production quota of +8.477m barrels. This ‘new’ policy of transparency from the Saudis has everyone looking to buy on pull backs. Last week’s weekly EIA report showed that inventories of gas and distillate fuel, a category that includes heating oil and diesel unexpectedly jumped. Gas stockpiles rose +3.7m barrels to +202.7m w/w, while distillate inventories climbed +5.6m to +130.6m barrels. They were anticipated to fall -400k barrels and distillate supplies by -1.5m respectively. Inventories of crude rose +392k barrels to +320.8m (analysts had anticipated a 10th consecutive increase of +1.3m barrels). Refineries operated at 87.4% of capacity and were up +3.1% from last week. The 4-week US fuel consumption averaged +19.3m barrels a day, that’s down -6.1% for the same period last year. Gold prices have rallied to a new 2-month high on the back of a weaker greenback; by default it has temporarily increased the appeal of the ‘yellow metal’ as an alternative investment ($838).

The Nikkei closed 8,664 down -96. The DAX index in Europe was at 4,732 up +78; the FTSE (UK) currently is 4,318 up +41. The early call for the open of key US indices is lower. The 10-year Treasury yields eased 6bp yesterday (2.53%) and a further 5bp in the O/N session (2.48%). The longer end of the US yield curve remains better bid ahead of today’s Fed announcement and once again has flattened the curve (2-10’s 175bp). The FOMC communiqué now become more important as investors seek longer term guidance on rates. Already futures prices have priced in a 70% chance of 75bp ease for later this afternoon.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell