Bernanke’s ‘green shoot’ economics is suffering frost burn!

Have we seen the ‘bear’ market high in equities this week? The world feels an unsafe place. After last weeks plethora of data and results, utopia was apparently around the corner as ‘green shoots’ were witnessed everywhere. The first sign of frost has killed growth! Forget the UFC, the new reality show du jour, Cat-fighting amongst ECB policy members! It’s giving the big dollar some breathing room for now, but, do not expect it to last.

The US$ is mixed in the O/N trading session. Currently it is lower against 9 of the 16 most actively traded currencies in a ‘subdued’ trading range.

Forex heatmap

US unemployment is starting to take effect as consumer spending is losing momentum. This was witnessed in yesterday’s US retail sales data (-0.4% vs. 0.0%). Analysts note that with the past 2-months worth of declines, the US consumer has given back all of the gains in retail sales that capital markets witnessed in the beginning of the year. The report is in total contrast to other indicators that were reported last month (i.e. rising chain store sales). Retail sales have now fallen 8 out the past 10-months. Its worth noting that the positive prints for both Jan. and Feb. were probable due to deferred spending on deep discounting, coupled with Fed transfers to households. Cash hoarding cannot support ‘green shoot economics’. Digging deeper, weakness appeared in most sub-categories like furniture (-0.5% m/m), electronics (-2.8%), food (-1.0%) and so on. More of an eye opener was to see that gas station sales fell -2.3% despite a rise in prices. Are North Americans driving less? The market will have to wait for other reports to conclude if its price or volume that has had the biggest impact on yesterday’s data.

The BOE Quarterly Inflation Report was ‘dovish’ and certainly put pressure on GBP yesterday (Gordon Brown and MP’s expense fiasco does not help).Governor King’s sees inflation below its 2% target at current market rates, this also included the sum of GBP125b they have earmarked for quantitative easing. Policy makers foresee CPI at +1.2% in 2-years and +1.5% in 3-years. Not at all the optimist, King said he sees ‘spare capacity building and unemployment rising and that the timing and pace of recovery were very hard to judge’, but the ‘pace of decline was moderating’!

The USD$ currently is lower against the EUR +0.09%, GBP +0.10% and higher against CHF -0.09% and JPY -0.27%. The commodity currencies are higher this morning, CAD +0.33% and AUD +0.05%. Finally, as anticipated the loonie took it on the chin yesterday. Last weeks bullish move certainly was over extended and the market seems to have got back to basics. US retail sales data has pressurized both commodities and the equity market, by default this highly correlated high risk currency was expected to be affected. It has rallied for the past 6-weeks vs. its largest trading partner. With recent global euphoria dampening, investors can expect to see better levels to own this commodity currency. After last weeks violent move on the back of ‘eye-popping and questionable’ employment numbers, it comes as no surprise that there remains a bias towards more advantageous levels to own the currency. The country’s fundamentals are strong when compared to other G7 partners, but it exports 70%+ of its goods and services south and 50% of that revenue is commodity based.

The AUD in the O/N sessions is trading close to the weeks lows as Asian equities fell on the back of US retail sales unexpectedly dropping last month, thus reducing investors’ appetite for the higher-yielding assets (AUD, NZD and CAD). Despite looking attractive, all high yielder’s moves are aggressively overdone and it’s only natural that the market will want to consolidate even further (0.7530).

Crude is lower in the O/N session ($56.72 down -130c). Oil prices gyrated in a tight range despite the weekly EIA report revealing an unexpected decline in inventories as imports plunged to the lowest level in 8-months. Crude supplies fell -4.63m barrels to +370.6m vs. an expected increase of +1m barrels (imports fell -12% to +8.71m). Earlier this week the API reports showed that supplies dropped by -3.13m barrels, w/w. Yes it was a bullish headline number, but, the market was given the heads up by the ADP results. Year-to-date, crude prices have advanced +33% this year, mostly on the back of a high percentage of OPEC members conforming to the last 9-months of production cuts. Surprisingly, OPEC yesterday stated that they boosted oil production last month for the 1st time since July. (+967k barrels a day over quota). They are now adhering to 77% of their self imposed cuts to production, the previous month it was 82%. Obviously these loft prices levels are to good to by-pass. There remains a strong correlation between equities and oil, and at the moment equity prices seem to have got ahead of themselves. This would imply that $60 a barrel remains a strong resistance point in the short term, one piece of data does not have much of an impact on a 19-year record high of inventories. The commodity market certainly has got ahead of its fundamentals and profit taking is probably warranted. Gold rose as a weaker dollar has boosted the demand for the ‘yellow metal’ as a hedge against inflation ($925).

The Nikkei closed 9,093 down -246. The DAX index in Europe was at 4,710 down -17; the FTSE (UK) currently is 4,340 up +9. The early call for the open of key US indices is lower. The 10-year Treasury’s eased 7bp yesterday (3.11%) and are little changed in the O/N session. Prices rallied after yesterday’s US retail sales data disappointed. The poor headline suggests that the US economy is well entrenched in this recession. With consumers paring spending, capital markets is now witnessing the delayed effect of the unemployed. With stocks struggling and the government taking a 2-week pause in its record sale of debt will also support the FI asset class. Today we have the last of this week’s buy-backs. Expect dealers once again to make the government pay up for product.

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