Bernanke Feels Weak!

‘From a technical perspective the recession is very likely over, but it’s still going to feel like a very weak economy for some time’. That say’s it all. It came straight from the horse’s mouth yesterday, Ben Bernanke. US data is consistently ‘stronger’, yes most of it may be incentive induced, but the US government is achieving what they set out to do. Even yesterday’s US retail sales shows that the consumer’s psyche may be turning positive for the better! Interesting, the BOE said it was considering adopting the Riksbank policy of imposing ‘negative interest rates’ on excess reserve balances. They want more money put to work! Would the Fed ever adopt a similar policy?

The US$ is weaker in the O/N trading session. Currently it is lower against 14 of the 16 most actively traded currencies in a ‘whippy’ trading range.

Forex heatmap

Well blow me down! Yesterday’s US core-retail sales managed to surge (+2.7% vs. -0.2%). It was much stronger than expectations and what’s even more shocking, if you exclude auto and gas sales, it still came in a whopping +0.6% m/m vs. a flat print. The consumer seems to have life again. Next question, where did all the cash come from? Most likely it came in the form of surging deposits ratios over the past year which has been aided by tax breaks and US government stimulus. For the longest time the US consumer has been diverting cash flow away from primarily service spending. Despite the upbeat print, next week from the St. Louis Fed we get to see if the results are due to price effects or volume-based. Digging deeper, most sub-components delivered a healthy gain. Auto parts led the way as expected (+10.6%), followed by sales at gas stations (+5.1%) that analysts say were mostly price-induced. It seems that the only weak categories were furniture sales (down -1.6%) and building materials (-1.2%).

Yesterday’s ‘gas’ report or otherwise know as the PPI was not that surprising (+1.7 vs. -0.9). US producer prices came in almost double expectations last month as gas prices rose over +20% compared to the previous month. However, ex-energy prices were up a more modest +0.2% m/m. It’s worth noting that intermediate goods prices advanced +1.8%, m/m, while crude prices were up +3.8%, m/m. This will surely put upward pressure on prices moving along the line!

The USD$ is currently lower against the EUR +0.19%, CHF +0.16%, JPY +0.86% and higher against GBP -0.13%. The commodity currencies are stronger this morning, CAD +0.18% and AUD +0.74%. Yesterday’s Canadian new motor vehicle sales according to analysts are a ‘once off’ print (+5.3% vs. -0.5%). This anomaly was expected because of the previous month’s guidance from company reports. Canadian auto sales had soared in July. The rise was the largest in 3-months, as automakers and dealers reduced prices and increased incentives. Other data revealed that Canadian are just not working any harder these days! Canadian labor productivity remains at record lows. Real output per-hour worked was flat in 2nd Q, and revised downward to a flat reading for 1st Q as well. This is in stark contrast to the US situation where US productivity posted a gain of +6.6% in 2nd Q. It seems that US companies are being more pro-active in their response to the recession! Despite all this Canadian data yesterday, the loonie remains range bound, caught between risk aversion and risk taking strategies. If commodities and equities can find a bid, then growth currencies like the loonie and the AUD will be wanting, currently that’s not the case. It’s worth noting that despite performing positively vs. the USD last week, the CAD strength is unlike the other G10 currencies, if anything it looks tenuous at best. Parity whispers seem to have been put on hold for the time being, but they are there! Dealers continue to play the range and will take their cue from commodities.

The AUD has once again surged to New Year highs on the back of US reports showing that retail sales surged by the most in 3-years, thus boosting the demand for higher-yielding assets. With commodity prices moving upwards hand-in-hand with Asian bourses has encouraged ‘new’ risk appetite, which should provide further support for the AUD. Commodity’s account for +50% of the country’s exports. Dealers are looking to buy the currency on pullbacks (0.8714).

Crude is lower in the O/N session ($70.89 down -14c). A technical correction and not the might of fundamentals managed to push Crude prices lower earlier this week. It’s currently trading higher on the back of promising US sales data yesterday and on Governor Bernanke’s belief that worst of the recession is over. With the USD trading nervously, on pull backs there is a demand for the black-stuff for inflation hedge purposes. With global equities finding it difficult to maintain traction consistently has raised concerns that the recent price for commodities advances may be outpacing global recovery. However, it’s difficult to dissuade people of their convictions! Basically, without equities advancing or the USD aggressively dropping, there will be no true love for the black-stuff in the longer term. Last week, we were subjected to the ‘weak’ dollar boosting the appeal of commodities to investors as an inflation hedge, this week we continue to witness a ‘sickly’ greenback. OPEC held oil production quotas unchanged earlier this month, as expected, with most members voicing satisfaction with current global crude prices. Temporarily at lest, the black-stuff has received support from the IEA, who raised its estimate for next year’s global demand for a 2nd-consecutive month. Do consumers not play a part of the equation? US crude oil inventories posted a much larger than anticipated fall last week on lower imports and higher demand from refiners because of the Labor Day holiday. Both the EIA and ADP recorded larger than expected drawdowns (-5.9m and -7.2m barrels respectively). The EIA also showed that stocks of gas and middle distillates were up w/w, to the highest level in 26-years! It seems that the market believes that the oil products supply builds likely will be offset by the somewhat bullish impact of a large crude drawdown. Be aware that high distillate stocks in the G20 economies present a clear downside risk to oil this winter. Demand destruction remains healthy no matter what the USD is doing! Let’s see what inventory reports have in store for us later today.

Last week the ‘yellow metal’ surged to its highest close in 18-months on the back of a weak dollar scenario. This week the picture remains the same with the ‘yellow metal’ O/N erasing an earlier decline, as investors bought the commodity as a hedge against inflation ($1,017).

The Nikkei closed at 10,270 up +53. The DAX index in Europe was at 5,674 up +46; the FTSE (UK) currently is 5,101 up +59. The early call for the open of key US indices is higher. The 10-year bonds backed up 2bp yesterday (3.44%) and eased 2bp in the O/N session (3.42%).Yesterday, Treasures declined for a 2nd consecutive day after US retail sales advanced the most m/m in 3-years, thus providing further evidence that the worst of this recession may be over. Just ask gentle Ben! With PPI also advancing, perception amongst investors is that the economy is improving. This scenario will always lead to a smaller appetite for government debt. FI has managed to pare some of their losses ahead of CPI data this morning.

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