Bernanke, what have you done?

What a week! Bernanke tried to talk the USD up, stating that they will raise interest rates, ‘sometime in the future’. All he succeeded in doing was push bond yields higher, while the greenback managed to print yearly lows vs. its major trading partners. Trichet had similar luck. Central Bankers are in fact bowing to their own domestic pressures and trying to appease the electoral vote by wanting a ‘stronger’ dollar policy. Trichet went as far as to concede that the vision of the EUR was never to be used as ‘the’ reserve currency. Record earnings managed to push the Dow through the psychological 10,000 handle, and gold and oil to record highs. Where to now? What’s actually making sense? The Fed sees tepid growth, unemployment to push through 10%, record foreclosures and no inflation worries. The dollar will remain the whipping boy. Yields will continue to push higher and equities a crap-shoot. All is still cheap to foreign investors!

The US$ is stronger in the O/N trading session. Currently it is higher against 12 of the 16 most actively traded currencies in another ‘whippy’ trading range.

Forex heatmap

A plethora of US data yesterday with some mixed results. Initial jobless claims remain stubbornly high and well above that psychological +500k print at +514k. However, it does remain in a deceiving downward trend, falling -10k w/w. Continuing claims fell below +6m for the 1st-time in 7-months (+5.992m), and with continuing claims remaining buoyant, this headline can only be a temporary blip. What seems to be bothering analysts most is the divergence between the NFP numbers, which show a decline in employment and the claims headline remaining at lofty heights. On the flip side and the most discouraging part of yesterday’s report was that the extended benefits (+471k vs. +465k) and the emergency unemployment compensation (+3.321m vs. +3.331m) moved higher, w/w. One can only conclude that job prospects remain scarce and that individual’s duration without a job is getting longer. Economists will tell you that the average number of weeks unemployed has now risen to new record level of 26.2! Continuing claims last for 26-weeks before potential workers need to apply for the two emergency programs. That is approximately +10.4m people without a job. The scary part is that this is the numbers who are eligible for benefits!

More benign was the US inflation report. It remains close to home and well anchored, harming no-one, not even the Fed. Both the headline and core were very much inline with expectations (+0.2% and +0.2%, m/m, respectively and -1.3% and -1.5%, y/y). It seems that excess capacity is keeping pricing power behind the curve across the US economy. This week some FOMC members have argued that inflation is pointing north, but, the majority believe that ‘inflation will remain subdued well into next year’ and it’s this that will keep the Fed on the sidelines until the middle of 2010. It seems that various asset classes are being overly aggressive in pricing in rate hikes any time soon (Gold and FI). Digging deeper, it was not surprising to see that higher gas prices was the main culprit in trying to lift the headline CPI. A similar decline in food prices managed to offset energy’s gain.

RealtyTrac Inc. did not bring a smile to many faces yesterday when they announced that US foreclosure filings surged to a new record in the 3rd Q on the back of lenders seizing more properties from delinquent borrowers. Close to +940k homes received a notice or were repossessed, that a whopping +23% increase y/y. It looks like Banks are becoming bigger and bigger real estate brokers, just like the ’80 in the UK! To put it in perspective, that’s 1 out of every 136 households receiving some sort of legal filing. And the ‘powers that be’ continue to tell us that the worst of the housing bubble is over, surely not!

Manufacturing expansion was moderate from the Philly Fed (+11.5 vs. +14.1, m/m) unlike the Empire Index (+34.6 vs. +18.2). The sub-categories for the Philly were mixed to soft, with one stand out headline and that was in inventories. They managed to plummet to -31.8 this month from a Sept. reading of -18.1. Strong evidence that inventory drawdown continues. The index measuring the outlook for the next 6-months fell to 39.8 from 47.8 (the lowest level in 6-months), while new orders advanced to 6.2 (the highest level since the beginning of the recession). However, employment continues to contract, but at a slower pace (-6.8 vs. -14.3).

The USD$ is currently higher against the EUR -0.22%, CHF -0.21%, JPY -0.62% and lower against GBP +0.25%. The commodity currencies are mixed this morning, CAD -0.05% and AUD +0.02%. Canadian data yesterday managed to knock the loonie off its highs despite rabid crude prices. Weaker Canadian manufacturing sales suggest that July’s headline was a temporary blimp (-2.1% vs. +5.2%). The weakness was concentrated in volume terms, which will have a negative impact on real GDP in Aug. The blip in July could be attributed to the ‘cash-for-clunkers’ program in the US. This Aug. headline print suggests that the Canadian recovery will be slow and tepid, exactly what the BOC has suggested, impeded by both high inventory levels (inventory-sales ratio at 1.49, pre-recession it was 1.3) and a strong loonie! With less than a week away from the next BOC meeting, dealers were better sellers of their own domestic currency believing that the recent rapid rise has come ‘too far and too fast’. Option traders continue to bet heavily that the CAD will reach parity by year end. Currently it stands at 67%. For now, look for investors to be better buyers of USD on pull backs and lock in profits.

The AUD managed to print new 14-month highs in the O/N session after RBA Stevens said that policy makers ‘cannot be too timid in raising its benchmark interest rate now that the threat of an economic crisis in the nation has passed’ (3.25%).A stronger business confidence print this year was one of the reasons why Governor Stevens at the RBA remains a firm hawk. I guess he now will show rapid normalization of interest rates. What about AUD at parity? (0.9216)

Crude is lower in the O/N session ($77.54 down -4c). Forget $75, how about $77? We managed to print new yearly highs yesterday after the weekly EIA report showed that inventory levels for gas unexpectedly declined as refineries idled units for maintenance. Even the dollar showing signs of life was unable to curtail prices. Weekly gas inventories plummeted -5.23m barrels w/w, and the largest drop in over a year. Consensus expected a +1.13m barrel weekly increase. With refineries operating at 80.9% of capacity, the lowest level in 6-months, gas output declined 10%, the most in 13-months. To put that in prospective, refineries have reduced their output by -964k barrels a day to +8.45m! The decline has left inventories at 209.2m barrels. On the flip side, inventories of crude rose + 334k barrels to +337.8m vs. an estimated weekly increase of +1m barrels. Over all the report was very bullish for products. Weekly fuel imports plummeted -13% to +2.53m barrels a day. The recent plunge in the value of the greenback has convinced speculators to purchase crude and other commodities as a hedge against inflation. Dealers continue to speculate that demand will increase amid signs that the global economy is emerging from this recession. Despite the weekly negative US numbers, global output remains healthy. Russia increased its production last month and has now surpassed Saudi Arabia as the largest produce. Let’s see if equities can support these loft commodity prices!

Prudent feelings dictated speculators actions yesterday. The yellow metal managed to retreat the most in 3-weeks during yesterday’s session as investors booked profits close to record highs to close out a winning week ($1,049).

The Nikkei closed at 10,257 up +19. The DAX index in Europe was at 5,861 up +30; the FTSE (UK) currently is 5,253 up +30. The early call for the open of key US indices is higher. The 10-year bonds backed up 4bp yesterday (3.47%) and are little changed in the O/N session. Treasuries managed to remain under pressure on the back of various Fed’s manufacturing reports last month (see above), which came in stronger than expected and provided further evidence that the US economy maybe emerging from its worst slump in over 50-years. The long end of the yield curve led the decline and 2’s/10’s have managed to widen the most in 3-weeks (250). Analysts believe that there is good technical support at 3.50% the first time around. However, looking at the big picture, Treasury buybacks are almost over. MBS buybacks have about $250b to go. The US Treasury still has to raise $1.8t per year (more pressure on the curve). Despite the USD encroaching on a 14-month low, analysts foresee 4% 10-yr notes before the year-end and 4.5% by middle of next year!

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