Bernanke’s reality is fighting deflation not supporting dollar.

It’s not what they say, it’s what they do. Bernanke’s sleight of hand comments on a stronger dollar were just that. Don’t look at the hand they want you to see! Helicopter Ben believes that bank lending practices and unemployment ‘headwinds’ could possibly restrain the pace of the US economic recovery. The twin evils warrant the continuation of low borrowing costs for a ‘long period of time’. The Fed is ‘attentive’ to changes in the dollar’s value and ‘will help ensure that the dollar is strong’. Do you not think that the word ‘strong’ is now becoming too subjective? His comments on the currency yesterday are the exact same made in a speech a year ago. In reality, he is preoccupied fighting deflation and rates at zero will ‘never’ support any currency!

The US$ is stronger in the O/N trading session. Currently it is higher against 11 of the 16 most actively traded currencies in a ‘whippy’ trading range.

Forex heatmap

Yesterday’s US retail sales headline was stronger than expected (+1.4% vs. +0.9%). Unfortunately much of that upside surprise was offset by a hefty downward revision to the Sept. headline (-2.3% vs. -1.5%). Technically, it’s all post ‘cash-for-clunker’ noise from the auto component. Digging deeper, the net 2-month effect on total sales is weaker than expected, similar to core-sales (ex-autos) which also showed a downward revision to the previous month. The weak gain in core-sales (+0.2%) is ‘masking greater weakness in some of the key sub-components’. Building materials fell for the 5th straight month (the strongest pace of decline yet recorded -2.4%, m/m), while sales of big ticket items like furniture and electronics also fell. Core-sales managed to keep its head above water by higher sales of clothing, food and drink spending. As we enter the holiday period, will the consumer continue to loosen the purse strings despite certain government incentives programs ending? In reality, the consumer spending accounts for +70% of the US economy and psychologically everything hinges on the US employment situation (-10.2% unemployment rate).

The Empire Manufacturing Index for this month was also somewhat disappointing despite the index showing continued expansion in activity and the 6-month outlook reaching a 5-year high (+57.0). The headline index slid 11 ticks to 23.5 vs. market expectations of 29.9. The details suggest moderation. New-orders and shipments both expanded for the 5th consecutive month, but, at a slower pace than last month. The spread between New-Orders and Inventories (+33.8) narrowed but remained a favorable signal for future output growth. Other signals of sustained recovery were the second straight positive reading for employment and the third straight above-zero print for the workweek. Despite solid readings on demand, selling prices declined for the 12th consecutive month. Looking ahead, respondents remain optimistic about continued expansion by showing a strong vote of confidence in the 6-month outlook. What will it be like when the unemployment rate reaches +13%?

The USD$ is currently higher against the EUR -0.18% and CHF -0.28% and lower against GBP +0.12% and JPY +0.31%. The commodity currencies are weaker this morning, CAD -0.53% and AUD -0.77%. Yesterday’s Canadian Manufacturing sales grew less than expected in Sept. (+1.4% vs. +1.7%), but a stronger positive than the decline print experienced in Aug. (-1.8%). Similar to the US situation, much of the growth was distorted by higher auto-sales (+13.7%), while core-sales (ex-autos) actually fell (-0.4%). It’s worth noting that in total, 14 of 21 sub-sectors posted a gain in sales during the month (+53.1% of total sales). Offsetting the gains was a decline in aerospace products, with production falling -28.6% in Sept. A healthy sign was that inventories fell for an 8th consecutive month (-1.9%, m/m). Combine this with the gain in sales has led to a large decline in the inventories-to-sales ratio (1.44). Expect next month’s ratio to be somewhat reversed as autos accounted for all of the growth in Sept. The commodity driven loonie continues to outperform its southern neighbor, as does most of the other major currencies. With the G20 and APEC pledging to keep the status quo on monetary stimulus is supporting global equities and commodities and by default higher yielding currencies for now at least. Governor Carney will be tested, or perhaps it’s more accurate to say that Capital markets want to test the Governor. Carney has insisted that they will use a combination of currency intervention, credit and quantitative easing options to influence the loonies’ value. Policy maker’s consensus has us believing that a strong currency is detrimental to Canada’s economic growth.

Within sight of the 15-month highs was too lofty a perch for the AUD last night. It managed to pare some of this week’s gains after the RBA minutes implied that three straight lending rate increases may not be on the cards. After appreciating close to +4% vs. the buck this month, futures traders hastily unwound some bets that Governor Stevens would tighten monetary policy again in two-weeks. He said that the pace of further rate increases ‘remained an open question’. However, bigger picture, the currency is well supported by commodity prices and expects dealers to remain better buyers on ‘deeper’ pullbacks (0.9288).

Crude is lower in the O/N session ($78.50 down -40c). Yesterday we witnessed crude prices advancing the most in nearly 3-weeks as the dollars strength remains questionable despite Bernanke’s slight of hand endorsement. Robust global equities are a boost to confidence that the global economy and energy demand may recover. Is it sustainable or are markets just retracing some of the ‘too far too fast’ loss from last week? Even after advancing +3.2% during yesterday’s session, crude remains entrenched in a tight trading range. Last week’s EIA report was bearish for prices. Initially, prices fell after the surprisingly larger than expected gain in inventory levels, as refinery operating rates dropped to their lowest level in 12-months. Crude stocks rose +1.76m barrels to +337.7m vs. an expected market gain of only +1m barrels. With refiners not able to drawn down excess inventories is strong evidence that demand destructions does remain. Refineries operated at +79.9% of capacity, down -0.7% w/w, vs. an expected gain of +0.2%. It’s worth noting that imports actually increased by +6.5% to + 8.66m barrels. Not to be out done gas inventories also managed to advance by an aggressive +2.5m barrels. Due to softer fundamentals this month, technically the market has once again aggressively got ahead of itself. To date over the past 2-months the market has been wishy-washy within a $7 range with very little follow through above the $80 a barrel level. All this despite the IEA earlier this week declaring that global oil demand will grow in the 4th Q for the first time in over a year. Both OPEC and the EIA expectations are a tad weaker!

It’s all about insurance. The market continues to push the yellow metal to new lofty heights as investors purchase the commodity as an alternative to the sickly dollar. With interest rates to stay low for a considerable period of time, there is no incentive for speculators to covet the greenback and by default gold is now the ‘currency’ of choice. Expect the Bulls to continue to dominate all of the action and remain strong buyers on ‘any’ pull backs ($1,133).

The Nikkei closed at 9,729 down -62. The DAX index in Europe was at 5,794 down -11; the FTSE (UK) currently is 5,367 down -16. The early call for the open of key US indices is lower. The US 10-year bonds eased 5bp yesterday (3.35%) and are little changed in the O/N session. The longer end of the US yield curve remains better bid for two reasons, firstly, the Fed will remain on hold and keep rates low for a considerable length of time (US retail sales yesterday also disappointed) and secondly, there is a natural demand for US product. Analysts believe that ‘seasonal’s’ are calling for a flattening rally from here (357 spread 2’s -30’s). In reality, the market will not want to be a contrarian ahead of ‘month end index extension’.

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