‘Thank’ Bernanke for ‘giving’ us this.

The Fed is sticking to its upbeat outlook as outlined in yesterday’s FOMC minutes. They heavily emphasized under the ‘forecast uncertainty and cautioning sub-sections’ that the recovery will be ‘milder than the historical norms’. The ‘official’ 10.2% who are unemployed will not get much comfort from that statement during this ‘thanksgiving period’. Reserve officials said record-low interest rates might fuel ‘excessive’ speculation in financial markets and possibly dislodge expectations for low inflation. Might fuel? The world has been using the so-called world reserve currency as a vehicle currency for the ‘carry trade’. The tsunami unwinding of this trade could take years and felt world wide. It’s a safe bet that excessive speculation has been here for sometime! Expect today to be the last ‘normal’ trading day in the holiday shortened trading week. Volatility and an illiquid market will be the order of the day until next week.

The US$ is weaker in the O/N trading session. Currently it is lower against 15 of the 16 most actively traded currencies in another ‘whippy and illiquid’ trading range.

Forex heatmap

We have a plethora of data to get through for the remainder of this shortened holiday trading week. Yesterday we witnessed US home prices rising for a fourth consecutive month. On a seasonally-adjusted basis, home prices rose a modest +0.3%, m/m, in Sept., and it was the smallest increase in that time period. However, non-seasonally adjusted prices have been up for five months. It’s worth noting that from April’s lows, prices have advanced +5.2%, but, from our peaks three years ago, we have plummeted -29%! The question is whether these price increases are sustainable? Most likely not, for two reasons, firstly, shadow inventories will most likely be released, resulting in contributing to inventory levels and secondly, reset of mortgages and next April’s expiration of housing incentives will naturally increase pressure on prices again.

Preliminary GDP data yesterday showed that the US economy expanded at +2.8% last quarter vs. government expectations of +2.9% and less than what the Obama administration reported last month (+3.5%). It also highlighted a smaller gain in consumer spending and a bigger trade deficit. Digging deeper, despite corporate profits advancing the most in 5-years, reduction in spending patters reinforces companies and consumer dependence on government incentive programs to drag the US economy out of this recession. More and more data continue to show the consumers unwillingness to spend, their propensity to hoard and desire to increase their saving ratio. The US economy will have to rely more on the corporate world’s willingness to open their coiffers as consumer spending, which accounts for about +70% of the economy, advanced at a +2.9% pace and opposed to the +3.2% rate expected by analysts.

The FDIC did not have too many nice things’ to say yesterday. Despite US banks posting $2.8b third quarter profits, there were 522 banks on their ‘problem’ list during that time period. That is the highest posted recording in 16-years. These ‘problem’ banks collectively had $345.9b in assets, but, the insurance fund had a negative balance of -$8.2b.

The USD$ is currently lower against the EUR +0.32%, GBP +0.83%, CHF +0.35% and JPY +0.41%. The commodity currencies are stronger this morning, CAD +0.40% and AUD +0.82%. Yesterday, the loonie declined vs. its largest trading partner and southern neighbor as crude, Canada’s largest export, and global equities fell, diminishing the appeal of any currency tied to growth. Risk aversion trading strategies remain in this holiday shortened illiquid trading week. Earlier this week, a surprisingly strong Canadian retail sale print managed to lift the loonie to this week’s high. Weaker US data yesterday and global concerns about financial balance sheets been adequately funded had investors seeking temporary shelter in the USD. However strong growth signals out of Asia has once again put the reserve currency on the back foot in this morning session. Technically, the loonie is lacking clear direction amongst the tight 3c trading range. Currently, within this range, intraday traders are been squeezed daily out of the core positions, whether it’s commodity prices pushing the loonie or risk aversion. Dealers continue to be better buyers of the CAD on USD rallies as the buck’s bear trend remains well established.

It’s on again, it’s off again! Deputy Governor Battellino at the RBA said that the Australian economy has entered a ‘new upswing’, fueling speculation that policy makers will raise interest rates for a record third time this year (+3.50%). Analysts now expect the RBA to hike rates by another 25bps next week. Over the last 12-months, the AUD has managed to appreciate just above 50% vs. the greenback as the RBA became the first Cbank to hike rates twice this year. Earlier this month, the RBA minutes implied that three straight lending rate increases may not be on the cards had futures traders unwinding some of their 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’. That question now seems to have been answered by his deputy, as once again futures traders lay their bets again. The currency remains well supported by commodity prices and expects dealers to be strong buyers on ‘deeper’ pullbacks (0.9280).

Crude is higher in the O/N session ($76.44 up +44c). What goes up must come down! Crude prices have no appetite to buck the trend. Yesterday, prices fell just under -2% because of the twin evils of a ‘larger’ inventory report expected later this morning (+1.5m barrels) and a weaker GDP growth headline print yesterday (see above). With volume and liquidity down this week due to the holidays, volatility and whip-lashed price actions will remain the order of the day. For now this asset class is firmly entrenched in its desired $7 trading range. Earlier in the week prices had been supported by heightened tensions between Iran and some Western nations, their subtle aggressive actions raised concerns of a potential supply risk. The war games have subsided somewhat and this has reduced the commodities ‘insurance premium’. Last week’s EIA and API report confirmed the weakness of the weekly inventories situation. With US crude stocks falling by more-than-expected, and the dollar trading under pressure, had the market temporarily penetrating that psychological $80 a barrel level. Repeatedly over the last few weeks the $80 handle remains a stubborn resistance point, again the market attempted and again it has failed despite US crude inventories falling by -900k barrels last week vs. market expectations of a +300k increase. Confirming their support for bullish prices, both gas and distillate stocks also fell, by -1.7m and -300k barrels respectively. However, demand destruction does not warrant elevated prices, perhaps the $80 a barrels will be the top for the remainder of this year. OPEC is expected to remain on hold in a couple of weeks because of their concerns about tipping global economies back into contraction.

No surprises, gold jumped to another record high in the O/N session as the greenback once again faltered against all its major trading partners. Thus far, the yellow metal has gained +34% this year as investors and central banks increased their holdings of the commodity to preserve wealth. Even the CBR (Central Bank of Russia) said it bought +19.5 metric tonnes last month, bringing their yearly total to +90 tonnes, and firmly establishing them as the world’s 8th largest holder of the commodity. They said that they want to hold 10% of their reserves in gold, that’s approximately 12-13 thousand tonnes or twice what they presently hold! Expect the bulls to continue to dominate all of the action and remain strong buyers on ‘any’ pull backs even if the USD finds support from risk aversion trading strategies ($1,181).

The Nikkei closed at 9,441 up +40. The DAX index in Europe was at 5,809 up +40; the FTSE (UK) currently is 5,359 up +35. The early call for the open of key US indices is higher. The US 10-year bonds ended up easing 4bp yesterday (3.32%) and are little changed in the O/N session. Yesterday’s $42b 5-year auction was once again well received and certainly had an added bid after weaker than expected fundamental US data. The bid-to-cover of 2.81 was the highest in more than two years and the yield of 2.175% was a couple of bps better than where the market was trading just prior to the auction. It is nonetheless very strong, especially given that yields are now near their lowest levels of the past year. Indirect bidders, the category that includes foreign Cbanks, took 60.9% of the auction. This is a large number. The last few auctions have been on the order of 45% – 55%, though there was a slightly stronger indirect number back in June (62.8%).US refunding numbers for this shortened holiday week (7’s $32b) will make supply the main for reason for any temporary downward movement. On deeper pull backs, the longer end of the US yield curve remains better bid as the ‘seasonal’s’ are calling for a flattening rally 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