No action just words from Helicopter Ben

The show must go on. Helicopter Ben’s speech has given the dollar an unfair handicap over it major rivals. The race to depreciate your own currency the lowest is underway. The SNB had the inside track for most of this year, but, alas has and continues to stumble. The BOJ certainly had aspiration last week and for a moment looked like a good bet amongst the punters, but in the end their efforts have had little affect. They will be back. No actions just words and the market squeezes weak dollar longs out of their positions as the continue to try to establish a top or dollar bottom. Momentum is pushing the higher yielding currencies towards parity while the cross have a ways to catch up. The market is taking dead aim in wanting to push Ben’s currency much lower. Good Luck.

The US$ is mixed in the O/N trading session. Currently it is lower against 13 of the 16 most actively traded currencies in a ‘volatile’ trading range.

Forex heatmap

Yesterday’s US housing data certainly surprised to the upside (+0.6m vs. +0.55m) and provided albeit brief support for the dollar. Builders broke ground on +598k houses at a annual rate of +10.5% and the most in four months. Not to be outdone, building permits, a proxy of future activity managed also to rise from it record lows (+0.57m vs. +0.56m). Investors are beginning to believe that the housing market may have found its bottom and currently is dredging along it. A plus factor has been mortgage rates piggy-backing their record lows. The degree of sustainability is giving developers the confidence to build after the expiration of a government tax credit caused sales to plunge. Similar to most of the US sectors, housing expansion is dependent on ‘a drop in the unemployment rate’.

The only thing that the market could have been assured of yesterday from the Fed was that there was ‘no rate change’. However, inline with market consensus, no additional QE was introduced. There were some subtle changes to the communique that was delivered a number of weeks ago. The assessment for growth has not changed. Policy makers acknowledged that business spending is not as dynamic as in the first half of the year. On a brighter note, bank lending seems to be contracting at a reduced pace to the Aug. release. However, the assessment for inflation has changed considerably. The statement clearly highlights that ‘measures of underlying inflation are currently at levels somewhat below those the Committee judges most consistent, over the longer run, with its mandate to promote maximum employment and price stability’. This is strong proof that the Fed will not move rates until inflationary pressures remain so low. ‘With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to remain subdued for some time before rising to levels the Committee considers consistent with its mandate’. The final paragraph was more dovish than expected, Helicopter Ben states that not only will they continue to monitor, but also are ‘ prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate’. The Fed is clearing the decks for further stimulus soon, especially if further disinflationary pressures develop!

The USD$ is lower against the EUR +0.72%, CHF +0.49%, GBP +41% and JPY +0.59%. The commodity currencies are stronger, CAD +0.48% and AUD +0.07%. Canadian data yesterday showed that the cost of living in Canada unexpectedly fell last month (-0.1% and +1.7%, y/y). Similarly, core-inflation was unchanged at +1.6% in Aug. from a year ago. The released data did little to phase the currency’s value. The loonie again became well sought after the Fed’s statement. Policy makers are willing to ease monetary policy some more to boost the economy, this by default will spur demand for assets that benefit from global growth. That equate to cheaper money, growth presumably and riskier commodity driven currencies being in demand. Speculators continue to covet higher yielding growth currencies like the CAD and AUD. US/CAD spreads are dominating the directional play of North American currencies. Month-to-date, spread trades have been the most fundamentally, macro-financial driven reason to want to own the loonie vs. its southern neighbor. A wider spread ‘reflects the improved monetary policy sentiment for Canada’ and is supportive for the currency. The loonie is receiving ‘three-prong’ support, a less dovish BOC, a currency being used as a proxy for growth and to a lesser extent a safer heaven investment. A higher percentage of speculators seem to have missed most of last weeks ‘move’, the market should expect to witness better buying of Canadian dollars on ‘big dollar’ rallies in the short term. It seems that parity is again back on the table.

Over the last quarter the AUD has been the best performing major currency. Various technical analysts now believe it is perhaps the most overvalued. Last night the currency advanced to a two-year high on the belief that the RBA would raise rates while the Fed eases monetary policy further, thus increasing the yield advantage. There is a strong difference in monetary policy stance between Australia and the US and it should provide stronger support for the Aussie. Since June, the AUD has rallied +13% vs. the ‘big dollar’, benefiting from its unilateral trade links with the Chinese economy. China is Australia’s largest trade partner. Not helping the currency will be the forming of a minority government. PM Gillard won the backing of key independent lawmakers this month, allowing her Labor Party to retain government and pursue a ‘tax on mining companies’. Technically, ‘the fiscal outlook looks worse under a minority government and management of an economy growing at +10% in nominal-terms may increasingly rest on the RBA’. The problem, a proposed tax on mining companies will dampen demand for the nation’s assets. If we happen to witness global economic growth decelerating, then we could have the reallocation of funds back out of growth currencies just as quickly as it came in. The AUD has gained ground against all of its major trading partners as the ‘vix index’ of volatility softens, boosting investor appetite for assets tied to growth. ‘Clearly what happens in the Australian economy is now more dependent upon what happens in China’. Analysts believe that the market is somewhat underestimating the number of chances of further tightening by the RBA over the next 6-12 months (0.9560).

Crude is higher in the O/N session ($75.13 +16c). Crude prices are finding it difficult to rally on the lack of market data. Investors require confirmation that the US economy is picking up otherwise prices will become well contained within a $5 trading range. Crude happened to pare some of the previous day’s +1.6% rally yesterday on the back of a surprising no-change to the Builder confidence index (13). Fundamentally, oil continues to look at stocks as a proxy for growth. The ‘black-stuff’ is expected to gyrate north and south of the psychological $75 print until there is a sign that the market is picking up, or that ‘the uncertainty and depressed conditions both here and within the Euro-zone spread’. The neutral weekly EIA report last week was very much inline with Capital Markets expectations. The headline print showed that oil inventories fell -2.5m barrels vs. a market expectation of -2.6m. Stockpiles of gas declined -700k barrels vs. a market prediction of a -400k loss, and inventories of distillates (diesel and heating oil) decreased -300k vs. expectations of an -800k retreat. At +357.4m barrels, US crude inventories remain above the upper limit of the average range for this time of year. Crude imports rose +141k barrels to +8.99m bpd and this despite an outage by Enbridge, who provides a pipeline which brings crude directly to the US from Canada. Refinery utilization slipped -0.6% to +87.6% of capacity. The market is wary that the underlying situation has not changed, the overall fundamentals remain weak and stockpiles of crude and products remain close to their record highs. Analysts expect speculators to remain better sellers on up-ticks in the short term.

Gold continues to fluctuate within the record high territory achieved this morning as a weaker dollar and concern about the sustainable growth of the US economy has investors seeking protection in an asset with a ‘store of value’. Any mentioning of projects to keep the currency low will provide stronger support for the commodity. Year-to-date, the yellow metal has appreciated +18.7%, outperforming most of the other asset classes, as global sovereign-debt concerns and an ‘uneven economic recovery roil financial markets’. With the dollar currently trading at new lows vs. the EUR is also aiding commodity prices. Metals are heading for their 10th consecutive annual gain. Global ‘fear’ has the momentum, again, to push speculators back into this overcrowded, one-directional commodity trade. With the Fed on the verge of announcing further QE programs ‘tend to be supportive of asset prices and is fueling concerns about the potential longer-term inflationary impact of such measures’. The opportunity costs of holding gold are low due to falling interest rates, by default, the market should expect better buying of the metal on pull backs ($1,291 +$17.60c).

The Nikkei closed at 9,566 down -36. The DAX index in Europe was at 6,218 up -37; the FTSE (UK) currently is 5,538 -57. The early call for the open of key US indices is lower. The US 10-year eased 13bp yesterday (2.57%) and another 4bp in the O/N session (2.54%). Yields have tumbled across the curve especially in the short end. Two-year product managed to print record low return this morning after the Fed’s statement yesterday. Helicopter Ben is willing to ease monetary policy to try to boost the US economy and employment. The has curve flattened to its narrowest point in two-weeks (+213bp). Further risk of economic relapse is providing the bid for the debt. It’s back to the drawing board for innovative trading strategies. Until there is significant changes in the economic outlook, investors will expect Treasuries to trade within a tight range.

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