Open Season to sell the buck and love that EUR

Finally, we will be getting to ride the ‘real’ QE2 wave. The gem from yesterday’s FOMC minutes is the sentence ‘targeting a path for the price level rather than the rate of inflation’. It seems that a particular level of inflation is not good enough for helicopter Ben. This would require pushing the inflation rate above the long-term desired inflation rate whenever there was an ‘undershoot’. The net effect would have a continuous debasement of the real value of money. With Ben persuading his policy makers to publicly announce their intention to ‘debase’ it’s open season to sell the dollar as ‘targeting specific price-levels is more bearish for the greenback than desired inflation levels’. It seems medium term EUR records are to be broken, and supports the currency wars ‘in vogue’ branding.

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 ‘volatile’ trading range.

Forex heatmap

The FOMC minutes came and went with the market back to debasing the dollar. There were a few little gems appearing in the communique yesterday. It seems that the market focused on the unity call, honing in on the ‘many participants’ copy. ‘Many participants noted that if economic growth remained too slow to make satisfactory progress toward reducing the unemployment rate or if inflation continued to come in below levels consistent with the FOMC’s dual mandate, it would be appropriate to provide additional monetary policy accommodation’. Thus far, Capital markets has been correct in assuming the Fed will soon be monetizing more debt. ‘Meeting participants discussed several possible approaches to providing additional accommodation but focused primarily on further purchases of longer-term Treasury securities and on possible steps to affect inflation expectations’. It seems that the Fed wants to boost inflation expectations to lower real short term interest rates. ‘Participants noted a number of possible strategies for affecting short-term inflation expectations, including providing more detailed information about the rates of inflation’. The gem of the copy can be found in the aggressive language of ‘targeting a path for the price level rather than the rate of inflation’.

The USD$ is lower against the EUR +0.48%, GBP +0.41%, CHF +0.05% and higher against JPY -0.18%. The commodity currencies are stronger this morning, CAD +0.29% and AUD +0.22%. Not to be left behind, the loonie appreciated after the FOMC minutes showed that they have moved closer to further monetary easing. The CAD is making an assault on its five-month high on speculation that ‘stepped-up quantitative easing by the Fed will debase their own dollar’. Year-to-date, the CAD has appreciated +4% vs. its largest trading partner south of the border. Traders and investors are trimming their bets that the BOC will increase interest rates again next week. Recent data like the softer jobs report and declines in housing starts is probably making Governor Carneys decision easier. The Dec. Bax’s contracts have come under pressure since the headline employment report last week (-6.6k vs. +10.2k). Some optimists would argue that the details were more encouraging than the ‘headline drop’. Full-time jobs rose by +37.1k, while the destruction of -43.7k part-time jobs managed to keep the headline in the red. The conversion of part-time to full-time jobs is a mild positive, as it expands hours worked, and they tend to be better paying and more stable. The demise of the greenback had the CAD threatening parity earlier last week as commodity prices provided a bullish backdrop for the currency. That being said, interest rate differentials are not the primary reason for wanting to own the currency. The ongoing threat of QE2 continues to gives all major currencies a leg up on the ‘historical reserve currency’. Expect Carney to have the final say next week as the currency continues to lag the other major’s appreciation vs. the buck.

The AUD is near its record highs as regional bourses see black and commodity prices rise. A rebound in Australian consumer confidence (+3.3% vs. -5%) and an unexpected increase in Japanese machinery orders (+10.1% vs. -3.7%) has boosted optimism in the region’s economy. The recovery in risk sentiment, which was also seen in declines in the VIX (volatility) index, will support currencies tied to growth, such as the Aussie and CAD. A stronger employment report down-under earlier this month is also supporting the currency to print new highs vs. the greenback. Australia’s employers added +49.5k workers and the unemployment rate held at +5.1% in Sept. Month-to-date, the AUD has climbed +8% vs. the buck as data fueled bets that the RBA will raise interest rates before the year ends. Futures traders now see a 42% chance that the RBA will increase its target rate next month, down from 66% last week. Investors are better buyers on deeper pullbacks as the interest rate differential continues to be of appeal for alternative investments (0.9892).

Crude is higher in the O/N session ($82.57 +90c). Crude dropped for a second day yesterday after some OPEC member states signaled that they may leave production targets unchanged at tomorrow’s OPEC meeting and that the group is lowering their forecast for demand for product. They believe that the market is ‘very well-balanced’ and that prices between $70 and $80 a barrel are ‘ideal’. With the commodity trading at the top of OPEC’s range has investors wanting to push prices lower. However, the dollars demise by default is pushing commodity prices higher. Last week’s inventory report was mixed, a little bearish for oil and bullish for the products, that said, the focus remains on pending QE strategies been implemented by different governments. Crude supplies climbed +3.09m barrels to +360.9m, leaving stockpiles +13% higher than the five-year average. Analysts had expected weekly inventories to rise by +413k barrels. In contrast, gas stockpiles fell -2.65m barrels to +219.9m. Supplies of distillate fuel (heating oil and diesel) slipped -1.12m barrels to +172.5m. Refiners reduced their operating rates by -2.7% to 83.1%. It seems that the drop in refinery runs has probably caused the drop in fuel supplies. Also of note was the drop in fuel consumption, falling -6.4% to +18.5m barrels a day (the biggest weekly decline in nearly seven years). Gas demand also fell -4.2% to +8.99m barrels a day. Until the report, higher inventory supplies had been the biggest inhibitor for a market advance over the past quarter. The market remains wary that the underlying fundamentals have not changed, but the dollar value continues to dictate the direction of commodity prices.

Despite everything, gold is a commodity in demand. Yesterday, metal prices fell for the first time in three days as the dollar tentatively rallied curbing the appeal of commodities as an alternative investment. The whole move was reversed and then some in early morning trading in Europe. With market confidence wavering in currency prices, and with free money, it’s making commodities attractive on ‘deeper’ pull backs. Any time that governments are in the business of printing money then the commodity is bound to do well. To date, gold has outperformed global equities and treasuries (+24%), prompting record investment in gold-backed exchange-traded products. A concern about the strength of the dollar coupled with the sustainable growth issues of the US economy has had investors seeking protection in an asset with a ‘store of value’. With the Fed on the verge of implementing further QE programs ‘tend to be supportive of asset prices and is fueling concerns about the potential longer-term inflationary affect 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 again ($1,358 +$12).

The Nikkei closed at 9,403 up +15. The DAX index in Europe was at 6,391 up +86; the FTSE (UK) currently is 5,727 +66. The early call for the open of key US indices is higher. The US 10-year backed up 8bp yesterday (2.44%) and is little changed in the O/N session. A weaker than expected 3-year auction on Tuesday coupled with the uncertainty about how much QE2 easing is priced in the market continues to weigh on the US curve. The US treasury gets to auction $66b’s worth of product this week. The indirect bid for the 3’s yesterday fell to +29%, compared to the +42% average over the past four-auctions. The direct bid was +12% vs. the +14.5% average. The notes drew a record-low yield of +0.569%. The weak demand is also weighing on the 10’s and bonds that are also on offer this week. Until now, the market had been aggressive in pricing in the ‘future’ buying by the Fed. This months rally seems to have overshot the upside in the short term. With more product this week one can expect the US curve to edge a tad higher.

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