Bye Bye USD$! Is the Fed creating a covert protectionist policy similar to that of the SNB? ……Nope?

After the Fed’s ‘out in left field’ announcement yesterday afternoon all asset class managed to do a complete u-turn, forcing analysts to rewrite their scripts after they surprised the markets in expanding the debt purchase portion of its quantitative easing policy. This aggressive approach probably suggests that policy makers believe the economy is nowhere near a bottom, hence the depth and depth of their announcement. They said ‘economic conditions are likely to warrant exceptionally low levels of the fed funds rate for an extended period’, which is an upgrade from the previous statement, where they said keeping rates low for ‘some time’. The Fed will ramp up the printing presses to ignite the economy!

The US$ is mixed in the O/N trading session. Currently it is higher against 10 of the 16 most actively traded currencies, in another ‘whippy’ trading range so far.

Forex heatmap

Wow, gentle Ben sure knows how to ignite an inactive market. Yesterday afternoons FOMC communiqué stoked all asset classes. The Fed wants to bring down borrowing costs across the economy and pledged to buy as much as $300b of treasuries and to step up its purchases of mortgage bonds ($750b). Under the TALF initiative they may broaden this program aimed at boosting consumer loans to include other assets. In effect the Fed will be committing to buying or loan against everything from corporate debt, mortgages and consumer loans to government debt. The Fed has now joined the BOE, BOJ in buying government debt as policy makers initiate other procedures to stimulate economic growth with interest rates too low to provide further stimulus. The Fed believes that it is employing strategies to stamp out the risk of deflation and remain confident that consumer prices will remain in check given ‘weak’ demand and expect inflation to ‘persist for a time’ below their preferred level. The Fed will begin purchases of securities next week and buy debt 2-3 three times per week.

Also yesterday, the US CPI advanced more than forecasted last month (+0.4% vs. +0.3%) and has gone a long way to ease concerns that inflation would fall below the Fed’s desired target level. The core-CPI (ex-food and energy) showed no change m/m (+0.2%). The usual suspects were the cause for the move higher, not surprisingly, higher energy prices (gas +8.3%, m/m) accounted for the difference between the headline and core gains. Food prices fell for the 1st-time in 3-years. The core advance was driven by higher new vehicle and apparel prices. It is still the slowest pace of growth in over 50-years, which may suggest that businesses continue to have less pricing power as consumers face falling wages and increased layoffs. However, economists continue to caution that a deeper economic slump may cause the slowdown in inflation to turn into outright ‘deflation’! Other US data released showed that the current account deficit narrowed more than forecast for the 4th Q (-$133b vs. -$181b).

The US$ currently is higher against the EUR -0.12%, GBP -0.09% and CHF -0.06 and lower against JPY +0.70. The commodity currencies are little changed this morning, CAD +0.21% and AUD -0.15%. Yesterday, Canadian wholesale sales fell for the 4th-consecutive month. It fell to its lowest level in 2-years (-4.2% vs. -3.1%), mostly on the back of plummeting auto orders for export to its largest trading partner (US accounts for +70% of all Canadian exports). Chrysler is currently studying an exit strategy from Canada if it does not win more concessions form union members. All of the above will have a big impact on the 1st Q GDP number. Initially yesterday falling commodity prices had justified speculators bear positions, earlier in yesterday’s session they sold the loonie as the USD came under severe pressure vs. the EUR. But all was aggressively reversed after the Fed’s announcement. Dismal data of late has prompted ex-Governor Dodge to disagree with both the Canadian government and current BOC chief Carney that we will experience a faster recovery. Analysts expect the BOC’s governor Carney to revise the banks economic outlook targets and perhaps adopt some extraordinary monetary policies to boost economic demand. On any further pull backs look for speculators to add to their already off-side short CAD positions, and hope that they will not be squeezed out!

Despite Asian equities gaining traction on the back of ‘certain’ banks expecting a healthier year and convincing investors to add riskier assets to their portfolios after the Fed’s announcement yesterday, the AUD$ has retreated from its 2-month highs in the O/N session. Investors remain concerned that the countries deteriorating economy may convince the RBA to lower interest rates to new record lows (0.6787). In this current environment one should expect better buying on pull backs.

Crude is higher in the O/N session ($48.94 up +80c). A two pronged attack weighed on crude prices yesterday morning, but was quickly reversed after the Fed’s surprise quantitative announcement. Initially, a higher than expected weekly EIA stock report and acknowledgment that Japanese refiners are processing less crude managed to push the commodity away from its 3-month highs. Inventories climbed +1.94m barrels to +353.3m vs. an expected increase of +1.5m. Supplies of gas and distillate fuel (heating oil and diesel) also increased. A very bearish report that had speculators continuing to sell on upticks as ‘demand destruction’ remains intact. However the only variable that has been supporting crude of late OPEC along with the IMF said also yesterday that they are concerned that lower oil prices will cut investment in new fields, thus risking a supply crunch when the global economy does turn around. According to the Saudis, developing deep-wells requires prices of least $60 a barrel. Current prices help the world economy to recover from the worst recession in 50-years, but definitely undermine new projects. Last weekend OPEC prudently refrained from cutting output any further on concerns that higher energy prices in this economic climate could worsen this global recession. In fact they probably are deferring production cuts until May whilst they implement fully the last suggested quotas back in Dec. They need to trim another -800k barrels a day to comply with the lower quotas already decided on. The Fed’s decision has single handedly reversed most ‘trains of thought’ for now.

Earlier yesterday, the long gold trade (probably the most over crowed trade currently) was once again trying to test medium support levels. Technical analysts were weary that below $875 could open up a much larger move towards $775 level. Thankfully for all ‘bull pundits’ the Fed’s decision to buy Treasury securities renewed concern that inflation would once again accelerate. Hence gold rebounded from its biggest decline in 2-months ($942).

The Nikkei closed 7,945 -26. The DAX index in Europe was at 4,055 up +59; the FTSE (UK) currently is 3,825 up +20. The early call for the open of key US indices is lower. The 10-year Treasury yields eased a whopping 47bp yesterday (2.53%), that’s the largest one day move in 47-years, and is little changed in the O/N session. The Fed surprised investors yesterday and announced that they would concentrate on the front and medium end of the FI curve by purchasing $300b in government debt to drive consumer borrowing costs lower and lift the economy from recession. 2’s/10’s spread narrowed 27bp to 175. This decision will surely satisfy Chinese Premier Wen!

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