Timmie, Say it ain’t so?

US treasuries have now become an artificially manipulated market. A major concern when most of the national debt is being held globally and not domestically. This week’s Fed announcement could be the death knell for the USD$ as ‘the’ primary reserve currency as we know it (I am sure the Europeans are not happy with an inflated EUR at the moment). Perhaps its time we gravitate towards a basket of currencies? Policy maker’s actions have now raised the stakes for ‘rabid’ inflation or ‘hyperinflation’. Bernanke seems to be turning his back on the USD$ and with this maybe the faith and patience of the rest of the world as they fight their own domestic concerns? The US administration has so far been unable to inspire confidence on its own financial crisis handling. Specifically Geithner’s handling of ‘bonus gate’; he has been a PR nightmare and is fuelling doubts about the Obama administrations’ take on this financial debacle. Confidence is everything, but the masses are beginning to turn!

The US$ is weaker in the O/N trading session. Currently it is lower against 12 of the 16 most actively traded currencies, in another ‘whippy’ trading range so far.

Forex heatmap

Yesterday, US initial jobless claims came in slightly better than expected. However, it remains above the psychological +600k threshold level for the 2nd-consecutive week (+646k) as sales deteriorate further with global weakness intensifying. More popping was the fact that continuing claims rose to a new record high of +5.473m. One could conclude that the US unemployment rate (+8.1%) may reach double-digits faster than previously expected, especially since continuing claims still underestimates the number the true number out of work. Analysts believe the partial reason for seeing claims so highs is due to the extension of UI benefits in most states hit hard by the current recession. Unfortunately the trend is your friend and it’s only going up! Other data showed that manufacturing in the Philadelphia region contracted for a 6-straight month, all this on the back of orders and employment weakening (-35 vs. -41.3). The same problem’s persists, manufactures are scaling back operations and investment’s as the domestic economy weakens.

The US$ currently is lower against the EUR +0.32%, GBP +0.44%, CHF +0.48 JPY +0.30. The commodity currencies are stronger this morning, CAD +0.32% and AUD +0.85%. The loonie is caught within a 300 point trading range, 1.2200-1.2500. The currency has soared over the last 2-trading sessions as the USD$ has plummeted vs. its biggest trading partners. There is no fundamental reason why the currency should be stronger, on a cross related basis its very much underperforming, but, speculators are certainly getting whiplashed from this volatile market. Again yesterday the currency benefited from a stronger than expected inflation report, where we witnessed a CPI headline of +0.7% vs. -0.3% m/m. The less risk of deflation will weigh against Governor Carney considering quantitative easing measures directly. Robust commodity prices have certainly given the currency a temporary leg up. 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 again……..

The AUD remains buoyant this morning and heading for a 3rd weekly gain, on the back of global commodities surging and the greenback sliding on concerns that the Fed’s plan to keep yields low will only weaken their currency further. However, investors remain concerned that the countries deteriorating economy may convince the RBA to lower interest rates to new record lows (0.6916). In this current environment one should expect better buying on pull backs.

Crude is lower in the O/N session ($51.35 down -26c). Investors, so it seems have become more optimistic about the outlook for the US economy after the Fed’s quantitative announcements on Wednesday. This has given crude the desired support that will appease OPEC somewhat. With the greenback weakening significantly vs. all its major trading partners and if oil holds its value in terms of other currencies, by default that would imply a higher price for the commodity in the short term. So, its not just OPEC’s support that’s pushing crude higher, if the US$ continues to fall and global equity markets continues to rally, oil could go much higher and print $55, the level that technical analysts expected to see if OPEC implemented further cuts at last weeks Vienna meeting. All this despite a bearish EIA weekly report, 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 initially selling on upticks as ‘demand destruction’ remains intact. US demand dropped -0.6% last week to +18.8m barrels a day, while total daily fuel demand over the past month was + 19.1m, down -3.2% from a year ago. However the only variable that has been supporting crude of late OPEC along with the IMF also said this week 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. The $1.5 trillion Fed decision to buy bonds and mortgage securities has renewed concerns that inflation would once again accelerate. This has been the impetus for the ‘yellow metal’ to rebound to these lofty heights from its biggest decline in 2-months earlier this week ($963).

The Nikkei closed 7,945 -26. The DAX index in Europe was at 4,027 down -16; the FTSE (UK) currently is 3,803 down -13. The early call for the open of key US indices is lower. The 10-year Treasury yields eased 2bp yesterday (2.55%) and are little changed in the O/N session. The Fed announcement already this week has put an artificial cap on FI yields. Psychologically the ceiling for 10-year product will be around 3% for some time to come. Policy makers are now determined that yields will not rise given the current economic environment. Technically they are artificially manipulating the FI market and speculators will remain better buyers on pull backs.

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