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Bernanke ‘stood and delivered’ Trichet and King your next

One down and two to go this morning! Bernanke and Co. have done ‘the right thing’ by wanting to keep rates low for ‘an extended period of time’. Initial reaction was utopia had arrived for Capital Markets, as individuals piled on the riskier strategies again, pushing equities higher and ‘reserve’ currency’ lower! Then the news that the House of Rep. would bring forward the limiting of credit card charges ‘burst the bubble’. The action will dent financials bottom line and it was these stocks that have driven global bourses into the red this morning. ECB and BOE are within hours of their decisions, conservative Trichet seems to be leaning towards the hawkish camp while Governor King may have to loosen his belt another notch!

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

Forex heatmap

Yesterday, consensus did not get what they wanted, an ADP report with a headline print below -200k. In fact, private sector jobs fell in the US a further -203k, in line with the revised average forecast for this Friday’s NFP of -200k. Year-to-date, 7m private sector jobs have been eliminated and most analysts expect this trend to continue in the short term as economic growth remains sluggish, while government stimulus has been pared back aggressively. Digging deeper, the goods-producing sector accounted for -58% of the decline in Oct. and the manufacturing sector experienced a loss of -65k jobs. Small and medium-sized businesses continued to account for the largest portion of the decline, with each sector losing -75k, while large businesses pared -53k workers. On the flip side what about Monday’s the surprisingly strong employment component in the ISM report? The ISM index does indeed point to upside risk to the headline print this Friday, as do two of the three regional manufacturing surveys (Philly Fed and Empire State). Similar to yesterday’s reports, other indicators point to a softer reading. For instance, the Chicago NAPM employment index is holding at low levels (38.3), the number of people receiving unemployment insurance benefits was unchanged but historically high and consumers’ perceptions of the labor market has deteriorated. Perhaps it’s no wonder that the contrarian remains in the minority for tomorrow numbers!

More incentives not less is required to get the US economy off its knees according to yesterday’s surprisingly sluggish growth reading from the ISM non-manufacturing composite (50.6 vs. 50.9, m/m). The headline print suggests that the service sector neither expanded nor contracted last month, in stark contrast to Monday’s ISM manufacturing report (55.7 vs. 52.6). Digging deeper, business activity and new-orders continued to improve to 55.2 and 55.6 respectively, however, it’s worth noting that most of the growth in new-orders came from foreign demand (not a strong dollar policy initiative!). While new export orders surged to 53.5, both employment (41.1-lowest level in 8-weeks) and inventories deteriorating offset any strength. Now, if you combined this weeks manufacturing and non-manufacturing indexes, then we remain at the same level as Sept. Can we ask for more money please!

It was a unanimous decision from the FOMC meeting yesterday. It’s obvious that the US recovery is ‘not’ strong enough for Bernanke and Co. to withdraw some of the $1t+ that they have pumped into the US economy to avert a ‘depression’. Even with US GDP rising this quarter (3.5%), indicators are pointing to a weaker NFP tomorrow, thus handcuffing policy maker’s hands! Until we see some positives with the employment data they have to ‘stay the course’. They also indicated that inflation will remain subdued for some time. In translation, what the Fed is saying is that the US economy remains in recovery, the outlook is improved, but ‘we are not ready to give the all clear’.

The USD$ is currently higher against the EUR -0.31%, GBP -0.32%, CHF -0.31% and lower against JPY +0.53%. The commodity currencies are weaker this morning, CAD -0.32% and AUD -0.57%. Enough said, BOC Deputy Governor John Murray reiterated Governor Carney’s conditional pledge to keep O/N lending rate at a record +0.25% through to June 2010, that assuming there are no issues with inflation. The Fed statement opens up the door for most currency to trade higher against their US counterpart. The market should experience a rebound in risk appetite which tends to help commodities and their currency pairings. Year-to-date the currency is up +15% after falling -18% vs. its southern trading partner last year. Tomorrow we also have Canadian employment numbers and surprises have been the norm over the past two announcements. Weaker Canadian data of late may be stronger evidence that the Canadian economy is not following its southern neighbor directly out of this recession, however, expect global lack of appetite for the greenback to favor speculators owning the loonie. Soon it will be time again to test BOC governor Carney’s resolve. To date, the BOC has declared that they would use a combination of currency intervention, credit and quantitative easing options to influence the loonie and meet their 2% inflation target. On a technical level we are coming very close to where their first talked the currency down last month. They believe that a strong currency is detrimental to economic growth. Will they get to use any of these methods? Yes. Dealers want to see better levels to own their own currency. Let’s see what the BOE and ECB have to say for themselves this morning!

The AUD has had a whiplash session ahead and after the Fed announcement. Earlier Australian retail sales for Sept. unexpectedly fell (-0.2% vs. +0.5%). Analysts believe that weaker household spending gives the RBA latitude to keep the O/N rate unchanged in Dec. after raising it earlier in the week for a second straight month. Governor Stevens’s hiked rates 25bp to 3.50% as expected, but said that it was ‘prudent to lessen gradually’. The wording ‘gradually’ has prompted traders to pare bets that there will be a rate increase in Dec. The futures market is now only pricing in a 50% chance of a hike! The currency is well supported by commodity prices and by investor’s appetite for risk for a higher yielding currency. Expect dealers to remain better buyers on pullbacks (0.9072).

Crude is lower in the O/N session ($79.91 down -49c). Yesterday, crude prices extended the previous session’s gain after the weekly EIA report showed a surprise decline in US crude stocks. Crude inventories fell -4m barrels last week vs. expectations that stocks were to rise by +1.4m barrels. It was a bullish report across the board because no one seems to want ‘excess supply on hand’ and not because of a ‘tightening market’. Imports of crude fell -764k barrels, or -8.6%, to +8.13m barrels a day (the lowest level in 3-months). Refineries surprisingly are operating at +80.6% of capacity, down -1.2% from the previous week and the lowest rate in 6-months. Fundamentally, analysts point out if it were not for the drop in refinery runs, the weekly figures would have been considerably more bearish. A similar story for gas, where gas inventories fell -287k barrels to +208.3m, w/w, vs. an expected increase of +400k barrels. A tad better news from distillates (includes heating oil and diesel), stocks fell -378k barrels to +167.4m. The market had been expecting a decline of around -1m barrels. Bear in mind one week does not make a trend! However, the softness of the greenback continues to support commodities. Expect OPEC once again to enter the fray and perhaps talk down crude by commenting on the sustainability of the ‘fragile global economy’. If the USD finds any momentum ahead of NFP tomorrow then expect speculators to sell the commodity on upticks!

Gold futures hit new record highs yesterday and are encroaching on $1,100 an ounce, as a questionable greenback continues to support the ‘yellow metals’ appeal as a hedge against currency depreciation. Earlier this week the IMF declared that they have been selling to the reserve Bank of India gold bullion, 200 metric tons or $6.7b of the yellow metal. Cbanks are toying with the idea that ‘the commodity is a safe store of value compared to the dollar’ and a better bet for upside potential. Year-to-date, gold has climbed +24% ($1,095), while speculators continue to be better buyers on pull backs!

The Nikkei closed at 9,717 down -125. The DAX index in Europe was at 5,416 down -27; the FTSE (UK) currently is 5,070 down -37. The early call for the open of key US indices is lower. The US 10-year bonds backed up 4bp yesterday (3.51%) and are little changed in the O/N session. Treasuries fell for a 3rd consecutive day after Fed stated that they are more ‘optimistic about the economic outlook’. Technically, Bernanke and Co. is trying ‘to forewarn and set up the market to prepare them for the inevitable’. Perhaps tomorrow’s data will indicate otherwise? Next week, the US treasury plans to sell a record $81b in its quarterly auctions of long-term debt and replaced its inflation-protected 20-year bond (TIPS) with a reintroduction of the 30-year security. They will issue $40b 3-year notes on Nov. 9, $25b 10’s on the 10th and $16b 30-year bonds on Nov. 12th. Yesterday’s sentiments were a good enough reason to make room for them!

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 [5]

Vice-President of Market Analysis at MarketPulse [6]
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
Dean Popplewell

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