Bernanke stick to deflation, dollar problem is Geithner’s

It’s no wonder that Bernanke fears for the unemployment rate next year. Another million job losses will mean a total of ‘zero’ employees have been added to NFP in over the last decade. Another bleak way of looking at it, only one million jobs ‘have’ been created in the largest expansion period in the US since the depression! Bernanke may be concerned about ailing USD, but aiding it, that Geithner’s job. Yesterday, the greenback found a bit of life surging higher after ECB president Trichet seconded helicopter Ben’s support for a strong buck. Watching prices this morning, their rhetoric provided a classic blip in the greenback’s downwards trend.

The US$ is weaker in the O/N trading session. Currently it is lower against 11 of the 16 most actively traded currencies in a ‘whippy’ trading range.

Forex heatmap

Bernanke forget the dollar strength or lack of it and get a grip on deflation. Is that not supposed to be your forte? Yesterday’s US data goes a long way supporting the theory that inflation will remain subdued for some time yet. The PPI report has given renewed confidence to FI investors wanting longer term product as the headline print came in at +0.3% vs. consensus expectations of +0.5%. Even more disappointing was the core number (ex-food and energy), it managed to produce the steepest decline in over 16-years (-0.6% vs. -0.1%), emphasizing the absence of company level pricing power. Digging deeper one notices that consumer goods rose +0.6%, m/m. Most of this gain may be attributed to gas and residential electricity prices which rose +1.9% and +0.9% respectively. However diluting some of the strength was a decline in prescriptions and auto prices. Almost a quarter of the index is made up of Capital Equipment and its prices declined -0.7%. Another sub-category is intermediary goods whose headline print advanced +0.3, while core prices declined -0.2% suggesting weak pipeline pressures from the intermediate phase. Crude goods jumped +5.4% last month, the largest monthly gain in 18-months on higher food and energy prices. Bernanke this week indicated that inflation seemed likely to remain subdued for some time. But the Fed’s sustained low interest policy may lead to three ‘real risks scenarios’. Firstly, the Fed is creating bubbles, secondly, they are encouraging moral hazards and finally, their policies are undermining the dollar. However reports last this has Bernanke and his policy makers handcuffed!

It seems that the auto industry has had its peak production effect in the 3rd Q, as US Oct. industrial production grew less than expected and the Sep. report was revised downward, creating an even larger miss (+0.1% vs. +0.6%). US vehicle production was up +74% by Sept. from the June lows, but managed to slip in Oct. on the back of fewer incentives, solidifying perhaps that auto production may have actually peaked. Utilities and machinery production accounted for all of the modest increase, as auto production fell -1.7% after 3-months of strong gains (+8.1% in Sept., +6.3% in Aug. and +19.7% in July). Computer and electronics production was down -0.3%, while mining eased -0.2% also after 3-months of gains. Capacity utilization came in weaker than expected at +70.7% vs. +70.9%, however, it’s still is the highest level in 9-months.

Net foreign inflows accelerated in Sep. with net foreign purchases of US long term securities rising +$40.7b (TICS). Market expectation was looking for something around the +$30b mark yesterday. The inflows for Aug. was revised higher to +$34.2b vs. +$26.8b. For the year, that’s an aggregate total of only +$216.2b vs. the +$500b inflow for the first 9-months of last year. Who is going to want next year’s product?

The USD$ is currently higher against the EUR +0.36%, GBP +0.04%, CHF +0.33% and lower against the JPY +0.18%. The commodity currencies are stronger this morning, CAD +0.07% and AUD +0.11%. Initially the loonie lost support yesterday for various reasons. Firstly, Trichet was able to talk up the USD and with that most G7 currencies managed to pare some of this weeks gain vs. the world’s reserve currency. With investors losing some of their risk appetite dragged the loonie to a new week low print as they liquidated various high-yield asset strategies. Technically, the currency is trading in a defined 3c-range of 1.04 to 1.07. On the downside the market awaits for BOC next move. The market wants to test his intervention and quantitative policies, the policies that the BOC believes need to be implemented to aid the currency from appreciating too fast that it may have longer term effect on Canadian economic growth. Currently, within this tight range, intraday traders are been squeezed daily out of the core positions, whether it’s commodity prices pushing the loonie or risk aversion. This morning we get Canadian CPI data and weekly oil inventories. The BOC is on hold until mid-of next year, so I guess we rely on crude inventories for conviction in our direction!

Within sight of the 15-month highs was too lofty a perch for the AUD this week. Already this week the AUD has managed to pare some of this week’s gains after the RBA minutes implied that three straight lending rate increases may not be on the cards. After appreciating close to +4% vs. the buck this month, futures traders hastily unwound some bets that Governor Stevens would tighten monetary policy again in two-weeks. He said that the pace of further rate increases ‘remained an open question’. However, bigger picture, the currency is well supported by commodity prices and expects dealers to remain better buyers on ‘deeper’ pullbacks (0.9315).

Crude is higher in the O/N session ($79.90 up +75c). For most of yesterday, Crude prices were little changed yesterday despite the ‘buck’ finding traction. However by days end The API revealed that crude inventories fell by -4.37m barrels last week to +333.1m on the back of disrupting hurricanes. Will the market takes its cue from the API or from this mornings EIA release? Market consensus has this morning’s inventory report expected to reveal an increase in stocks. With the lack of commodity fundamentals, capital markets have relied on the world’s reserve currency direction for guidance. Last week’s EIA report was bearish for prices. Initially, prices fell after the surprisingly larger than expected gain in inventory levels, as refinery operating rates dropped to their lowest level in 12-months. Crude stocks rose +1.76m barrels to +337.7m vs. an expected market gain of only +1m barrels. With refiners not able to drawn down excess inventories is strong evidence that demand destructions does remain. Refineries operated at +79.9% of capacity, down -0.7% w/w, vs. an expected gain of +0.2%. It’s worth noting that imports actually increased by +6.5% to + 8.66m barrels. Not to be out done gas inventories also managed to advance by an aggressive +2.5m barrels. Due to softer fundamentals this month, technically the market has once again aggressively got ahead of itself. To date over the past 2-months the market has been wishy-washy within a $7 range with very little follow through above the $80 a barrel level. All this despite the IEA earlier this week declaring that global oil demand will grow in the 4th Q for the first time in over a year. Both OPEC and the EIA expectations are a tad weaker!

Gold pared some of its record advance yesterday on the back of renewed USD strength. Year-to-date the yellow metal has managed to appreciate +29%, aided by record low interest rates and quantitative easy policies of CBankers who have managed to depress the greenback and by default promote the yellow metal as an alternative investment. In the O/N session, the USD has retreated and investors have once again coveted the commodity, pushing it to yet another record print. Expect the Bulls to continue to dominate all of the action and remain strong buyers on deeper pull backs ($1,147).

The Nikkei closed at 9,676 down -53. The DAX index in Europe was at 5,806 up +28; the FTSE (UK) currently is 5,355 up +10. The early call for the open of key US indices is higher. The US 10-year bonds eased 2bp yesterday (3.33%) and are little changed in the O/N session. The longer end of the US yield curve remains better bid for two reasons, firstly, the Fed will remain on hold and keep rates low for a considerable length of time (US retail sales yesterday also disappointed) and secondly, there is a natural demand for US product. Analysts believe that ‘seasonal’s’ are calling for a flattening rally from here (357 spread 2’s -30’s). In reality, the market will not want to be a contrarian ahead of ‘month end index extension’.

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