With Bernanke engaged with Humphrey-Hawkins, EUR’s direction dictated by Greece

Ok, the market was shocked. Despite telegraphing the discount rate move in last weeks minutes, Capital markets found it difficult to deal with Bernanke’s’ timing of delivery. This week ‘the sober assessment begins’. Bernanke will deliver his semi-annual report on the economy and interest rates to House and Senate panels on Wednesday and Thursday. It’s here that he will want to assure congress that the Fed is ‘mindful of the lack of job growth and that any increase in the benchmark is not imminent after their decisions to raise the cost of direct loans to the banks’. Last week’s lower than expected CPI has taken away any immediate danger. With these slow days, our thoughts will turn back to mainland Europe for direction.

The US$ is stronger in the O/N trading session. Currently it is higher against 15 of the 16 most actively traded currencies in a ‘subdued’ trading range.

Forex heatmap

With nothing to hang our hat onto today, the market will be looking for any excuse to get involved. The Australasian bourses have had a healthy start to the new week. The Nikkei is up +2.7% and the Hang Seng is up +2.6%. Do not be surprised to see this newfound optimism will trigger further profit taking in FX-land. Not much has changed on the position front as aggregate ‘long’ dollar positions remain close to record highs (including dollar index positions, it’s believed that the market is long +$13b vs. the G7 currencies). Past weekend there were German rumblings about an aid package to Greece, but it has been since denied. On the face of it, the market is taking the Greek situation in its stride. We know that we are a long ways from conclusion, however the market is coping, it’s in ‘corrective’ mode with the EUR slowly grabbing a toe-hole and wanting to push itself higher in the short term. The quiet markets are always the most dangerous!

The USD$ is currently is higher against the EUR -0.25%, GBP -0.05%, CHF -0.19% and JPY -0.06%. The commodity currencies are weaker this morning, CAD -0.11% and AUD -0.21%. On Friday, the loonie marched to a new 4-month high as the price of oil remained firm. All month commodity prices have tentatively supported the currency. With Dec. Canadian retail sales rising (+0.4%) and the leading indicator supporting the economy’s improved outlook (+0.9%), has given credence to the BOC view that consumers are recovering from the country’s first recession in 18-years. Governor Carney has pledged to keep O/N lending rates at a record low (+0.25%) through June this year, unless the country’s inflation outlook shifts. Last week’s TIC data showed foreigners buying +$104b’s worth of Canadian securities last year (double the previous record).Their appetite for Canadian securities has certainly influenced the currencies value over the past 12-months.Year-to-date, it is the fourth best currency vs. its southern neighbor. On a cross related basis it has outperformed most of its major trading partners. Whether it’s an increased risk appetite or acting as a surety currency, the loonie by default has remained well sought after. Technical analysts expect to see consolidation at these elevated prices until capital markets get to witness a strong transparent message from the EU on the woes of sovereign debt. Governor Carney will be patient and absorb how ‘his’ currency reacts to the hawkish Fed movement last week.

The AUD held near its strongest levels in 3-weeks vs. the greenback and in almost 25- year high vs. Sterling on speculation that the countries interest rate will remain above those of its counterparts. Earlier last week, the AUD rallied to its strongest monthly print after the RBA said that further ‘increases to the benchmark interest rate are likely if the economy improves’ (3.75%). Futures traders continue to bet that the RBA will hike rates early Mar. and all this before Bernanke’s semi-annual testimony this week. The currency declines have been tempered by Governor Stevens’ remarks that the Australia’s benchmark rate was below normal. He said borrowing costs for ‘businesses and households were still about 50 and 100 basis points below average’. The rhetoric looks like its giving the green light to Capital Markets to expect another hike. So far, the futures market is pricing in a 44% chance of a hike during the Mar. meeting. On pull backs, expect better buying of the currency (0.8990).

Crude is higher in the O/N session ($79.90 up +72c). Technical analysts are salivating as the recent upward trend has chartists plotting another move higher for crude after last week’s bullish closing price. Crude managed to hold their earlier gains, printing a five-week high, after the Fed’s discount-rate increase signaled an extended economic recovery. Mind you, a strike at a French refinery has also cut global fuel output, again supporting this upward move. A weaker dollar and global equities crawling higher is increasing the appeal of raw materials as an alternative investment. Last weeks EIA inventory data also supported prices. It showed that distillate stocks fell more than anticipated. Distillate stocks, diesel and heating oil, fell -2.94m vs. a market expectation of only -1.5m barrel drawdown. The gains were somewhat tempered by the crude print climbing +3.1m barrels, much more than the +1.8m barrels that had been expected. A build in gas stocks of +1.62m barrels was in line with market expectations. Refinery utilization rates grinded higher on the week, up +0.7% to +79.1% of capacity. For market direction, we are now depending on equities and investors ‘on’ again ‘off’ again risk appetite. With the dollar reigning supreme this quarter, commodities may find it difficult to maintain this momentum.

Last week, speculators happily booked profits accumulated during this months gold rally. The big picture concerns about deepening EU deficits becoming contagious should continue to support the yellow metal on much deeper pull backs. Albeit briefly, the yellow metal rallied to a 3-month high over concerns that Greece’s sovereign debt will heighten demand for the commodity as an alternative to holding a currency. Various think tanks believe that with the sovereign-debt problems coupled with Cbanks printing money, in the end, gold will be the only hard asset speculators will want. However, the IMF may end up being the bull’s party spoiler. Late last week they indicated that they will shortly begin ‘on-market’ sales of 192 tonnes of Gold. This will surely dampen the markets enthusiasm if true ($1,121). Continue to watch the dollar for direction.

The Nikkei closed at 10,400 up +276. The DAX index in Europe was at 5,712 down -9; the FTSE (UK) currently is 5,363 up +5. The early call for the open of key US indices is higher. The US 10-year note eased 1bp on Friday (3.79) and are little changed in the O/N session. Supply and fears of supply has both dealers and investors cheapening up the US curve aggressively. The Treasury Department said it will sell another +$126b’s worth of notes and bonds this week ($8b TIPS, $44b 2-yeras, $42b 5-years and finally $32b 7-years). Again, this is a record amount of product to absorb, especially with China putting the brakes on their requirements for US issues. The Fed has now ‘unlocked’ the front end, by increasing the discount rate, they are perhaps moving closer to lifting benchmark borrowing costs. Hiking the discount rate will hopefully cap the steepness of the curve.

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