Markets wait for Bernanke and default announcements

Weather will play havoc with market data over the next few weeks. Next month’s NFP report is expected to bring a few surprises after Feb.’s unexpected snow dump along the Easter sea board. This morning’s German Business confidence headline, itself, could not escape the ‘weather’. German confidence unexpectedly fell for the first time in 11-months in Jan., as the coldest winter in 14-years damped retail sales and construction (95.2 vs. 95.8). Despite its stronger underlying fundamentals, technically the German recovery is suspended until the winter is over. Expect bourses to struggle to remain in the black this morning. Prior to the confidence reports, the dollar was spluttering on Fed Yellen comments last night. ‘The US economy will operate below potential this year and next and still needs low interest rates to gain strength’. Not much of an endorsement to want to own the greenbacks aggressively.

The US$ is weaker 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

We do have an event packed week planned, but yesterday’s ‘twiddling thumbs’ does not register on any scale of enjoyment. The rest of this week will pack a punch and is very much open to interpretation. The next two days, Bernanke will be giving both the House and the Senate ‘his’ monetary policy report. With his ‘dovish’ attitude he is expected again to reiterate his ‘low interest rate policy’ before the panels. He will explain away the rise in the ‘discount rate’, indicating that it was a technical step in phasing out several other extra-ordinary measurements taken during the financial crisis. Its has been noted on several occasions that the Fed and its policy makers are ‘cleverly separating this announcement from the regular FOMC meeting cycle in order to not confuse markets what their monetary goals are’. Let’s assume that gentle Ben delivers the above recipe, markets are free to return to their previous ‘discount interest’ rate levels. The dollar in theory could again be under pressure. It seems that volatility is in store!

The USD$ is currently is lower against the EUR +0.64%, GBP +0.43%, CHF +0.39% and JPY +0.27%. The commodity currencies are stronger this morning, CAD +0.33% and AUD +0.68%. Yesterday, the loonie managed to retreat from its 4-month high as the lack of enthusiasm with global equities and especially commodities had investors shying away from owning the currency. Tomorrow is ‘oil day’ and the monthly seasonal’s are expected to cap any serious attempt for the dollar to rebound into mid-week. Technically there remains strong demand (1.0300) from long term hedgers and corporate Canada, however, on the top side there is very little interest from these types until we approach 1.8000 again. 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 of last week.

The AUD continues to trade near its decade high vs. the EUR on speculation that Greece’s fiscal deficit is set to widen and on the belief that the RBA will manage to keep their interest rates above most of their competitors. Again this morning the BOJ announced that they will keep rates low. 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 next month. It’s difficult to bet against the currency. According to the RBA, ‘the economic situation is stronger than expected and it is natural for monetary tightening’ to take place currency. 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 one at the Mar. meeting. On pull backs, expect better buying of the currency (0.9020).

Crude is lower in the O/N session ($79.87 down -48c). Yesterday, Oil fluctuated near $80 a barrel as the dollar strengthened vs. the euro, making crude less attractive as an alternative investment. Lethargic trading again put equities under pressure, giving little overall support to commodities. Technical analysts are salivating as the recent upward trend. Chartists are plotting another move higher for crude after last week’s bullish closing price. Currently, it seems that $80 is the first strong psychological resistance level. The commodity managed to temporarily print, in yesterday’s morning session, a new five-week high after the Fed’s discount-rate increase last week signaled an extended economic recovery. A strike at a French refinery has cut global fuel output. Expect this to directly affect the US’s import numbers. 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 their recent upward momentum.

Yesterday was not the time to ‘diddle in the middle’. Trading days like that end up eroding some of our hard earned capital. Last week, speculators happily booked profits accumulated during this month’s 3-month high gold rally. The big picture concerns about deepening EU deficits becoming contagious should continue to support the yellow metal on much deeper pull backs. Yesterday’s trading session was about leakage. With the dollar climbing, and with its negative correlation relationship with commodities, lack of interest and volume, had the ‘weak’ longs exiting the market. 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. Currently, perception believes that 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 ($1,114). Continue to watch the dollar for direction.

The Nikkei closed at 10,352 down -48. The DAX index in Europe was at 5,700 up +12; the FTSE (UK) currently is 5,380 up +28. The early call for the open of key US indices is higher. The US 10-year backed up 1bp yesterday (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. Mind you Japan is stepping into their shoes, increasing their own interest. That’s impressive coming from a country that has lived through a decade of recessions and deflation. From their perspective, dominated by low rates, US Treasuries remain a bargain at these elevated yields. I wonder what sort of tails we will witness this week.

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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