Bernanke is ‘flexible’ in his delivery!

The Fed was relatively upbeat in their outlook, so we’ve seen a return in appetite for growth-sensitive currencies. Europe’s recession may be ending, this morning both Germany and France reported unexpected growth. The stimulus package implemented by CBankers seems to be finally filtering throughout the system, just in time for the last quarter! Despite the Fed delivering it’s most optimistic outlook in over a year, their action continue to allow them to be flexible as we head towards our toughest economic stretch. They want to have the ability to prevent ‘double-dipping’ back into recession and snuffing the life of the ‘green shoots’. We still have to travel the long road for sustainable growth, but baby-steps are ok!

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

Forex heatmap

The rest of this week could be a mine field. Yesterday’s North American Trade data provided a pleasant surprise for investors, at least encouraging us to keep these ‘green shoots’ hydrated. The US trade deficit widened less than expected in June (-$27.0b vs. -$28.4b), a 2nd -consecutive gain in exports driven by a pick-up in other global economies. Exports increased by +2% (specifically on aircraft parts), while imports advanced +2.3% (influenced mostly by the higher cost of oil). The ‘less bad is good’ headline is again more proof that we are pulling out of the worst recession in 50-years. The pace of growth will depend on other economies stabilization rates and eventual growth. In this mix we would need to thrown in the value of the USD, which over the last quarter has depreciated against all of its major trading partners. Even the skeptics must admit that the fiscal and monetary stimulus packages that have been introduced around the world may be finally gathering some traction!

The Fed’s statement came in very much as expected for the market. In fact, end result they are buying some time, obviously the prudent move. They retained most of the language in the last statement, but cleverly herded markets towards the belief of further improvements in the economy. They are avoiding implementing any radical policy changes at the moment. Like any good CBanker, they need to evaluate if this ‘green shoot’ theory is sustainable. The communiqué noted only one minor policy shift, it has extended its Treasury purchase program to Oct. (continued to be capped at $300b), a smart move, this allows them to remain flexible entering the home stretch of 2009.
Finally, they shifted their language from the last release from ‘stating that the pace of contraction is slowing’ to now saying that ‘economic activity is leveling out’……this is where they are buying time!

The USD$ currently is lower against the EUR +0.26%, GBP +0.32%, CHF +0.11% and higher against JPY -0.35%. The commodity currencies are stronger this morning, CAD +0.03% and AUD +0.70%. Yesterday we witnessed that Canada’s nominal trade deficit narrowed more than expected in June as exports rose for the 1st-time in 3-months (-$0.1b vs. -$0.6b). Digging deeper, most of the gains can be attributed to the double-digit surge in crude exports. Oil prices advanced +20.0% in the month and an increase in US demand also helped. But, if one excludes energy exports, total exports would have declined rather than advance, thus producing a deficit somewhat in line with original estimates (-$0.9b). Other data showed that Canadian new home prices continues to reflect builders caution (-0.2% vs. -0.1%). Analysts will tell you that the sharper than expected dip in builder prices is consistent with lower than expected housing starts already reported earlier this week. Buy the rumor sell the fact mentality still works. The loonie, like most of the other major currencies advanced vs. its southern partner yesterday (1st time in 5-days), fundamental data, advancing equities and higher oil prices made growth-linked currencies more attractive. It also helped that individuals wanted to lock in some profit ahead of the Fed announcement. Is the strength sustainable?

With regional equities advancing the most in 2-weeks, coupled with the Fed’s belief that the world’s largest economy’s economic activity is beginning to ‘level’, which can only be favorable for higher-yielding assets. The Fed’s mandate is to keep rates low for a considerable period of time this in effect would encourage the ‘carry trade’. For now, investors look content to buy on pull backs (0.8414).

Crude is higher in the O/N session ($70.99 up +83c). Oil has hummed and hawed around the $70 level after printing 2-week lows early in yesterday’s session on the back of climbing global equity markets and the USD faltering. It’s worth noting that the strength of demand remains suspect. Already this week the IEA raised its oil demand outlook for this year and next on accelerating Chinese industrial activity, but, is it sustainable? Yesterday’s EIA reported higher crude inventories which should cap gains in the short term. The data showed that crude stocks in the world’s largest energy consumer rose by +2.5m barrels last week, against expectations for just a +700k build. The latest data on industrial production for some of the larger countries remains negative and should provide support for further demand destruction. We have technically been subjected to elevated prices for too long. In reality, we may have seen the worst of this recession, but global growth will remain very subdued. This certainly does not bode well for any strong rebound in the coming months. Reality continues to tell us that inventories are high, demand is still really weak and the risk is increasing that we will see a bigger correction towards $60. Similar to most commodities, the ‘yellow metal’ found a bid close to its 2-month lows as the USD weakened on concerns that bank earning in the 2nd half of this year will be an issue ($955).

The Nikkei closed at 10,517 up +82. The DAX index in Europe was at 5,432 up +83; the FTSE (UK) currently is 4,774 up +58. The early call for the open of key US indices is higher. The 10-year Treasury’s backed up 7bp yesterday (3.71%) and is little changed in the O/N session. Treasuries prices fell after the Fed’s announced that they would be suspending the buy-back program in Oct. The Fed left rates unchanged at <0.25%, and believe with the economy leveling out it will allow them to gradually do away with the buy-backs, in theory at least. Expect traders to continue to weigh on the long end today as they complete the final auction slated for this week ($15b 30-years).

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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