Bernanke: Soothsayer or Gambler?

The USD$ is stronger in the O/N trading session. Currently it is higher against 11 of the 16 most actively traded currencies in a ‘tight’ trading range, despite Iran test firing 9 long and medium range ground-to-ground missiles which led to a USD$ selloff, causing equities to drift lower, oil and gold to be better bid.

FX Heatmap July 9th, 2008

Yesterday, Bernanke the ‘slick salesman’ massaged capital markets fears somewhat, by potentially extending ‘a greased palmed hand’ to alleviate the fears of global investors as financial shares tumbled to new lows this week. He indicated that the Fed ‘may’ extend its emergency loan program for investment banks into next year (PDCF-primary dealer credit facility, FTSLF-fed term security lending facility). True to a CBankers oath, ‘the Fed is strongly committed’ to financial stability. He also endorsed proposals to set up a federal liquidation process for a failing investment banks (parachute). Analysts believe that this may help reduce concerns that investors and dealers begin counting on Fed aid if bets going pear shaped. This extension should make it more difficult for the Fed to hike rates in the short term (2.00%). It has provided some support for both the DOW and the greenback.

Other US data yesterday revealed that the US housing markets should continue to get worse over the lazy days of summer. US pending home sales fell more than anticipated (-4.7% vs. -2.4%, m/m in May). By default, the market can expect similar results for June, during which time Bernanke stoked inflation fears, causing the long bond yield to back up to last fall levels. Housing inventory levels remain high, combined with falling housing prices can only weigh further on an ailing ‘no growth’ economy.

The US $ currently is higher against the EUR -0.00%, GBP -0.05%, JPY -0.05% and CHF -0.05%. The commodity currencies are mixed this morning, CAD +0.13% and AUD -0.46%. Can we shout ‘Commodities’ loud enough? With over 50% of Canada’s exports commodity based, of course it will have an effect on the currency. With USD/CAD trading close to the top of its medium term range yesterday, risk aversion and global growth concerns will continue to weigh on commodity prices, thus by default one can expect the loonie to enter a new trading range finally. The loonie had strengthened earlier in the week after a BOC survey showed the outlook for future sales growth rose to the highest level in a year during the 2nd Q. But, global concerns over financial finances have investors questioning global recession. Any slowdown will have an impact on commodity pricing for various reasons. But, is this scenario sustainable? Stagflation has been CBankers nemesis for most of this year and the average ‘consumer’ finally seems to be clued into what’s occurring and not suffering wholly from the ‘ostrich syndrome’. But, according to Chicken Little, Is the sky falling? Not just yet!! But, CBankers have their work cut out trying to provide liquidity, avoid mass liquidation and financial flops. These balancing acts will of course hurt ‘higher yielding’ currencies as risk aversion trading strategies tend become more dominant. The market should not expect this to influence BOC governor Carney decision on July 15th. It just highlights the BOC concerns of late. With the FED and in some respect the BOC expecting dis-inflationary pressures to unfold going forward as both the US and Canadian economies stumble in the 3rd Q, combined with weaker commodity prices should have USD/CAD trading at the upper end of its range sooner rather than later.

In the O/N session, Aussi consumer confidence fell to a 16-year low (-6/7 vs. -5.6) and home loan approvals dropped by the most in nearly a decade (-7.9 vs. +2.0), pressurizing the AUD$ (0.9502) on speculation that the RBA will not raise interest rates again this year (7.25%). With further cross related selling, on ‘upticks’ expect to see better selling.

Crude is higher O/N ($137.28 up +128c). Global growth issues and collapsing equity markets continue to weigh heavily on crude prices. Fears that economies will slow even further had investors selling through technical support levels yesterday. Week-to-date crude has given up close to $10 a barrel as fears that financials need more working capital for their bottom line. Year-to-date commodities have been purchased as a hedge against inflation, but, with a potential global recession on the horizon has encouraged speculators to exit their profitable trades. G8 has lent their support for lower crude, they unanimously have had ‘a strong concern about the spike in oil’ and collectively announced that ‘the world economy is now facing uncertainty, with downside risks persisting’. With the UK tumbling towards a recession and the US showing no backbone, has developed countries economies being described like a ‘house of cards’. Couple this with Iran’s foreign minister expressing confidence in the ‘on going’ talks about their country’s nuclear program and the USD$ gaining traction vs. the EUR, has traders selling upticks for now. How long will this last? CBankers rhetoric has walked crude prices down of late, while global uncertainty has traders trigger happy with their positions as a ‘sea of red’ portfolios persist. Geo-political concerns over Iran’s capabilities and last weeks stock inventory data had kept oil prices better bid on pull backs. Technical traders anticipate oil to move lower as it breaks below its recent trading range. Last weeks EIA report revealed an unexpected fall in stocks, which provided support for prices and bearish for refined products. This morning we will see what the report brings and Iran’s justifications for their actions. Gold prices had eased yesterday as energy costs fell, reducing the appeal of the ‘yellow metal’ as a hedge against inflation. Iran’s overnight nuclear testing has the precious metal finding some legs again this morning ($924).

The Nikkei closed at 13,052 up +20. The DAX index in Europe was at 6,364 up +60; the FTSE (UK) currently is 5,493 up +53. The early call for the open of key US indices is lower. Yields of the US 10-year bond eased 2bp yesterday (3.89%) and are little changed O/N. With global equities continue to take a beating despite commodity prices easing aggressively, investors took sanctuary in the FI asset class. The front end of the US yield curve continues to be the area of choice, which remains steep (148).

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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