Commit Bernanke!

Will he or won’t he? Does Bernanke give us an outline of his ‘exit’ strategy in this afternoon’s FOMC communiqué or does he commit to a strategy of longer term ‘low’ interest rate policy? The way that the USD is under-performing this week it seems that the market does not want to be blindsided twice. With a 4-handle move in the EUR in the last 24-hours, ‘gentle’ Ben is expected to destroy the market myth of an European style call for an exit strategy!

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 ahead of the FOMC decision.

Forex heatmap

Yesterday’s US data revealed that ongoing record foreclosures have pushed home resales higher for a 2nd-consecutive month (+2.4%, m/m, to an annual unit rate of 4.77m). However, the median price has now collectively fallen -17%, y/y (3rd-largest decrease on record, from $207k vs. $173k). Not unexpected and not a bright spot for consumer wealth, the FHFC (Federal Housing Finance Agency) reported that home values nationally decreased -0.1% in April, m/m. Analysts note that Obama’s tax breaks for 1st-time buyers coupled with low mortgage rates (for now) have temporarily supported the market. But, we should expect higher unemployment rates and future borrowing costs to limit any of the positives in the medium term. The US housing crisis remains in a downward spiral!

A few European policy members (Weber and Nowotny) believe that the Cbank has used up all its room to cut interest rates further and that there is no need to implement any more stimuli. Trichet begs to differ so it seems. This is there acknowledgment of an exit strategy. Certainly the most conservative of administrations, they will wait and see what the impact will be from actions already implemented. Other council members Noyer and Fernandez Ordonez believe that the global economy will ‘stabilize by year end’ and that Cbanks ‘should start preparing the design of exit strategies’. Some of the market expects Bernanke to comment on an exit strategy in his communiqué this afternoon, but, the safer bet will be his comments on the duration of low rates!

The USD$ currently is weaker against the EUR +0.25%, GBP +0.61%, CHF +0.21% and higher against JPY -0.11%. The commodity currencies are stronger this morning, CAD +0.46% and AUD +0.54%. The loonie traded in a tight range yesterday, a day after printing new monthly lows when the greenback advanced on the back of the World Bank’s negative comments on this recession. It seems that ‘green shoots’ are not rooting, which seems to have a negative impact on commodities and eventually a negative impact on higher yielding commodity based currencies. With lack of liquidity and no direction from ‘no data’, it takes very little to push the CAD about. The euphoric rise of the loonie since March has hinged on ‘green shoot’ economic theory and the rampant rise of commodities. In reality, the market has very much got ahead of itself and has easily squeezed weak long CAD positions out all week. The market waits for this afternoons FOMC communiqué. BOC governor was overheard yesterday stating in Washington that Canada’s recession is as deep as their southern trading partners. He believes that ‘Canadian households are facing rising stresses because of increases in unemployment’, which will not be currency positive in the medium term. On USD pull backs dealers will want to sell the CAD.

With global equities and commodities stabilizing ahead of today’s FOMC meeting combined with the weakness of the USD against most of the major trading partners has speculators seeking higher yielding currencies like the AUD. With the OECD raising global outlook for the 1st-time in 2-years, dealers will want to buy AUD on pullbacks (0.8013).

Crude is lower in the O/N session ($69.00 down -24c). Oil advanced in baby steps yesterday as the greenback weakened and equities floundered in no-mans land. There was nothing fundamentally positive aiding commodities especially after the previous day’s onslaught. The market anticipates that the weekly crude report will once again show another decline in stocks. The key to the report will be the headline number for gas inventories. Last week’s EIA report showed a bigger-than-expected gain in supplies of motor fuel. Gas inventories climbed +3.39m barrels to +205m, w/w (the biggest increase in 6-months). The increase was more than 6-times bigger than analysts had predicted, all in time for the holiday driving season in the US! On the flip side, crude oil stocks declined -3.87m barrels to +357.7m, double expectations. It was a bearish report for commodity prices, despite the fall in crude, over the next couple of months expect the market to focus on the driving season that ends on US Labor Day. Global concerns on the longevity of this recession continue to weigh on energy demand. This market is all about the negative correlation of commodities and the USD’s movements. Similar to oil, gold stayed close to home, but, with the greenback under renewed pressure may revive demand for the ‘yellow metal’ as an alternative investment as we have seen in this morning’s session ($929).

The Nikkei closed 9,590 up +40. The DAX index in Europe was at 4,724 up +17; the FTSE (UK) currently is 4,227 down -3. The early call for the open of key US indices is higher. The 10-year Treasury’s eased 5bp yesterday (3.66%) and are little changed in the O/N session. Prices advanced for a 3rd-straight day despite refunding this week. Treasuries rose on the back of US home resale data advancing less than expected which would support the theory that the Fed will have to keep rates close to zero for awhile longer. Treasuries also garnered support from an OECD report stating that its 30-members unemployment rate will reach +9.9% by next year. Its today’s 5-year auction ($37b) that will be interesting, I wonder how much appetite there will be for product ahead of the FOMC communiqué at 2.15pm.

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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