Dove Bernanke to push EUR higher

Investors are embracing an environment conducive to more risk taking and the reason for the ‘safe-haven’ currencies, JPY and CHF, to be leading the G10 selloff. This morning’s data shows European manufacturing activity picking up. With the growth divergence between the core and the peripheries narrowing and price pressures mounting, it’s a good argument for Trichet to contemplate raising interest rates and the reason the EUR is here. Chinese PMI data last night provided little excitement and little new information. The headline was in line with expectations at 52.2. Beijing should be in no hurry to change monetary policy any time soon. Market anticipates Bernanke to remain dovish today, there is no need for deviation from the FOMC’s core message in his semiannual testimony to the Senate this morning. A consistent message will keep yields heavy and the dollar on the defensive. The problem, improved economic data and a market bracing itself for a strong employment report should be capable of pushing yields higher by end of week.

The US$ is mixed in the O/N trading session. Currently, it is lower against 10 of the 16 most actively traded currencies in a ‘subdued’ O/N session.

Forex heatmap

This is a busy week on the data front. Yesterday the market was treated to signs that US consumers are hoarding their stimulus. Consumer spending disappointed with a +0.2% gain, half of the consensus forecast. Offsetting the disappointing print was income jumping +1%, more than double the expected pace. Most of the spending gain was on goods (+0.7%), led by nondurables (+0.9%). Digging deeper, the pace of growth in spending moderated across most of the subcategories. For instance, service spending, which accounts for two-thirds of household spending, came in flat. The ‘nominal’ rise in spending was due to higher prices, with the inflation adjusted volume of consumer spending down -0.1%, month over month. Analysts now expect this to be a drag on first quarter GDP where household spending represents +66% of headline growth. Turing our attention to income (+1%), gains were widespread. Private salaries were up +0.4%, while the support from government transfers was down -0.5%. Notably, the saving rate climbed to +5.8% from 5.4%, strong proof of US consumer hoarding. In real terms, real personal income ex-transfers were up +1.1% (most in five-years), while real personal disposable income was up a more modest +0.4%. The inflation component remains benign, with the core-deflator for personal spending (ex-food and energy) coming in a modest +0.1%, month over month. It seems that the ‘commodity shock is crowding out core-pricing power’ and something that will not be worrying the Fed monetary stance anytime soon.

Not a surprise and further proof for the US housing markets weakness was pending home sales falling for a second consecutive month in January (-2.8% to 88.9). Even the revisions went deeper, with December falling into negative territory (-3.2%) from its original positive print (+2%). Year-over-year, sales are down -1.5% in January. Many of the variables that influence the housing print remain weak, high rates of joblessness (+9%) and elevated foreclosures will continue to depress home values. Last week’s January sales of new homes happened to fall -12.6%, month over month.

Finally, February’s Chicago PMI print of 71.2 was the highest reading in 23-years, led by a surge in production to 78.2 from 73.7. This release is hot on the heels from the January ISM manufacturing index, and the Empire and Philly Fed surveys for February and providing more proof that manufacturing is picking up in the 1st Q, in part on a need to build inventories. Digging deeper, new orders and prices paid saw little change, but remain strong. Supplier deliveries with a rise to 64.1 and order backlogs at 61.8 contributed to the increase, but employment softened to 59.8.

The USD$ is lower against the EUR +0.22%, GBP +0.31% and higher against CHF -0.24% and JPY -0.42%. The commodity currencies are mixed this morning, CAD +0.01% and AUD +0.00%. Surprisingly strong Canadian 4th Q GDP of +3.3% vs. +3% expected and an upward revision to the 3rd Q print to +1.8% from +1% pushed the loonie to new three years high outright yesterday. Some of the currencies appreciation was offset by the income and spending data down south. Exports rose +4%, the biggest percentage gain in six-years. Crude oil shipments rose +30% to a record. Thus far, the value of the CAD seems ‘not’ to have impeded Canadian growth. Other key positive drivers of growth included consumption (+1.2%) and imports remaining flat. The value of the loonie should be expected to further contain inflation and further question the sustainability of export gains. What is the BOC to do? With the Fed on hold until early next year or later, Governor Carney will be weary about raising the overnight BoC-Fed spread aggressively or at all anytime soon. Carney should be believing that the currency value and the implementation of tighter mortgage rules will act accordingly. This morning the BOC is expected to hold rates steady. Now, will Carney talk the currency down a tad? (0.9704)

In the O/N session the AUD received an initial leg up from slightly better than expect January retail sales growth (+0.4%), however, the currency has been unable to retain its momentum after the RBA policy meeting just yet. As widely expected the RBA left policy rates on hold (+4.75%). The communiqué was largely unchanged from previous months. It seems that they are very comfortable with rates on hold at present. The only hawkish element in the statement was around wages. Market pricing of rate hikes over the next 12-months edged higher to +28bp from +25bp. The market seemed disappointed because the statement was not as bullish as has been expected, spurring some profit taking. The unwinding of JPY risk aversion trading strategies will continue to support the AUD on theses pullbacks (1.0190).

Crude is higher in the O/N session ($97.22 +25c). Crude prices remain elevated on Middle-East geopolitical concerns. Oil climbed to a 30-month high last week as violent uprising reduced supplies from Africa’s third-biggest producer. It’s been estimated that as much as +1m barrels of Libya’s daily oil production may have been shut. The IEA believes that may be a ‘bloated figure’ which has caused oil prices to back away from their recent highs. ‘While there’s a risk of contagion, of this spreading to Iran or Saudi Arabia, the market is going to see prices elevated from these levels’. The IEA’s chief economist said that ‘higher oil prices pose a danger for a global economic recovery’. Last week’s EIA report again has provided some support for the US crude market on pull backs. The report showed a smaller-than-expected increase in supplies. Crude inventories rose by +800k barrels vs. an expected increase of +1.4m. Even worse was the gas inventory headline declining -2.8m, analysts had been expecting an increase of +950k barrels. Stocks of distillates (heating oil and diesel) fell -1.3m barrels, which was very much inline with expectations. Concerns about the Middle-East and production problems in the North Sea are boosting Brent relative to WTI and pushing the spread to a record premium. With supply the number one concern, the commodity will remain bid because of the contagion concerns.

Like most commodities, gold is heading for its longest rally in six-months, as mounting tensions in North Africa and the Middle East boost demand for a ‘safe haven’. Last week the commodity was up +1%. The yellow metal continues to be supported by geopolitical factors and inflation threats. Prices have risen nearly +7% this month, as protests in favor of democratic reform in North Africa turned bloody. Investors have grown increasingly uneasy that the crisis could spread. Even hawkish global rhetoric has managed to give the yellow metal a leg up in February. Consumer prices are also boosting the demand for the precious metal as a hedge against global inflation. Last week, the market witnessed Chinese’s inflation accelerating the most in six years, and UK consumer prices the most in two years. Even US data is showing that their inflation numbers are edging higher. The commodity is being used as a store of value. The asset class is expected to remain better bid on speculation that currency volatility will boost demand for a safe heaven investment once the Euro contagion fears raise its ugly head again over the coming weeks during the Euro-periphery refunding season ($1,414 +$4.50c).

The Nikkei closed at 10,754 up+130. The DAX index in Europe was at 7,327 up+55; the FTSE (UK) currently is 6,016 up+25. The early call for the open of key US indices is higher. The US 10-year backed up 6bp yesterday (3.46%) and is little changed in the O/N session. Geopolitical pressures continue to support treasuries despite the uptick in global inflation numbers. Treasuries were little changed yesterday after a report showed consumer spending in the US rose less than forecasted last month. Last week, the US benchmark 10’s gained the most in nine-months as the Middle-East and North African crisis has driven investors to the safety of US product and raised concern that surging commodity prices may curtail some of the global economic recovery we are currently witnessing. Also aiding prices is the belief that the Fed will buy between $18.5b and $26.5b in US debt this week. Month end requirements have also had portfolio managers requiring some duration. Event risk remains the order of the day despite more encouraging global economic data.

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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