Risk hinges on Helicopter Bernanke

Does he seize the moment? His fifteen minutes of infamy? Nope, it will be nothing that exciting, but he is sure to have an impact. The Jackson Hole symposium gives Bernanke the opportunity to clarify the Fed’s monetary policy strategy in the face of a significant slowdown in the US recovery. US economic data leading into the conference has been coming up short, even shorter than all of the modest expectations. Risk appetite hinges on helicopter Ben. Investors want to be guided to more quantitative easing. The market needs to be reassured that QE will restore confidence in the US recovery. Too vague a commitment will undermine risk and we will soon be uttering the words ‘double-dip’!

The US$ is stronger in the O/N trading session. Currently it is higher against 12 of the 16 most actively traded currencies in a ‘subdued’ trading range ahead of Bernanke’s eagerly anticipated address in Wyoming.

Forex heatmap

Yesterday’s US jobless claims point to a disappointing NFP report next week. With no ‘material revisions’ to the data, a weaker employment report is expected. Initial claims fell -31k to +473k, but with a monthly average of +496k would suggest potential loses for next Friday. The 4-week moving average is +487k and continues to drift higher. It’s worth noting that no unusual factors like ‘distorted seasonal factors’ happened to influence this report. Continuing claims fell by -62k to +4.456m, rather static, as claims filter down to the extended and emergency programs. The number of individuals receiving extended (+937k) and emergency (+4.899m) continued to climb, advancing +102k and+199k respectively. In the extended category, we have witnessed a +126% jump since the beginning of the summer, while emergency has increased +50%. In July, Obama approved a bill that restored unemployment benefits to those who have been on the rolls so long that they had run out by June. This program expires at the end of Nov.

Finally yesterday, US mortgage stress indicators eased slightly in the 2nd Q. However, they do remain high (+9.85% vs. +10.06%). Mortgages in foreclosed proceedings were +4.57% vs. +4.63% in the 1st Q. The report is a small piece of good news on the stress indicators. Digging deeper, one notices that the improvement in delinquencies occurred in both prime and sub-prime loans while the improvement in foreclosure indicators was mainly in the sub-prime category. On the flip side, we should not become too euphoric as these indicators remain relatively high and they do tend to be lagging indicator.

The USD$ is higher against the EUR -0.01%, GBP -0.13%, CHF -0.06% and JPY -0.28%. The commodity currencies are mixed this morning, CAD -0.19% and AUD +0.09%. All week the loonie has been feeling the pain and pressure that comes with being a growth, interest rate commodity sensitive currency. Yesterday, the currency happened to get a reprieve, rallying as risk appetite improved ever so slightly, dragging commodity and equity prices higher. Big picture, Canada is not immune to weaker data reported south of its borders. Over +70% of its trade is conducted there. This ‘faltering economic recovery means the chances for a further BOC interest-rate increases this year weakens day over day’. Finance Minister Flaherty indicated that he saw Canada’s real-GDP for this year at about +3% and expressed concerns over the weakness in US economic data citing Canada’s reliance on exports to US. It is only natural that growth and interest rate sensitive currencies would be dumped even more aggressively. Traders are happy to play the risk-aversion card with longer term CAD bulls looking to pick up cheaper loonies north of 1.0650.

The AUD has inched higher in the O/N session, in anticipation of Bernanke’s speech this morning. Global bourses under pressure have been capable of pushing the AUD to test its one month lows earlier this week. However, in the O/N session with Asian bourses finding its legs has given some life to the growth and interest rated sensitive AUD. On the whole, concerns that global growth is slowing has damped investor appetite for higher-yielding assets. The currency has underperformed against all of its major trading partners and is expected to do so until there is a new Government formed. The commodity rich currency is not isolated, as other growth sensitive currencies are suffering the same fate. Government data has also happened to put a lid on the recent rally. Net result traders are adding to their bets that the RBA will leave interest rates unchanged for the next 12-months. Interest rate differentials play a big part of the currency’s attractiveness. Risk aversion will likely force the bull’s hand, capping rallies with better sellers on upticks (0.8875).

Crude is lower in the O/N session ($73.02 down -34c). Yesterday, crude prices initially rose the most in three weeks on the back of stronger than expected weekly US claims report. Since then it has managed to retreat from its highs as equity prices fell. A weaker dollar has also helped to give the commodity a leg up from its lows. Market should be wary that the underlying situation has not changed, the fundamentals remain very weak, demand does not look good and stockpiles of crude and products remain at a record high for a second consecutive week. Last weeks EIA report showed an unexpected increase for all energy products. US crude stockpiles rose by +4.1m barrels, surprising analysts who had expected a modest decline of -0.1m barrels. Gas inventories grew by +2.3m, while distillates (ex-heating oil and diesel fuel), saw inventories rise by +1.8m barrels. The market had expected gas stocks to fall by -500k and distillates to climb by +900k barrels. The data confirms that the current US supply glut continues unabated, even surpassing record levels reached this month. Analysts note that the ‘commercial supplies of oil and oil products are at the highest level in nearly 27-years, with gas stockpiles well above 5-year averages’. It’s no wonder that crude prices continue to gravitate towards the $70 psychological support level. The report re-confirms the IEA conclusion earlier this month that ‘oil demand could take a substantial hit should economic growth continue to falter’. Speculators remain better sellers on up-ticks in the short term as crude rallies somewhat in this oversold market.

Gold prices backed down from its two month highs as a rally in global equities eased demand for the precious metal as a haven. All week speculators have sought sanctuary in the safer heaven asset classes on the back of weaker equity markets. Investors are trying to put there cash somewhere more solid on mounting evidence of an economic slowdown. Speculators again are supporting the various safe heaven assets on pullbacks, avoiding risky assets due to uncertainties in the markets. With a genuine fear for global growth, by default, should boost the demand for the metal as a protector of wealth in the grand scheme of things. Year-to-date the metal has risen +11.8%. With treasury yields expected to remain low, could promote a quickening inflation rate, which would promote pushing commodity prices even higher. The opportunity costs of holding gold are low due to falling interest rates ($1,238 -50c).

The Nikkei closed at 8,991 up +85. The DAX index in Europe was at 5,888 down -24; the FTSE (UK) currently is 5,133 down -23. The early call for the open of key US indices is higher. The US 10-year eased 2bp yesterday (2.51%) and is little changed in the O/N session. Treasury prices have been fluctuating with equity prices, easing from their highs after initial claims fell more than the market expected. Yields seem to have found a bottom after the 19-month record low prints witnessed earlier this week on the back of new home sales unexpectedly dropping last month to a record low and orders for durable goods rose less than economists forecasted. Already the curve has flattened to trigger analyst’s 2’s/10’s +200bp short term objective. Treasuries 7-year note sale came in with a record low yield of 1.989%. The bid-to-cover ratio was 2.98, compared with a 4-auction average of 2.87. The indirect bid (foreign buyers) was 57% (v-strong), compared to the average of 51%. The direct bid was 9% vs. 10.6%. Longer term buyers continue to control the market, that being said, product does look rich on the curve.

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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