Todays Central Bank trifecta BoE ECB and BoJ

Now that the Fed has acted accordingly and asset classes are performing to the script what really happens from here? How much more dollar liquidation can the EUR or JPY take? Regarding JPY, expect the BOJ to provide all the required information at this evenings policy meeting that was conveniently brought forward in anticipation of what the Fed was going to do perhaps? The trifecta of Cbanks meet today, BOE, ECB and BOJ. They certainly will not make the same splash in their currencies, but it will be interesting to read their communiques. The Fed’s actions, today’s Cbank talks and tomorrows employment numbers will gives us a much clearer picture of where and how asset classes want to perform for the remaining weeks of this year.

The US$ is weaker in the O/N trading session. Currently it is lower against 14 of the 16 most actively traded currencies in a ‘volatile’ trading range.

Forex heatmap

One feel like a parrot repeating that the Fed stood pat at <0.25%, announced a +$600b QE program for long term maturities, over a longer time scale and reiterated that rates would remain low for an extended period. The vote was 8-1, with Hoenig again dissenting. He believes that the risks of additional securities purchased outweighed the benefits and that ‘this continued high level of monetary accommodation increased the risks of future financial imbalances’. The net effect would ‘cause an increase in long-term inflation expectations that could destabilize the economy’. The Fed noted that the pace of recovery in output and employment continues to be slow. Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising, though less rapidly than earlier in the year, while investment in nonresidential structures continues to be weak. Employers remain reluctant to add to payrolls. Housing starts continue to be depressed. Longer-term inflation expectations have remained stable, but measures of underlying inflation have trended lower in recent quarters. Although the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, progress toward its objectives has been disappointingly slow. This has resulted in the Fed maintaining its existing policy of reinvesting principal payments from its securities holdings. In addition, the Committee intends to purchase a further $600B of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75B per month. The Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability. Recent US data certainly has surprised to the upside and was too little too late to have influenced policy makers QE2 strategy. Yesterday’s factory orders beat market expectations (+2.1% vs. +0.0%), even the revisions were a welcome sight (-0.5%). Despite the headline being somewhat impressive, the details, according to analysts were less supportive because, yet again, aerospace orders remain the lone jewel in the crown. Previously, they happened to drag durable goods orders higher on the headline, while the sub-components registered newer lows and adding non-durables for a complete factory orders report, ex-transportation, was only up +0.4%, m/m. Also disappointing and used as a proxy indicator for business investment, capital goods orders ex-defense, was also softer on the month. This leaves the three-month average again on the weaker side. Not to be outdone, the US service industry also grew faster than expected and recorded the fastest pace in four-months (54.3 vs. 53.2) and should be a positive contributor to GDP growth. Digging deeper, nine sub-components surprised to the upside, with only new export orders (-2.5 pts) and supplier deliveries (-4 pts) disappointing. The strongest gains were recorded in the prices paid (+8.2 pts), business activity (+5.6 pts) and order backlogs (+4 pts). The combined ISM manufacturing and services results signal the tenth consecutive month of growth. The USD$ is lower against the EUR +0.44%, GBP +0.58%, CHF +0.25% and JPY +0.16%. The commodity currencies are stronger this morning, CAD +0.01% and AUD +0.25%. The Fed announced the expected and currencies performed somewhat according to script and that includes the loonie. This growth sensitive higher yielding currency is going to gain from commodity aided inducements in the longer term. The CAD was waiting for its own even risk yesterday and that was PM Harper’s ‘yay or nay’ to BHP Billiton $40b takeover of Potash. The negative response could lead to pro-trade problems arising and the unwinding of some speculative long CAD positions acquired in front of the deal. The net new purchase of around $600b is probably about where the market thought the Fed would be. The loonie, along with other commodity growth sensitive currencies, have enjoyed the strongest gains vs. the dollar over the past five trading days and it would not be surprising to see some of those gains booked for profit. Parity provides strong support, first time around at least. Technically, the loonie has been caught in ‘the dollar debasing jet-stream’. Canadian data highlights this week sees the Oct. Ivey PMI today and the employment release tomorrow. The AUD rose to its strongest level in more than six years against its Canadian counterpart after BHP Billiton $40b hostile takeover bid for Potash was blocked by the Canadian government. The currency trades at a strong premium to its US counterpart after Bernanke’s QE2 announcement. The interest rate differential and the issue of dollar liquidation favors commodity growth sensitive currencies. Australasian bourses and commodity prices in the black will favor the AUD over the longer term. In the O/N session, weaker sales data missed economists’ expectations and the trade surplus shrank by more than forecasted, temporarily dampening demand for currency. The retail sales headline print advanced +0.3% in Sept., compared with the median forecast for a +0.5% rise. Exports fell -2%, narrowing the trade surplus to $1.76b vs. the anticipated gap of +$2b. Analysts expect the strength of the commodity sector will keep spare capacity tight and the RBA to continue hiking in 2011. The currency remains in demand on pull backs as carry look attractive to investors (1.0094). Crude is higher in the O/N session ($85.88 +$1.41c). Crude prices rallied for a fourth consecutive day, briefly trading strongly through the psychological $85 a barrel, as the dollar trades near a nine-month low vs. the EUR after the Fed move to buy an additional $600b of Treasuries to spur the economy. The commodity has also been well supported after the weekly EIA report showed that fuel supplies plummeted as refineries reduced operating rates to the lowest level in seven-months yesterday. Crude stocks rose +1.95m barrels to +368.2m vs. an expected +1.5m barrel climb. Offsetting all of these gains was the gas inventories headline print. It fell -2.69m barrels to +212.3m, the lowest level in twelvemonths. Also providing a leg up was the refineries operating at +81.8% capacity last week, the weakest print in seven-months causing the crack spread (crude into oil) falling -46% in that period. Technically, the decline in stocks is primarily due to the low production numbers been witnessed. Gas stockpiles were expected to be little changed from the previous report. Distillate supplies (heating oil and diesel) decreased -3.57m to +164.9m, providing the biggest drop in over two-years. The market remains wary that the underlying fundamentals have not changed. The ‘big’ dollars value continues to push the price about. Gold happened to pare some of its losses yesterday after the Fed ‘walked a careful line in launching QE2, pledging to buy +$600b over eight months to boost the economy. Despite the headline print being slightly larger than expected, but spread over a longer period, the fresh cash infusion is expected to aid the yellow metal over the medium term, proof being in this mornings price action. Commodities should remain coveted on speculation that steps to support growth through QE and low interest rates will boost demand for precious metals as an alternative to some currencies. A negative move for the dollar is bound to affect the yellow metal’s price. It’s about playing catch up. The depth of the pull back have been testing the underlying strength of the commodity. Last month, gold rose +3.7%, printing a new record high of $1,388.10 an ounce, as the dollar fell -2.2%. Gold has come off because of the high expectations built into the Fed announcement. The market was technically overbought, it had become a momentum play, and now requires a good dip to give a good buying opportunity. For most of this year speculators have sought an alternative investment strategy to the historical reserve currency. The market has been using the commodity as a proxy for a ‘third reservable currency’, the reason for the record highs. The debasing fears of the dollar, coupled with the sustainable growth issues of the US economy have had investors seeking protection in an asset with a ‘store of value’($1,358 +$20.10). The Nikkei closed at 9,358 up +199. The DAX index in Europe was at 6,694 up +77; the FTSE (UK) currently is 5,839 +90. The early call for the open of key US indices is lower. The US 10-years eased 5bp yesterday (2.56%) and are little changed in the O/N session. Early in yesterday’s session Treasury prices rallied on expectations of less treasury issuance now that the Republicans have taken back ‘the house’. Bernanke has again indirectly provided support for the asset class when he said that concern about the central bank’s asset-purchase program are ‘overstated’. Their approach has worked in the past and they expect it to do so again. Next weeks auctions were also announced yesterday. The US treasury plans to issue only $72b of new product (3’s $32b-$2b less than Aug, $24b 10’s and $16b long-bonds). Lower projected budget deficits have allowed the government to reduce borrowing requirements.

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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