Bernanke gives the dollar a boost with rate talk

An interesting way to talk up the USD and appease some G20 members, get ‘helicopter’ Ben to mention that rate hikes are on the table. When? The million dollar question, when the US economy is ‘sufficiently strong enough’. Wow! That’s nailing it, a moving target that has capital markets scrambling to undo some of the directional play achieved by different asset classes this week. Bonds are ending on a loosing streak and the USD has managed to retreat from its yearly lows. With the long holiday weekend in the US (Columbus Day), positions will be trimmed and some profits booked.

The US$ is stronger in the O/N trading session. Currently it is higher against 14 of the 16 most actively traded currencies in another ‘whippy’ trading range.

Yippee! US initial claims are trading lower. Is this the new trend? Since an Aug. print of +575k, yesterday we were treated to +521k. Skeptics will have us believe that despite a modest improvement w/w (-33k), we are still above the psychological +500k mark. It was back in July when we last managed to print similar levels. But, according to optimists, we are building up for a break below the psychological mark in the not too distant future. Digging deeper, the decline in continuing claims came in better than expected (+6.04m vs. +6.11m), however it was offset by a rise in emergency (+3.32m vs. +3.27m) and extended claims (+443k vs. +465k). This tells us that we continue to see claimants after their 26-week duration migrate towards the emergency and extended benefit programs. Over the past few months it’s becoming more of a predictable trend. It not good news to see that both the emergency and extended benefits programs were revised higher last week. The bigger question, what’s going to happen when individuals finally become ineligible for any type of benefit program? Not surprising, other data showed that US wholesale inventories again dropped in Aug. (-1.3% vs. -1.6%), this is the 12th consecutive decline. Wholesalers have now been working through their inventories stocks on hand for the past year after being caught off-guard by the abrupt drop-off in demand late last year. The inventory-to-sales (I/S) ratio constructively has also managed to tick lower in Aug. from 1.23 in July to 1.20. Its also heart warming to see that US retail sales increased +1.1% last month, the 1st gain in over a year. Deep discounting dragged the sales figure along.

Both the BOE and ECB did what was expected of them, hold rates steady at +0.5% and 1% respectively. No maverick tactics like their G20 co-member, the RBA, who hiked earlier in the week to 3.25%. Trichet said interest rates are ‘appropriate’ and that the ECB has no plans to tighten policy any time soon. Analysts expect them to be on hold well into next year. ‘The outcome of their monetary analysis confirms the assessment of low inflationary pressure over the medium term’. The fear of raising rates too soon, especially in this strong EUR environment, could curtail sustainable growth. Their recovery is expected to be uneven. Trichet believes that ‘it will be supported in the short term by temporary factors but will be hampered in the medium term by balance sheet issues at financial and non-financial institutions’.

The USD$ is currently higher against the EUR -0.40%, GBP -0.37%, CHF -0.47% and JPY -0.83%. The commodity currencies are weaker this morning, CAD -0.22% and AUD -0.22%. The loonie is back on course and accelerating towards that psychological parity level vs. its largest trading partner. Speculators believe that the pace of a global recovery may quicken after the Aussies posted better jobs numbers this week. This has risk takers coveting commodity and high yielding currencies on pull backs. The way the short end of the CAD yield curve was performing yesterday, it was like one was expecting the BOC to hike as soon as possible! BOC governor Carney has been adamant that rates will remain accommodative until well into next year unless inflation concerns become an issue. Canadian policy makers have been vocal of late expressing their reservations about a strong loonie and its implications on medium term growth. This morning we get employment numbers, market consensus is already looking for a +5k gain. However be warned, do not be surprised to see a much stronger number based on seasonal adjustments to account for the loss of student summer jobs. With a soft summer job’s market, the BOC/Stats Canada, making their usual Sep. adjustments to account for the loss of summer positions could make for a higher than anticipated number! Buying the rumor and selling the fact could endanger the loonies’ weekly strength being unwound with anything less than +5k! Year-to-date, the loonie has gained +16% vs. its southern partner and incidentally was the best-performing of G7 currencies against the greenback last week. Combing stronger commodity prices and a weak USD sentiment, achieving parity before Christmas is within speculators grasp!

No wonder Governor Stevens at the RBA remains a firm hawk. The Sept. Australian employment report this week beat all expectations, increasing by +40.6k on the month vs. a forecast of -10k. This probably provides another nail in the coffin for a 25bp rate hike in Nov.! The futures market is currently pricing in a +86% chance of another hike. Will the RBA be ‘gradual’ in its monetary cycle or show rapid normalization of interest rates? (0.9041)

Crude is lower in the O/N session ($71.09 down -60c). Crude managed to reverse the previous day’s losses with a vengeance yesterday. This after falling close to -2% in it previous session, prices supported by signs of global economic recovery threatened resistance levels. On the flip side, the weekly EIA report, while reporting a decline in crude, more importantly was a confirmation of still weak oil product demand in industrial fuels. It seems that the market is not relying on fundamentals to price the black-stuff. The EIA report should be bearish for the commodity. The data showed that inventories of gas and distillate fuel (includes heating oil and diesel) increased. Gas inventories rose +2.94m barrels to +214.4m, w/w. That was a threefold increase, way more than market consensus. Distillate stocks advanced +679k barrels to +171.8m (the highest print in 26-years!). The gain in gas supplies has left inventories +6.9% higher than the 5-year average. Not to be outdone, distillate inventories are +30% higher for the same time period. Refineries are operating at +85% of capacity, +0.4% w/w. In contrast, crude inventories declined -978k barrels to +337.4m. The market had expected a +2m gain. Despite this, stockpiles remain +10% above the five-year average. Strong evidence that demand destruction is alive and kicking. Global output remains healthy. Russia increased its production last month and has now surpassed Saudi Arabia as the largest produce. They have just added to the global glut of the black-stuff. With energy fundamentals remaining unconvincing, it would be a safe bet that crude should be confined to its $10 range of $65-$75.

Store of value, store of value! Gold, like an unpredictable thoroughbred, has charged forward and managed to print new record highs this week. It’s the debate of deflation and inflation that spurring the ‘yellow metal’ higher. Investors are concerned that an economic recovery will promote inflation, this despite interest rate product telling us otherwise ($1,058). With the USD gathering some strength in the O/N session, speculators have been content to pare some of their positions. However support remains on pullbacks.

The Nikkei closed at 9,832 up +32. The DAX index in Europe was at 5,689 down -23; the FTSE (UK) currently is 5,119 up +30. The early call for the open of key US indices is lower. The 10-year bonds backed up 10bp yesterday (3.26%) and are little changed in the O/N session. It looks like treasuries are heading for a weekly loss on the back of Bernanke stating yesterday that the Fed is prepared to hike rates when the economic outlook ‘has improved sufficiently’. The decline in US jobless claims data is stronger evidence that the the US economic recovery is strengthening. Most analysts still believe that the Fed will hold off raising interest rates until mid- 2010 as the recovery is likely ‘to be too weak to lift employment and incomes to inflationary levels’.

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