Bernanke waves Dollar Pompoms at Euro peripheries

Helicopter Ben, the Captain of QE2 gave the dollar the ‘nod’ during his testimony yesterday. This certainly raised a few eyebrows and did nothing to dissuade the record Central Bank interest in wanting to own the US 10-year auction. The EUR’s fall from grace this morning is partly due to the reemergence, finally, of Euro-periphery spread concerns. After ignoring the periphery’s for so long, it looks like the FX market is returning its focus. Portuguese spreads have been widening and rumors that the ECB has been buying some of their paper most certainly has pressurized the weaker EUR longs. Governor King will not stutter. The BOE is expected to hold rates at +0.5% this morning with the market pricing in less than a 20% chance of a hike, a 25bp move is fully priced in for June.

The US$ is stronger the O/N trading session. Currently, it is higher against 13 of the 16 most actively traded currencies in a ‘whippy’ O/N session.

Bernanke kept to ‘his’ script and doused the hawkish comments of his colleagues, Lacker and Fischer who implied earlier this week that the Fed was nearing a change in course with QE2. Yesterday’s statement indicates that helicopter Ben has a strong hold on the FOMC despite the ‘undercurrents of discontent’. He stated that inflation was a problem overseas and not an issue in the US and believes that commodity prices will not undo a benign inflation environment. In translation, QE2 will run its course. Thus far at best, it’s been a marginal influence on the US economy and with growth accelerating there would be no reason to extend the program. He acknowledged in his speech that the economic recovery has picked up stream and should accelerate this year, despite continued high levels of unemployment. He admits that it will probably take several years for the employment sector to get back to normal. In conclusion, he reaffirmed the ‘status quo and leaves the current path of bond buying in place’.

The USD$ is higher against the EUR -0.66%, GBP -0.20%, CHF -0.41% and JPY -0.39%. The commodity currencies are weaker this morning, CAD -0.28% and AUD -0.73%. There were no significant domestic data releases in either Canada or the US yesterday. The loonie took its direction from Ben’s prepared speech. Despite helicopter Ben giving the dollar a ‘nod’ the loonie continues to trade in a tight trading range dictated by commodity prices. After its third rate hike in a number of weeks investors are concerned that China’s demand for oil will slow their appetite for commodity driven and interest rate sensitive currencies. The loonie has taken the path of least resistance and that’s lower, temporarily at least. This weeks buying interest, influenced by the strong jobs report last Friday, have moved up their selling interest levels as the currency underperforms against most of its major trading partners. Concerns about an over valued currency, according to Governor Carney, waning government capital spending, a cooling housing market, and moderating retail sales will eventually combine to limit overall GDP growth this year. These are all stellar reasons for BOC to be concerned, as a ‘persistent strength in the currency is a threat to economic expansion’. With the peripheries back in the picture we may be back to less risk more safe heaven. The market will continue to look for better levels to want to own the CAD (0.9962).

It was a soft Australian employment report. The Aussie has reacted negatively to the mixed employment data, forcing the liquidation of the weak long carry trades who have been influenced by the market pricing for RBA rate hikes over the next 12-months dropping 4bp to 41bp. Total employment rose +24k in January, higher than the +17.5k expected, but part-time employment (+32K) accounted for the rise, with full-time employment down-8k. The unemployment rate was unchanged at 5.0%. It was also noted that the disruption due to the flooding in Queensland had no statistical significant affect to January’s employment survey. With the economy at full employment, the rebound in employment growth after the small +2.3k gain in December probably still points to continued medium-term inflation pressures. In it’s quarterly policy statement last week Governor Stevens stated the ‘the modest rate of increase in household indebtedness suggests that household behavior remains cautious’ and that ‘there are a few factors, including the recovery in household net worth over the past 18 months and the improvement in the labor market, that would suggest that growth in household consumption is unlikely to remain as low as over the past couple of years’. It’s difficult to sell AUD, but the PBOC decision to hike rates another +25bp this week is also pressurizing regional currency’s that have strong trading ties with China (1.0057).

Crude is lower in the O/N session ($86.18 -0.53c). Oil advanced yesterday on continued uncertainty about Egypt and a weaker dollar. The weekly EIA report revealed no surprises. To date, there have been no oil supply disruptions from the Egyptian political fallout. However, uncertainty is weighing on traders minds. The potential for unrest to affect shipping traffic and pipeline flows and spill over to other countries in the region is supporting the black-stuff on pull backs. Both crude and gas stocks happened to edge higher last week. Oil inventories increased by +1.9m barrels to +345.1m and analysts note that stocks remain above the upper limit of the average range for this time of year. It was a similar story with gas. Inventories moved up by +4.7m barrels after increasing by +6.2m in the prior week, and are above the upper limit of the average range. Crude imports averaged +8.9m bpd last week, down by-105k per day. Over the last four weeks imports have averaged +9.1m bpd, which were +783k barrels above the same four-week period last year. Distillate stocks rose +288k barrels to +164.3m, compared with projections for a +1.2m draw. Refinery utilization rose +0.2% to 84.7%. Fundamentally there is far more oil in storage, more fuel capacity and more idle oil wells to limit a much stronger market rally. Egypt will keep upward pressure on the commodity. The country is a significant oil producer and a rapidly growing natural-gas producer. It is also an important transit corridor for world oil markets with its proximity to the Suez Canal. The fear of a reduction of supply will always exaggerate the commodity’s price.

Uneasiness in the Middle-East continues to provide support for gold, the commodity that every investor hated last month has found strong support on this weeks pull back. Prices have climbed to a three-week high on demand for a hedge against rising consumer prices after China increased borrowing costs earlier this week on expectations that their inflation has expanded at the fastest pace in two and half years. The commodity is being used as a store of value. Last year the commodity appreciated +30%. So far this year, natural physical buying has been less than modest with the commodity off to its worst start in 14-years. Has the commodity peaked or is it simply a short-term correction? The commodity is attracting technical buyers after rallying above its 20-day moving average. On deeper pullbacks, the metal should 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 ($1,357 -$8)

The Nikkei closed at 10,605 down-12. The DAX index in Europe was at 7,278 down-42; the FTSE (UK) currently is 6,006 down-46. The early call for the open of key US indices is lower. The US 10-year backed 6bp yesterday (3.65%) and is little changed in the O/N session. With US yields backing up aggressively all week and Helicopter Ben adamant in staying his course something had to give and it did in the 10-year auction. The US Treasury’s $24b auction of the debt drew the most demand on record from a class of investors that includes central banks. Indirect bidders bought 71.3% of the notes, compared with 53.6% last month and an average of 46.4% for the past 10 sales. The bid-to-cover ratio was 3.23, compared with an average of 3.13. Ben said yesterday that the unemployment rate is likely to remain high ‘for some time,’ indicating that the Fed will maintain its policy of low rates and debt buying. Investors are happy to move further out the curve for value, income and yield. All eyes will be on the last of this weeks auctions, the long-bond this afternoon.

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