Bigger Punch Irene or Bernanke?

Bernanke is unlikely to announce any new easing initiatives at todays ‘market hyped’ gathering in Jackson Hole. Dallas Fed Fisher has already stated this week that the Fed has no intention of announcing ‘some magical new policy’. Besides, others note that this market environment is ‘not the time for adventurism, it requires stability’. Investors can expect Ben to reiterate what he said in the past regarding the options that are still open to the Fed (paying interest on reserves, reinvestment of interest from their portfolio and increase duration). In other words, repeat and rehash his last communique. If he conveys that there is absolutely no way the Fed will allow the US economy to deteriorate, and that they will use all policy tools at their disposal, then it will be risk-on and the dollar to weaken, again. The window of opportunity to maximize the bang for your buck will probably only be a few hours as some investors make haste and vacate New York ahead of Hurricane Irene.

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 ‘tight’ trading session.

This skittish market was more concerned about acquiring anything toxic ahead of Bernanke’s over hyped speech today than yesterday’s disappointing US weekly claims data. The number of new claims climbed higher by +5k to a seasonally adjusted +417k. Adding further disappointment was the prior week’s release being revised up by +4k to +412k. The unexpected gain was fueled in part by a labor dispute at Verizon (+45k went on strike).

Digging deeper, the four-week moving average, which smoothes some of the volatility increased by +4k to +407.5k. The headline print offers little hope for improvement in the short term for the US job market. The recent trend remains elevated, moving further away from the psychological +400k where below analysts believe that the market is creating job. On the flip side, the data excluding the Verizon labor dispute shows that companies are slowing the pace of firings, which may ease concern that consumers will cut back on spending. However, the unemployment rates of +9.1% remains a psychological hurdle. The number of continuing claims fell by-80k to +3.64m (one week lag reporting) and the unemployment rate for individuals with UI was +2.9%, down from +3%. Analysts are estimating that August Payrolls grew by about +95k.

The dollar is lower against the EUR +0.48%, GBP +0.28%, CHF +0.17% and JPY +0.63%. The commodity currencies are stronger this morning, CAD +0.20% and AUD +0.68%.

There is no denying it, the commodity growth sensitive currency, the loonie, remains range bound. It’s movements are been dictated to by the risk loving and risk aversion trading strategies that are positioning most portfolios ahead of Ben’s highly ‘over’ anticipated speech in Jackson Hole today. Yesterday, the loonie managed to trade to intraday high as investors sought a refuge in currencies of countries that rely on natural resources for economic growth. However, risk aversion spurred by EU regulators extending bans on equity short-selling to prevent the region’s sovereign-debt crisis from worsening had investors again lightening up on their growth and interest rate sensitive basket.

Outlook for the Canadian economy has come under serious scrutiny over the past few weeks. Governor Carney says second-quarter growth is likely to be flat or down slightly. It was only a month ago they had forecasted growth of +1.5% on an annualized basis in the quarter. Parity looms again for the loonie on fears about the stability of the European banking system and on the back of weaker data from its largest trading partner. Technically, the currency needs to fill in that gap. The loonie has dropped –4.1% so far this month, as global equities remain on the back foot. Investors are better buyers of dollars on dips (0.9863).

The Aussie printed a two-week high o/n against the yen after RBA governor Stevens said inflation ‘bears careful watching’, easing speculation that policy makers would cut rates any time soon in a speech to the House of Representatives Standing Committee. Futures dealers reduced their expectation for RBA rate cuts over the next year by-7bp to +126bp. He acknowledged the ‘heightened’ degree of uncertainty offshore, but again, highlighted the impact from the improvement in the terms of trade on income keeping inflationary pressures elevated. Importantly, Stevens discounted concerns over bank funding. He has also commented on how Australia’s corporate, household and Government balance sheets are strengthening. Although the Governor stating that the currency at 1.10 is ‘getting ahead of itself’, he said that intervention would have been futile. Big picture, the Aussie remains vulnerable to bouts of renewed global stress. Many now expect the RBA to remain on hold for the remainder of the year, as ‘risks for policy makers have become more evenly balanced and the outlook remains conditional on the strength of the global economy’. Currently, investors are better sellers of the currency on rallies (1.0504).

Crude is lower in the O/N session ($84.95 down-0.35c). Crude prices rallied to a weekly high yesterday on speculation that Ben and Co. would announce new measures to stimulate the economy, and after US weekly supplies declined as refinery rates matched their highest level for 2011.

Oil stockpiles fell -2.21m barrels to +351.7m last week. The market had been anticipating a build of inventories of +800k barrels. Crude imports fell-477k barrels per day to +8.77m. Also of note, data released by the IEA shows that the US SPR supply fell -4.8m barrels last week. On the flip-side, gas inventories rallied +1.36m barrels to +211.4m. Analysts had been expecting a-1m barrel decline. Average gas demand in the last four-weeks fell -2.4% from a year ago. Finally, distillates (heating oil and diesel), rose +1.73m barrels to +155.7m, more than the forecasted rise of +700k barrels. Refinery utilization rose +1.2% to +90.3% of capacity.

The report is bullish for crude and bearish for the products. For the moment, Crude prices continue to hold just above strong support levels, supported by Libya, exclude them from the equation and the commodity remains vulnerable. The Fed’s monetary policy will be bearish for the dollar and so should be bullish for crude in the longer term. The market now waits for Ben to re-enforce the Fed’s intentions.

Gold extended its biggest slump in three-years yesterday as investor demand diminished after a rally to a new record this week. From a technical perspective this is a normal correction given the magnitude of this months move. The weak long investors have been tapping the market and taking some profit off the table on speculation that financial markets may be stabilizing, eroding the appeal of the precious metal as a safer haven. The commodity has lost over 8% in the past three-days, that’s equal to all of the last two week gains. Technically it’s a crowded trade that investors wished to pare on expectations Bernanke will do something to boost equity prices today. This morning we see small traction in commodity prices, bouncing from this weeks lows.

Before this week’s carnage, the commodity trade was up +31%, y/d, as the global debt crises and volatile stock markets boosted the appeal of the metal as an alternative asset. A hike in margin requirements for gold forwards in Shanghai is also helping to curb the precious metal’s meteoric rise. This is a similar move to the COMEX margin hike of +22% earlier in the month.

Big picture, with the Fed’s efforts to drive interest rates lower to support lending should curtail the dollar’s appeal and by default, support commodities eventually. The commodity is heading for its eleventh consecutive annual gain ($1,788+$24).

The Nikkei closed at 8,797 up+25. The DAX index in Europe was at 5,507 down-76; the FTSE (UK) currently is 5,095 down-35. The early call for the open of key US indices is lower. The US 10-year eased 5bp yesterday (2.22%) and is little changed in the O/N session.

Yields on shorter term treasuries remain rooted to their record lows amid speculation that the Fed will signal later this morning that policy makers are willing to take further measures to prevent the US from falling back into a recession. On out the US curve, treasury prices rose as global equities slumped and as US weekly claims unexpectedly increased last week, fueling concern the economic recovery is slowing and stoking demand for debt again.10-year yields remain range bound +2.35-2.03%.

A disappointing result from Bernanke this morning should push the US yield curve to continue to trend lower as money is forced to seek yields that are further out the curve. With 2’s tied to o/n funds the only way for the curve to steepen (normal curve) is through higher inflation expectations.

This week the market has been focusing on the demand for US product as yields fall to new record lows. The US treasury issued $99b of new notes supply and the demand for 2’s and 5’s were strong and printed record low yields. Yesterday’s 7-year sale was decent. The issue was offered at +1.58%, the lowest yields since the notes were reintroduction in 2009. The bid-to-cover ratio was +2.76, compared with the average of +2.78. The indirect bid was +51.7%, highest in eight-months, compared to the average of +39.6%. Now we all wait!

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