Markets Pleased With Bernanke’s Confirmation

Financial markets around the globe are celebrating the confirmation of Fed Chairman Ben Bernanke for another four year term. Prior to the confirmation the dollar rose in currency markets as the news emerged that Bernanke was likely to win senate confirmation. Yuzo Sakai of Tokyo Forex & Ueda Harlow stated; “The news prompted dollar-buying as there’s no adequate person who has (Bernanke’s) abilities.” The dollar rose after comments by White House officials and Republican Senator Mitch McConnell who said that Bernanke’s confirmation would garner senate approval. Last Thursday the senate voted to confirm Bernanke 70-30.

Fed to Retain Independence

Many saw the confirmation of Bernanke as a sign that the Fed may remain free of congressional meddling and that the central bank would remain independent. Dan Fuss of Loomis Sales stated; “This is very good news. It gets rid of probably the biggest worry of all for many investors, particularly foreign investors. They’ve been worried because they see Congress starting to interfere with the independence of the central bank. And the conclusion they draw, and me too, is, ‘There goes the currency, the dollar.’ You trust the central bank or you don’t. This confirmation takes that that uncertainty away for many.” The Fed was created in 1913 after several bank panics and is supposed to be apolitical but traditionally when the economy is bad the Fed chairman is blamed.

Opposition and Support

As if to confirm the politicization of the Fed Bernanke opponent Richard Shelby of Alabama, the senate’s leading Republican stated, “Bernanke fiddled while our markets burned. Ben Bernanke’s Federal Reserve played a key role in setting the stage for the financial crisis.” Many regard Shelby’s statement as political posturing. Bernanke’s opponents blame him for failing to spot the irregularities that led to the financial crisis and lax bank regulation. Bernanke supporter Chuck Schumer said that the partisan fight over the confirmation would send “the message that the Federal Reserve and its monetary policy decisions are under the thumb of Congress. Businesses will be faced with the prospect that the Fed might not be able to do what’s necessary for the economy because of pressure from Congress.”

Rates to Remain Low Says Fed

Many investors see Bernanke’s biggest upcoming task as devising exit strategies from the emergency measures taken by the Fed at the start of the financial crisis. Despite speculation to the contrary the Fed said after a two day meeting last week that rates would remain “exceptionally low” for “an extended period.”

Euro at Four Month Low vs. Pound

The troubled euro fell to a one week low against the US dollar and a four month low vs. the pound. EU finance ministers met to discuss the Greek fiscal crisis and the unreliability of Greek statistics. The ministers believe that Greece has misled fellow EU nations about the size of its debt and are running out of patience with Greece. Rob Minikin of Standard Chartered in London stated, “The Greek developments are definitely casting a shadow on the euro. It underlines how a strong euro could compound problems in the region, and reinvigorates the argument for a weaker euro.” The ministers from the 16 nations that use the euro as a common currency are meeting in Brussels to look at plans to curb Greece’s massive debt. Last week the European Commission said there were “severe irregularities” in Greek data used to calculate the nation’s debt.

Greece’s Credibility at Stake

Last month Fitch Ratings, Moody’s Investors Service and Standard & Poor’s lowered their ratings for Greece boosting concerns about a possible Greek debt default. On January 13th Moody’s said that the economies of Greece and Portugal faced a “slow death” by dedicating more of their already strapped resourced to paying debts. Jeremy Stretch of Rabobank International said, “It’s all about credibility and perceptions, and if there’s a building credibility gap on Greece, the euro will come under pressure. The Greek finance minister will give a presentation, and the question is whether it will be perceived as credible.” At the present time Greece is widely seen as the EU’s weakest member nation.

Bank of Japan to Continue Current Policies

The yen fell against 12 of the 16 most traded currencies on Monday. Bank of Japan Governor Masaaki Shirakawa said that the BOJ will continue its current policy of fighting deflation. Shirakawa told a quarterly meeting of regional branch managers, “The central bank is aiming to maintain an extremely accommodative financial environment.” US markets are closed for the Martin Luther King holiday.

Rise in Risk Aversion

The yen and dollar rose broadly against other major currencies on Friday as investors questioned the speed and strength of global recovery. Falling stocks and commodity prices triggered a rise in risk aversion as investors dumped risky positions in favor of the safe haven of the dollar and yen. The euro was pressured by ongoing Greek fiscal problems and remarks by ECB President Trichet and German Chancellor Angela Merkel. US data indicated a rise in manufacturing and stable consumer price inflation which also helped to lift the dollar. Euro zone finance ministers believe that the Greek government repeatedly misled them about the size of Greece’s debt and are willing to impose sanctions against Greece if necessary. In late trading in New York the euro fell 0.9% trading at $1.4373. Dan Cook of IG Markets in Chicago stated, “What is really crushing the euro is additional concern about the serviceability of the massive amount of debt rung up in Greece.” Cook also said that until Greek fiscal problems are resolved, “we will likely see a lot of selling pressure on the euro.” The euro fell 1.3% against the yen trading at 130.51 yen.

US Data Meets Expectations

Analysts said that Friday’s US data met most expectations and showed improvement in regional manufacturing and stable consumer prices. Data also showed that consumer sentiment was little changed. Michael Woolfolk of BNY Mellon in New York stated, “It’s not a surprise to see better-than-expected manufacturing data. A point of this recovery, outside of fiscal stimulus, is that the U.S. manufacturing sector is already on the rebound.”

EU Problems Not Limited to Greece

Persistent Greek fiscal problems are expected to weigh on the euro into 2010. Problems in other EU countries, most notable Portugal, Ireland, Italy, and Spain, have also pressured the currency. Dean Popplewell of OANDA said, “I do not think the market has fully priced in the extent of the problems in Greece including the other troubled countries in the euro zone — Portugal, Ireland, Italy, and Spain. I don’t believe the situation is contained and I think investors will still demand U.S. dollars as some form of safe-haven.” Monday’s trading is expected to be thin as US markets close for the Martin Luther King holiday.

Fed to Keep Rates Low

The US dollar fell vs. the yen as disappointing retail sales figures for December reinforced the view among investors and traders that the Federal Reserve will keep rates low well into 2010. The dollar held onto gains vs. the euro after the European Central Bank left rates at record lows. Analysts said that the combination of last week’s non farm payrolls report combined with disappointing retail sales data are cause for caution about the pace of global recovery. Joe Manimbo of Travelex Global Business Payments stated, “The U.S. continues to recover at a really slow pace. If you add that to last week’s jobs data, that certainly dampens expectations of an early Fed rate hike. Consequently, that sets the stage for a weaker dollar.”

Greek Fiscal Problems Trouble Euro Zone

The dollar was also pressured by remarks from New York Federal Reserve Bank President William Dudley and Chicago Fed President Charles Evans who said the Fed would need to be certain that economic recovery is firmly underway before the Fed would begin to tighten monetary policies. At the same time the ECB kept its rates at 1% for the eighth straight month. The euro was also pressured by remarks by European Central Bank President Jean Claude Trichet who said that the economic outlook for the euro zone is ‘uncertain.’ Statements by German Chancellor Angela Merkel at a private forum hosted by Die Welt newspaper put further pressure on the euro. Merkel spoke about Greek fiscal problems and said, “The Greek example can put us under great, great pressures. So the euro is in a very difficult phase over the coming years.”

Aussie On Track For Parity With Greenback

The Aussie dollar was the big winner vs. the greenback in today’s trading sessions. The Aussie gained as much as 0.9% against the US dollar trading at 93.28 U.S. cents, a two month high. Rising commodity prices and demand helped currency linked currencies to gain broadly. A recent Australian report said that Australian employers added 35,200 jobs in December. The Reserve Bank of Australia is widely expected to increase rates by a quarter of a percentage point at its next meeting February 2nd.

Commodity Linked Currencies Gain

Commodity linked currencies rebounded from yesterday’s losses as investors concluded that China’s recently announced monetary tightening policies would not adversely affect the growth of the world’s third largest economy. The Aussie gained but markets remain nervous. Australia is one of the chief suppliers of iron ore and coal to China. Australian employers added 10,000 jobs in December which also helped boost confidence in the Aussie. Some currency experts believe that market reaction to China’s move was exaggerated.  Omer Esiner said, “The reaction yesterday to China’s measures was a bit overstated, with the euro and most commodity currencies selling off. Today we are seeing a retracement of that move and the realization that the impact of the China’s bank moves won’t be so detrimental to the global growth scenario. ”

Markets Wait For Fed Beige Book Report

Today the Fed releases its ‘beige book’ which is a report on regional economic conditions and is used as a basis for discussion at FOMC meetings. The next Federal Open Market Committee meets January 27th. Some traders believe the report will be subdued pointing to a prolonged US recovery. Joseph Trevisani of FX Solutions Inc. stated, “Past Beige Books have said the same thing that things are slowly getting better, but today’s is probably going to be toned down. The market is really looking for something that will change the current complexion of things, and the Fed has been making some noise about pulling liquidity.”

Pound Gains on Euro and Yen

The pound gained on the euro and yen after Bank of England policymaker Andrew Sentence told the Guardian newspaper that the BOE will take a ‘wait and see’ approach to its quantitative-easing programs. Better than expected UK industrial production data also boosted the pound in currency markets. Adam Cole of the Royal Bank of Canada stated, “The comments from Sentance gave a sniff of a turn in the U.K. rate cycle, and that lifted the pound. It’s a bit premature in our view, but the comments moved the markets.”

Chinese Data Boosts Risk Appetite

The US dollar suffered a bad day on Monday as worse than expected US jobs data and comments from a Fed official who said rates are likely to remain low for some time put downward pressure on the dollar in currency markets. The dollar was also pressured by positive Chinese export data which boosted risk appetite. Last Friday the US labor Department reported that US employers cut 85,000 jobs which was disappointing to investors who had expected more positive jobs data from the US. On Monday St. Louis Federal Reserve Bank President James Bullard said that rates are likely to remain low for quite some time. Dag Muller of SEB in Stockholm stated, “The dollar went sour after the non-farm payrolls data. If the data didn’t meet expectations then it feeds the thought that there will be a prolonged period of time before the Fed hikes rates, which is what Bullard said. Stocks are higher too and oil is bid, which is another driver of a weaker dollar.”

Bullard’s Comments

After St. Louis Federal Reserve President James Bullard’s comments the euro broke the $1.45 barrier and some experts believe the euro will rise as high as $1.4800. Joseph Capurso of Commonwealth Bank said, “Expectations that the Federal Reserve will keep rates on hold for the foreseeable future, encouraged by Friday’s weak employment report have held the dollar down.” The European Central Bank meets this week and is widely expected to keep rates at record lows. US data to be released this week includes U.S. retail sales, industrial production and inflation data which could further test the dollar.

Commodity Demand Lifts Aussie, Loonie

Many currency experts believe that the Canadian and Australian dollars are on track for parity with the greenback due to rising commodity prices and increased demand. Accelerating U.S. growth is expected to increase demand for Canadian oil and natural gas and Chinese economic expansion will boost demand for Australian iron ore and coal. John Kyriakopoulos of National Australia Bank Ltd stated, “The global economy is going to strengthen, and the recovery is going to broaden out from what has so far been a China-, Asia-led global recovery.”

Yen May Reclaim Carry Trades

A recent rise in US bond yields combined with the recent dollar rally may once again make the Japanese yen the currency of choice for carry trades in 2010. The dollar/yen currency pair has become more attuned to bond yields as both currencies compete for favored funding status. Any shift in bond yields or rate expectations impacts both currencies. Richard Franulovich of Westpac in New York stated, “I think the yen will reclaim its status as the funding currency of choice in 2010. Even if the Federal Reserve raises rates by 25-50 basis points, that would mean U.S. rates will still be markedly above Japan’s.”

Employment Figures Dim Rate Hike Expectations

On Friday the dollar’s recent rally came to an end as US Labor Department figures showed that US employers shed 85,000 jobs in December. The worse than expected figures pared speculation that the Fed will raise rates anytime soon. Most experts had predicted that December’s figures would follow the same trend as November’s jobs figures which showed that US employers added 4,000 jobs in November. The ICE Futures U.S. dollar index fell 0.6% to 77.454. Some Fed officials said in the minutes of December’s monetary policy meeting that persistent unemployment might make it necessary to expend and extend asset purchase programs. Vassili Serebriakov of Wells Fargo said, “All together this report will probably work against the more optimistic expectations on the U.S. economy. It is negative for the dollar, and we are seeing it getting weaker. But we don’t expect to see a complete reversal in the dollar gains from last month based solely on this report. We need more data points.”

Euro Zone Data

Trading could be volatile this week as the results of euro zone data impact markets. Recently released euro zone data includes euro zone GDP, euro zone employment figures, German industrial production, producer price index output and other pieces of euro zone data.

Dollar Viewed as Safe Haven Currency

In late 2008 when the global recession hit the dollar initially rose as traders and investors sold off risky assets for the safe haven of the US dollar and the Japanese yen. The Federal Reserve took various emergency measures to address the financial meltdown and credit crunch. Measures taken by the Fed included reducing interest rates to record lows and introducing quantitative easing.

Trading on Risk

In 2009 when some economies displayed ‘green shoots’ of recovery investors dumped the dollar in favor of higher yielding assets. Throughout the year the dollar traded mainly on risk instead of fundamentals. When the news was bad the dollar gained and when the news was good investors sought out higher yielding currencies such as the Aussie and Kiwi dollars. Low US rates enabled investors and traders to use the dollar to fund ‘carry trades’ where investors use currencies with low rates to fund the purchase of higher yielding assets.  Neil Mackinnon of VTB Capital stated, “This year, particularly since the Federal Reserve adopted ‘quantitative easing’ as a formal policy and cut interest rates to virtually zero, the U.S. dollar effectively became for investors and traders a funding currency. So investors and traders would borrow in dollars and use those funds to invest in higher-yielding investments like equity markets, like commodities, emerging markets, high- yielding currencies.”

Year End Dollar Rally

The dollar rallied broadly after the November non farm payrolls report that showed that US employers cut fewer jobs. Most non farm payrolls throughout the recession showed job cuts in the hundreds of thousands and the November report showed that only 11,000 jobs were lost. Many analysts thought initially that the low figure was a misprint. Since then figures from the US indicate that recovery is under way. The dollar gained against the euro which had been pressured by EU banking problems and the credit downgrades of several EU nations.

Fed Rate Hike Key Question

When the Federal Reserve will raise rates continues to be a key question in currency markets. Many currency experts believe that recent positive US economic data will prompt the Fed to raise rates early in 2010. Investors remain concerned about mounting US debt and massive deficits caused by ongoing wars in Iraq and Afghanistan and various stimulus programs. The US deficit is now at a record $1.4 trillion dollars for the 2009 fiscal year. 2010 should be an interesting year for the dollar!