Bernanke Triumphs Over Opponents

Federal Reserve Chairman Ben Bernanke was confirmed by a senate vote of 70-30 last Thursday. United States President Obama and his allies in the Senate put pressure on several senators to get the 60 vote super majority necessary to defeat Bernanke’s opponents. Democrats supported Bernanke by 47-11 and the Republican vote was 22-18 in favor of confirmation. Many economists and experts have decried the politicization of the Fed which has traditionally been politically neutral and independent. Chris Krueger of Concept Capital stated; “The politically neutral and independent Fed has really been politicized this week, probably to its detriment.” Lawmakers who ultimately supported Bernanke said they were influenced by the original approaches taken by Bernanke to avoid a more serious financial meltdown. Michigan Democrat Carl Levin, said; “Chairman Bernanke’s performance in addressing the economic crisis and his current efforts to significantly enhance financial regulation to help prevent future crises outweigh his past mistakes.”

Exit Strategy Bernanke’s Biggest Task

Bernanke’s biggest task will be to decide when to dismantle the emergency measures used to address the financial crisis. For the past few months speculation has been rampant on when the Fed will raise interest rates. Every piece of positive US data has prompted speculation of a rate increase. Last Wednesday after a two day meeting the Fed announced that interest rates would remain “exceptionally low” for “an extended period.” Public anger over expensive bank bailouts has dominated the political landscape running up to the mid term 2010 elections. Public anger could lead to legislation which would strip the Federal Reserve of its supervisory role over banks and its consumer protection responsibilities.

Fed to Remain Independent

Investors, including foreign investors had worried that Bernanke’s confirmation difficulties could lead to increased congressional meddling in central bank decisions and monetary policy. Financial markets including currency markets were relieved by Bernanke’s confirmation believing that the confirmation limits congressional leverage over the Fed and its decisions. Dan Fuss of Loomis Sayles in Boston expressed the view of many when he said; “You trust the central bank or you don’t. This confirmation takes that uncertainty away for many.”

Congress May Curb Fed’s Power

Bernanke supporters and opponents voiced concerns. Senator Christopher Dodd, a Bernanke supported has criticized the Fed for lax oversight of banks. Dodd stated; “If I had been voting solely on the performance in ‘07, I would have voted against him.” Dodd and Senator Richard Shelby of Alabama and a Bernanke opponent want to strip the Fed of its supervisory power over banks. Shelby stated, “We should seriously consider, and we’re talking about, taking the regulatory power away from the Fed, let them concentrate on monetary policy. There’s a lot of unrest in the country, and a lot of people do not believe that the Fed should have been the central intervener in too-big-to-fail” financial firms.”

Rising Home Prices Boost Pound

The euro remains under pressure and hit a four month low against the pound on Monday. The pound traded below 88 pence per euro after a survey showed that UK house prices increased in January. Home prices in England and Wales rose 0.4% in January. Mitul Kotecha of Calyon, the investment-banking unit of Credit Agricole SA stated, “Data such as house prices and consumer sentiment are showing some signs of improvement. The pound is among our favorite currencies this year. A lot of negative news has already been in the price.” Economists believe that the UK’s economy is showing signs of recovery. The Bank of England cut its key interest rate to a record low of 0.5% and engaged in an a 200 billion pound asset purchase program. The pound also gained on speculation that US based Kraft Foods will increase its bid for Cadbury showing that demand for UK assets is growing.

Greece Casting Shadow on Euro

EU finance ministers met today to discuss the Greek fiscal crisis. Most believe the finance ministers are running out of patience with the Athens government and that the finance ministers have been repeatedly misled by the Greek government about the size of the nation’s budget deficits. Greek fiscal concerns have pressured the euro during recent trading sessions. Rob Minikin of Standard Chartered in London said, “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 euro weakened broadly last week after the European Commission said that there were “severe irregularities” in the economic data Greece used to calculate its deficit.

Bank of Japan to Maintain Current Policies

The yen fall against most of the 16 most traded currencies after Masaaki Shirakawa, Governor of the Bank of Japan said the central bank will continue its deflation fighting policies. Addressing a quarterly meeting of regional branch managers Shirakawa said, “The central bank is aiming to maintain an extremely accommodative financial environment.”

Dollar Boosted by US Data

The US dollar gained against most major currencies on Friday boosted by US reports showing increased manufacturing and stable consumer price inflation. The troubled euro fell 0.9% against the dollar as ongoing Greek fiscal problems weigh on the euro. Despite recent dollar gains some currency experts expect the dollar to remain weak during 2010. Many expect investors to dump dollar denominated assets in favor of higher yielding securities and currencies. David Bloom of HSBC Holdings Plc stated, “A dollar recovery would require overseas investors to be enthusiastic buyers of U.S. assets. Given the domestic financial imbalances, this seems unlikely, and we expect the dollar to remain weak throughout 2010.” In addition Bloom and his team said that the dollar will remain a favored currency for carry trades. Bloom said, to the extent that carry trades are back in fashion, it may well be the dollar that is the preferred funding currency given its low rates, high liquidity, and continuing current account deficit.” The reluctance of the Federal Reserve to raise rates has negatively affected the dollar and the Fed has said that rates are likely to remain at record lows for an ‘extended period.’

China Tightens Policies

Recent policy changes by The People’s Bank of China have sent ripples through global markets. The central bank said it would increase the proportion of deposits that China’s lenders must set aside for reserves in an effort to rein in growth. The move pressured commodity linked currencies such as the Aussie and kiwi dollars. Lowered commodity prices and reduced demand have pressured both currencies. Australia is a chief supplier of raw materials to China. Yoshihiro Nomura of Trust & Custody Services Bank Ltd said, “China is beginning to show signs of tightening, which should lead to risk aversion. Investors are sensitive to China’s news. I wouldn’t be surprised if the euro-yen were to drop further.”

US Markets Closed Monday

US markets will be closed Monday in observance of Martin Luther King Day but several reports are due later in the week from the US. Data to be released this week includes U.S. net capital flows, producer prices, housing starts, and initial jobless claims.

Disappointing US Retail Sales Data

The US dollar fell close to a three week low as US retail sales data showed an unexpected decline in December normally the busiest retail sales season of the year. A separate U.S. Labor Department showed that jobless claims rose during the week that ended January 9th. New unemployment claims jumped to a total of 444,000, 11,000 more than the previous week. The dollar extended losses after the Fed’s beige book report that showed modest economic improvement.

Rising Commodity Prices Prompt Loonie Gains

The Canadian dollar rose against its US counterpart as investors speculated that rising commodity prices will spur recovery in Canada. The Canadian dollar advanced 3.5% last month and is on track for parity with the US dollar for the first time since 1976. Commodity linked currencies are expected to gain as rising demand for raw materials will increase due to recovery. US growth is expected to raise demand for Canadian oil and natural gas. The Aussie dollar rose against all of its major competitors today as Australia’s statistics bureau said that the country added 35,200 jobs in December and that the Australian Reserve Bank may raise its rates by a quarter of a percentage point. Jane Foley of Forex.com stated, “The strength of the Australian dollar is again lending support to the Canadian dollar and the New Zealand dollar.”

Trichet’s and Merkel’s Remarks

The euro declined against the greenback after European Central Bank President Jean Claude Trichet said that the outlook for the euro zone region is ‘uncertain’ and added that “Greece fiscal problems won’t get any special treatment.” Germany’s Chancellor Angela Merkel said that Greece’s fiscal problems would lead to a “very difficult phase” for the 16 nation currency. Greek Prime Minister George Papandreou’s government has a plan to push the country’s deficit below the EU’s budget limit in 2012. Referring to Greece, Trichet said, “no government, no state can expect special treatment.” Greek fiscal problems will likely plague the euro for some time to come.

Fed’s Beige Book to be Released

The US dollar fell against 12 of the 16 most traded currencies in advance of the release of the Federal Reserve’s ‘beige book’ which is a summary of regional economic conditions. Many investors see last week’s weak US employment figures as pointing to a prolonged US recovery. Andrew Wilkinson of Interactive Brokers Group stated, “The lackluster momentum for the U.S. recovery has resumed and that seems to be undermining the dollar right now.” The Fed will release the beige book today and the report is used as a basis of discussions at FOMC meetings. Joseph Trevisani of FX Solutions Inc. pointed out the importance of the beige book report and said, “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 BOE Statements

The pound gained 0.7% against the greenback trading at $1.6282. The pound also gained against the euro and yen. The pound was lifted after Bank of England policymaker Andrew Sentence told the Guardian newspaper that the BOE may adopt a ‘wait and see’ approach to it’s program of quantitative-easing. The pound was also bolstered by better than expected UK industrial production data. 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.”

Yen Falls Broadly

The Japanese yen fell broadly as stocks rose. Currency experts now say the yen is the currency of choice for carry trades. David Deddouche of Societe Generale SA in Paris said, “The yen is clearly now the funding choice for the carry trades. As long as we stay in the sweet spot for equities, the yen has weakening bias.” On Thursday the US weekly employment figures and retail sales figures are due to be released.

Dollar Sustains Losses

The dollar sustained last weeks losses on Monday pressured by last week’s dismal employment figures and comments by a Fed official who said rates would remain low for ‘quite some time.’ Commodity based currencies were the big winners on Monday and many currency experts say the Aussie and Canadian dollars are on track for parity with the greenback. Increasing US demand for Canadian oil and natural gas and Chinese demand for Australian iron ore and coal helped both currencies to gain in Monday’s trading session. John Kyriakopoulos of National Australia Bank Ltd predicted, “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. We’re forecasting parity for the Aussie dollar, and we actually think the Canadian dollar will go through parity.”

Aussie, Loonie Parity Predictions

The Aussie gained 0.6% trading at 93.04 U.S. cents and was the third best performer in 2009 against the 16 most traded currencies. National Australia, Royal Bank of Scotland Group Plc, JPMorgan Chase & Co predicts the Canadian dollar will achieve parity with the greenback by June 30th 2010. National Australia Bank Ltd predicts the Aussie will achieve parity by March 31st. Commodity based currencies posted 2009’s biggest gains against the US dollar.

Commodity Currencies Big Winners

The most active commodity currencies are he Aussie, loonie, Brazilian real, Norwegian Krone, South African rand and New Zealand dollar. On the positive side history points out that US economic recovery coincides with increases in commodity prices and the Aussie and Canadian dollars. According to the Tihanyi of Bank of Nova Scotia, “A lot of the Canadian dollar gains up to now have been happening in the absence of strong growth in the U.S. Through this year, you’re going to see growth come back to what you might see in a normal year, and along with that you’re going to see a pickup in trade and demand for Canadian products.”

US Employment Figures Dim Rate Hike Expectations

The US dollar posted its biggest decline against a basket of six major currencies on Friday. An unexpected rise in US unemployment pared speculation that the Federal Reserve will raise rates anytime soon. The dollar also pulled back from a four month high against the yen and the euro posted its biggest daily gain vs. the dollar since November. In previous trading sessions the dollar had rallied as investors expected the trend set in November to continue. The revised November jobs report showed a gain of 4,000 jobs and prompted speculation that the Fed would raise rates in early 2010. The Labor Department report showed that US employers cut 85,000 jobs in December 2009. Samarjit Shankar of BNY Mellon stated, “It was undoubtedly a disappointing number. It’s put a dent on rate hike expectations … and is a bit of a setback for investors who were looking for a relatively stable and smooth economic recovery. The U.S. still has a weak labor market, and until that gets turned around, you are not going to have a sustainable recovery.”

Yen May Be Currency of Choice for Carry Trades in 2010

A recent rise in US bond yields coupled with the recent dollar rally is prompting investors to return to the yen to fund carry trades. A carry trade is a strategy using low yielding currencies to purchase assets in higher yielding currencies. The rise in US bond yields is making dollar funded carry trades more expensive. Richard Franulovich of Westpac 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.”

Euro Zone Data May Cause Volatility

Many experts expect volatility in currency markets this week as a slew of Euro Zone data will keep investors busy. Euro Zone data due this week includes, Euro Zone Gross Domestic Product, the Euro Zone unemployment rate and other data including German industrial production.

Dollar at Three Month High vs. Yen

The US dollar advanced to its first monthly gain since June 2009 as government reports show that job losses are ‘abating.’ Despite the year end rally the dollar is down 4.2% for the year. The dollar hit a three month high vs. the Japanese yen and advanced against the euro on positive US economic data that showed signs of recovery. Money manager Thanos Papasavvas said, “We are seeing the dollar recover probably into the first quarter of next year. We would expect the unemployment rate to start to stabilize.” The Dollar Index which tracks the dollar against a basket of six major currencies rose 4% in December to 77.860, the largest gain since January 2009 and the first monthly gain in six months.

IMF Reports Dollar’s Reserve Shares Declining

International Monetary Fund reported on Dec. 30 that the dollar’s share of reserves held by central banks fell to 61.6% the lowest on record down from 71% ten years ago. The euro’s share of foreign reserves rose from 17.9% to 27.7%. Tom Fitzpatrick of Citigroup Inc. in New York offered a somewhat pessimistic assessment of the dollar, “You might get periodic episodes of a little bit of dollar strength. But we really don’t feel any of the underlying parameters for dollar weakness has changed that much.” The yen was the only major currency to fall against the dollar on the year on speculation that the Fed will withdraw stimulus measures sooner than expected. David Tien of Francis Trees & Watts stated, “The surge in growth can continue for a while. The key question is against which currency the dollar’s gain can be the most pronounced. We think it’s the yen.”

Pound Posts Annual Gains vs. Dollar

The pound posted annual gains against the euro and the dollar as economic data showed the UK emerging from the recession. The pound pared second half advances after the Bank of England bolstered its quantitative-easing program, a debt-buying plan, to 200 billion pounds. ($324 billion USD) Most analysts expect the pound to strengthen in 2010.