Bernanke Posts on Forex Blog
Is Systemic Risk Over Hyped?
Jul 15, 2008
Certainly systemic risk is a real threat to the US Dollar.
With Fannie Mae and Freddie Mac woes (each down 75% year to date) and other banks encountering credit related problems it is easy to be glum. With record energy and food prices it is easy to be pessimistic about US growth.
But is it really financial Armageddon?
Are traders justified in running up the Euro and Pound in the face of more pessimistic data out of Europe?
In the short term, perhaps yes.
In the medium term, I don't think so.
What the US has going for it
This is not your grandfather's depression.
First, you have a Fed with far fewer constraints vis-a-vis the 1929 Fed. Indeed, the Fed is now run by monetarists who have extensively studied and argued how the Great Depression could have been avoided. Are they wrong? Only the markets can answer that in the long run, but early indications, while sometimes obscured in a sea of negative presidential year rhetoric, are to the contrary.
Consider this, the Fed today has increased expectations for annual GDP growth to 1.0% - 1.6% vs earlier forecasts of 0.3% - 1.2%. In addition, monthly job losses have held below 100k, far below previous recession peaks of 300k+. Q1 GDP was revised upwards from an annual rate of 0.6% to 1.0%. Exports remain a source of growth while inventory is tightening (meaning exporters are only buying what they can move).
And in a great sign for the tech sector, Intel posted prfit gains of a whopping 25% today. I have long suggested the housing recession would end in part with a Web 2.0 / High Def / extreme bandwidth tech cycle.
Second, the US government has bankers in all the right places. Hank Paulson of Goldman Sachs fame runs the US Treasury. And now the US Senate has finally confirmed a banker for the Fed in Elizabeth Duke. These 2 combined can provide an immense amount of insight and necessary guidance in steering the US through the economic storm.
Third, after entering the credit crisis while sitting on their hands, various entities have become innovative and expanded beyond the standard usage of interest rate policies to move markets. This was first demonstrated by the Fed when they negotiated the sale of Bear Sterns to JPMorgan Chase and opened the discount window to investment banks.
And lately, this innovation has gone further. Including a) the Fed opening the discount window to Fanny and Freddy b) the Treasury asking congress to grant emergency powers to expand GSE credit facilities and purchase equity and most recently c) Christopher Cox banning naked shorts on Lehman Brothers, Goldman Sachs, Merill Lynch, Morgan Stanley, Fanny, and Freddy
If the shorts get too bold, and the Treasury is granted permission to buy equity, I trust that Hank Paulosn knows how to coordinate a short squeeze. While perhaps unethical and smacking of market manipulation, it is a possible strategy that Mr. Paulson may use to restore value in Fanny and Freddy, and thus renew investor confidence in the mortgage markets.
As Mr. Paulson said before the Senate today, when you walk down the street with a squirt gun, you are likely to have to use it. When you walk down the street with a bazooka, others are unlikely to test you. So it shall be with the Treasury and GSE shorts.
What the Eurozone has going against them
In short, a crises of false hopes.
Today, some traders are fleeing to the Euro in the mistaken belief it is a safe heaven against a systemic crises in the US.
They could not be more wrong.
Consider the latest data, the ZEW Survey came in at an astoundingly low -63.9, European auto sales are down -8% year over year, Italian GDP has been slashed from 1.0% this year and next to 0.4% in 2008 and 2009, and ECB members now warn of growth risks despite their mandate to keep inflation in check. And that all happened today, when the Euro set fresh new highs.
As things settle down in the US, Euro longs may be in for a rude shock as markets readjust for recent macroeconomic data.
Indeed, ECB Council Member Vito Constancio has sounded rather Greenspanian circa 2004. He warned "Under normal circumstances, a rise in the interest rate by the ECB would have resulted in higher medium-term rates and a higher euro. Well, the exact opposite happened," Sounds like the EU is facing their own conundrum.
With the global economy slowing down, fx traders in late 2008 / early 2009 are likely to see an environment where the US is raising rates while Europe, the UK, Australia, and New Zealand are cutting rates and the Swiss and Canadians at best hold firm. Such an environment will put a smackdown on the current Carry Trades.
Again, don't get me wrong. This is NOT short term advice. I would not put a stop in the EURUSD below 1.5781. But with FX markets currently ignoring macroeconomic data to focus on systemic risk, it is better to keep a clear perspective on the entirety of the big picture.
ZEW Survey, Credit Crunch, Hank Paulson, Bernanke, EUR, USD
Bernanke, Paulson, Cox Take Center Stage
Jul 14, 2008
The US Dollar is likely to see unusually high volume starting at 10am est tomorrow.
At that time, Fed Chairman Ben Bernanke will have the floor to himself when he gives his semi-annual monetary policy report. The discussion will likely center on today's revision to mortgage lending rules and when Mr. Bernanke believes the credit crises will abate.
In an unusual move, Treasurer Henry Paulson and SEC Chairman Christopher Cox will join Mr. Bernanke at at a second hearing. No doubt, the topic of discussion will center around steps taken to prevent the collapse of Fannie Mae and Freddie Mac. This hearing will take place after Mr. Bernanke's monetary policy report.
Senator Chris Dodd, head of the Senate Committee on Banking, Housing, and Urban Affairs has indicated that he is receptive to the proposals put forth by Hank Paulson over the weekend. Senator Dodd stated that "Fannie and Freddie are in sound shape, but fear produces its own results". He further implied that he hopes to add amendments enacting Mr. Paulson's recommendations to last week's housing bill. The bill would then likely pass in time for President Bush to sign by Friday of this week.
US Dollar trades may also see some movement when reports on retail sales, PPI, and the Empire Manufacturing Index are released.
Retail sales are expected to rise 0.5% (1% excluding auto).
Lehman Brothers, the entity responsible for kicking up the Fanny and Freddy storm last week, is looking for 1.3% MoM and 8.5% YoY on the PPI.
The Empire manufacturing index is expected to come in at -5.
The German ZEW Survey will be released at 5am tomorrow, and may surprise to the downside. Industrial production has fallen off dramatically in France and Germany and trade balances shrunk last week.
Credit Crunch, Bernanke, Fed, USD
The Calm Before the USD Storm?
Jun 24, 2008
Bring back Fed Speak.
The Fed will have to craft tomorrow's statement very carefully. Perhaps some good ole' Greenspan ambiguity would be best.
A spat of negative news today confirmed the US economy is facing difficult times. The Case-Shiller index showed a whopping 15.3% annual decline in home prices. The OFHEO report, which tracks mortgages backed by Freddie Mac and Fannie Mae, showed an annual drop of 4.6%. The Richmond Fed Survey dropped to a low of 4.5 And consumer confidence fell far more than expected, to a reading of 50.4 (vs expected 56.5).
Yet the dollar didn't fall of the face of the earth.
Instead, it remained within a fairly narrow range against the Euro, Pound, and Yen. Evidently, traders feel the Fed is turning hawkish.
Aside from a month of hawkish commentary, what fundamentals can rationalize a strong statement out of the Fed?
1. Uptick in Q1 GDP
I can't stress this one enough. Q1 GDP is expected to be revised up to 1.2% later this week. From an initial reading of 0.6% (later revised 0.9%), that is fantastic.
2. The ARM Conversion Wave
Years ago, the Economist put out a great article discussing the housing bubble pre-burst. In it, they included a graph detailing the ARM conversion wave. The wave had a considerable upswing in Spring 2007 (start of credit crisis), another bump Spring 2008, and a final massive bump in 2010. That suggests that housing will see at least a temporary reprieve for the next 18 months.
3. FDI Outflows are Dropping, Inflows are Picking Up
The OECD today reported that foreign outflows have dropped sharply among member nations. Outflows are now expected to come in at $1.14 trillion, down 37% from the $1.82 trillion in 2007. Indeed, lower than the $1.21 trillion in 2006.
And last week, the TIC showed a sharp increase of inflows of $115 billion vs expected $63.3 billion.
4. Durable Goods Orders
The last 2 reports have beat expectations. The latest report will come out almost 2 hours before the Fed statement. Another surprise (especially excluding autos) is a sure sign of US resiliency.
5. Politicians are Dragging Us Down
It is not a great stretch to suggest political speeches are helping to drag down consumer sentiment.
The Fed is charged with remaining out of politics. As such, they should be expected to ignore the constant down talking of the US economy that is coming out of the politicos.
6. The Greenspan Tarnishment
Former Fed Chairman has taken a lot of heat for leaving rates too low for too long. Bernanke must be conscious of this perception. He must show this Fed will not repeat the mistakes of the past.
Expect the Fed to leave rates unchanged with commentary highly suggestive of rate hikes in the near future.
GDP, housing, Bernanke, durable goods, Fed, FOMC, USD
Signs of USD Rebound Over the Next Few Months Continue to Mount
Jun 5, 2008
Fed comments, improvements in services, ADP Jobs, and more Asian Oil subsidies may signal a fundamental rally in the greenback.
For the second day in a row, Fed head Ben Bernake took a hawkish stance on inflation. He indicated that long term indicators of inflation were of "significant concern" This is the 3rd time in a week (President Fisher last week) that a Fed member has made comments focusing on inflation. With Mishkin on the outs in August, the chance of a US rate hike this fall looks positive.
In addition, the US economy continues to skirt inflation. The service sector accounts for around 80% of American jobs. Well, today the ISM non-manufacturing reported a reading of 51.7, 0.7 higher than forecast. It represented a minor dip from the April reading of 52. A number above 50 represents growth.
Also, ADP numbers for private employment showed 40k new jobs, 70k over expectations. However, that ADP number needs to be taken with a grain of salt. The number has been wrong by an average of 104k since November. Q1 productivity also beat expectations slightly, with a 2.6% reading vs a forecast 2.5%. By comparison, 2007 Q1 productivity was up 1.8%.
Meanwhile, numbers in the UK and Europe continue to sour. Eurozone retail sales fell -0.6 vs an expected gain of 0.2%. And services seemed to contract for both the UK and the Europeans. The UK slipped into contraction with a PMI service reading of 49.8 vs a forecast of 50.5. The Eurozone PMI service number came in at 50.6 vs an expected flat reading of 51.1.
As expected by many traders, Asian countries have begun cutting subsidies. Indeed, Malaysia announced a whopping 40% raise in gas prices, and 67% rise in diesel prices! Malaysian consumers of gas will now pay $3.30 a gallon of gas (vs $2.32) and $3.04 for a gallon of diesel (vs $1.22). Malaysia - a net exporter of oil - becomes the 5th major Asian country to cut subsidies. Indonesia (raised prices 28.7% in late May), Taiwan (ended all price controls effective June 1), India (raised prices 11% this week), and Sri Lanka (raised prices 25%) have already acted on the skyrocketing cost of oil. It should also be noted that Egypt, the most populous Arab country, raised prices 40%.
As an aside, Chuck thinks many governments and traders underestimated the impact of Cyclone Nargis and the China earthquake. The two mega-disasters created a sudden need for diesel fuel to power generators. Economic historians will eventually recognize that disasters and ambitious speculation was the reason oil reached $135. July futures fell to $122.30 today.
The EURUSD traded in a 50 point range over 1.5425. The greenback is up 4% vs the Euro since the all time high of $1.6019 in late April.
Greenback, jobs report, Bernanke, oil, Fed
A Bundle of US Data This Week May Move Dollar Trades
May 27, 2008
The US will see a number of potentially trade driving reports in this holiday shortened week.
On Tuesday May 27
The S&P Case-Shiller Index at 9am est.
At 10am, New Home Sales and consumer confidence will be reported.
Wednesday May 28
Durable goods will be reported at 8:30am est, before equity markets open.
Thursday May 29
Revised Q1 GDP and weekly jobless claims are reported at 8:30am est.
Also, Fed Chief Ben Bernanke speaks at 2:30pm in Basel Switzerland. And Fed Vice Chairman Kohn talks at 7pm.
On Friday May 30
Consumer sentiment will be reported at 10am est
Other notable forex movers will be the German Unemployment numbers May 29 and Canada's Q1 GDP.
In light volume May 26, the EURUSD held above the $1.5750 support. Given the upbeat comments from the Germans last week, and the negative mood from the US Fed, this week's data has the potential for sending the EURUSD above the $1.58 resistance - we shall see.
GDP, jobs report, housing, Bernanke, upcoming reports, consumer confidence, Fed
Bernake: Foreclosure Issue Requires More Action
May 5, 2008
In a speech at the Columbia School of Business, the US Fed Chief urged more movement to combat the nation's foreclosure problem.
According to Mr. Bernanke, unemployment alone does not account for foreclosure rates in Florida, California, and Colorado. Instead,piggy back loans plus declining home values are working in conjunction to stop people from refinancing out of the problem.
Mr. Bernanke was heard to say "Doing what we can to avoid preventable foreclosures is not just in the interest of lenders and borrowers. It's in everybody's interest."
Read more at CNN
Bernanke, Fed
Bernanke Warns of Contraction
Apr 2, 2008
US Fed Chief Ben Bernanke warned the economy 'could even contract slightly' on Wed April 2. During congressional testimony, the Chairman also stated that recent moves - interest rate cuts and liquidity measures such as opening the discount window to investment banks - appear to have 'helped stablize the situation'.
Bernanke's comments did not offer much clarity on the chances for further rate cuts.
Read more at the Financial Times
Bernanke, Fed
