CAD Weakness No Surprise
03/03/09 23:59
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CAD Weakness No Surprise
Investors appear to be fatigued of Bernanke and Geithners chatter as little hope is drawn from the words of the authorities. It is no surprise to us, as we have been of the view that no stimulus resist the untold market forces. At least this his what has been repeatedly professed in Pro Traders Club. Bernanke's testimony largely mirrored his previous remarks from a week ago, though he did express more frustration with the way a major insurer operated prior to a government rescue. And he is surprised because? He also said the US may need to expand the size of the $700bn bank rescue fund depending on the results of the upcoming bank stress tests. We see this as a likely event, which will place more strain on the equities markets and further support USD. Geithner's testimony on the federal budget proposal echoed a similar sentiment, as he said that efforts to stabilise the financial system could cost more than the $250bn in the Financial Stability Plan. Both Bernanke and Geithner also indicated more stringent oversight and regulation of financial institutions could be likely going forward. As we have been reminded of frequently in Pro Traders Club, this will tighten credit even further and disable fund managers from taking on the excessive leverage as they had in the past which propped up equities to their highs. As such, we will not see the recent highs again for years to come, but that’s another story. Back to FX. Meanwhile, press reports suggest the Obama administration is starting to provide more details on a potential "bad bank" structure under the Financial Stability Plan.. The Fed announced that the Term Asset-Backed Securities Loan Facility (TALF) would be launched today, and that new securitizations would be funded by the facility beginning March 25, 2009, lasting until at least December 2009. The launch of TALF is anticipated to help ease credit markets closer to normalcy. In other news, economic data disappointed, with pending home sales down 7.7% m/m (cons -3.5%, prior 6.3%) and lower vehicle sales.
View our Workshops page for the latest details on our upcoming workshops.
CAD Weakness No Surprise
Investors appear to be fatigued of Bernanke and Geithners chatter as little hope is drawn from the words of the authorities. It is no surprise to us, as we have been of the view that no stimulus resist the untold market forces. At least this his what has been repeatedly professed in Pro Traders Club. Bernanke's testimony largely mirrored his previous remarks from a week ago, though he did express more frustration with the way a major insurer operated prior to a government rescue. And he is surprised because? He also said the US may need to expand the size of the $700bn bank rescue fund depending on the results of the upcoming bank stress tests. We see this as a likely event, which will place more strain on the equities markets and further support USD. Geithner's testimony on the federal budget proposal echoed a similar sentiment, as he said that efforts to stabilise the financial system could cost more than the $250bn in the Financial Stability Plan. Both Bernanke and Geithner also indicated more stringent oversight and regulation of financial institutions could be likely going forward. As we have been reminded of frequently in Pro Traders Club, this will tighten credit even further and disable fund managers from taking on the excessive leverage as they had in the past which propped up equities to their highs. As such, we will not see the recent highs again for years to come, but that’s another story. Back to FX. Meanwhile, press reports suggest the Obama administration is starting to provide more details on a potential "bad bank" structure under the Financial Stability Plan.. The Fed announced that the Term Asset-Backed Securities Loan Facility (TALF) would be launched today, and that new securitizations would be funded by the facility beginning March 25, 2009, lasting until at least December 2009. The launch of TALF is anticipated to help ease credit markets closer to normalcy. In other news, economic data disappointed, with pending home sales down 7.7% m/m (cons -3.5%, prior 6.3%) and lower vehicle sales.
Until details get worked out on the latest government plans and the effects from the TALF become visible, investors will likely be content to wait on the sidelines after having been disappointed by government initiatives in the past. The dollar should continue to remain supported as the health of the financial system remains in doubt and investor uncertainty continues. There is yet no material indication of any near-term improvement in growth conditions, and we remain of the view that further downside adjustment in investors' growth expectations is likely. Ahead today, non-manufacturing ISM, ADP employment change and the Fed's latest Beige Book are due
Q4 GDP came out below expectations at -0.5%. This will weigh on the AUD, as the market price a hold on rates. This data will change the view of traders as they move to price in the possibility of cuts next meeting. AUD dropped sharply in thin trading after the news. If you watch the Pro Traders Club video, you will see live trading of the event, when we bought at the spike low.
The GDP release comes after the RBA left rates unchanged at 3.25%. According to the central bank, low interest rates and the recent stimulus packages will provide major support to the economy. In addition it was highlighted that the domestic economy has not felt the large contraction as seen elsewhere around the world. However, it was also highlighted that weak economic conditions will remain in tact, and that the stance on monetary policy will be reconsidered at the April meeting. As such the RBA is keeping doors open for further easing in rates if needed and economists expect the cash rate to be reduced to 2% by mid-2009.
ECB President Trichet did not comment on monetary policy in his recent speech in Frankfurt but he did reiterate that the ECB could use "non-standard" policy tools if appropriate to combat the financial crisis. His comment followed ECB Governing Council Member Weber commentary, where he said that the ECB is looking into purchasing commercial paper in order to help companies. The ECB already accepts commercial paper as collateral and Weber said that the ECB has not yet made a decision on the purchase front. Recent comments from ECB officials has increased the scrutiny of the upcoming ECB meeting. While a rate cut by 50bp, as expected by UBS economists, the press conference will be closely followed especially given the wide range of pressing issues facing the Eurozone and we expect Trichet to highlight that uncertainty surrounding the outlook on growth will stay exceptionally high. Also, during the press conference we would not rule out any questions or discussions surrounding quantitative easing. Services PMI across the Eurozone, Germany and France and Eurozone composite PMI are all expected to remain unchanged. Italy services PMI is expected to decline.
The BoC cut the official rate 50bp as expected to 0.50% and mentioned quantitative easing for the first time in the accompanying statement, which has caused CAD to sell off. With the economy being dragged down by the global slowdown and the official rate converging to zero, BoC officials have reversed course and decided to look more into unconventional policy tools. Details of any potential credit or quantitative easing plans, though, will not be released until the April Monetary Policy Report, when it also releases its new economic forecasts. The BoC's decision came on the back of more weak data. Canadian Finance Minister Flaherty preceded the GDP report by saying that economic data will continue to get worse in the current environment and said there would be a substantial drop in Q4 output. Q4 GDP had a larger than expected m/m decline (-1.0%, cons -0.7%) but on an annualized basis it was less contractionary than consensus (-3.4%, cons -3.7%). However, it was still a far departure from the previous reading of 0.9% annualised and it pushed the economy firmly into contractionary territory. Given the slowdown in Canadian growth and trade from the problems in the global economies and financial sectors, we expect CAD weakness to remain. We may see a bounce at 1.3000, but look for more weakness.
Source: UBS, Bloomberg, Chris Lori