Morning Wrap for Friday October 15, 2010

Inflation is too low and unemployment is too high - that's what Federal Reserve Chairman Ben S. Bernanke said about the need for additional monetary stimulus at this morning's speech to the Federal Reserve Bank of Boston Conference titled "Monetary Policy Objectives and Tools in a Low-Inflation Environment". He didn’t offer new details on how the Fed would undertake those strategies or give assurances the central bank will act at its Nov. 2-3 meeting. Bernanke said the central bank could expand asset purchases or change the language in its statement, while saying “non-conventional policies have costs and limitations that must be taken into account in judging whether and how aggressively they should be used.” Now back to reality, the USD extended its losses against the euro on Friday after data showed stronger-than-expected U.S. retail sales and softer-than-expected consumer inflation. This data combination is enough to keep the risk trade on. Funny how in the east they call rising commodities a risk trade while in the west they call rising financials a risk trade. In Asia, the USD dropped to a 15-year low versus the Yen after Bernanke's speech was seen as a confirmation of already highly expected quantitative easing measures. In the U.S. today, the US Treasury Department is suppose to publish its Semi-Annual Currency Report, possibly labeling China as a currency manipulator. The reports official release dates are April 15 and October 15, but it is almost always delayed by 1-2 months. While Treasury has been pressured and criticized by Congress for never naming China as a currency manipulator; if it doesn't release the report today then there may be some truth to yesterday's rumour that a deal was in the works with China. The deal would involve China agreeing to either a revaluation of the Renminbi or allowing it to appreciate faster in exchange for not labeling China a currency manipulator and a much smaller Fed QE program. In Canada, the CAD moved higher on news that Canadian factory sales rose four times faster than economists expected in August and on Bernanke's remarks. Next week, Bank of Canada Governor Mark Carney is expected not to raise interest rates after the U.S. Federal Reserve indicated it may add new stimulus, which may strengthen the CAD and hurt exports.