The recent bout of volatility continues to challenge investors across all asset classes. Many refer to market declines as typical of ascending volatility, but in its true meaning the term depicts a period of increasing uncertainty with prices prone to surge and fall causing investors to sharpen their reactions. This picture remains true ahead of Friday’s delivery by Ben Bernanke where it’s hard to gauge consensus. Equity investors are proving resilient in anticipation of further stimulus in order to prop up demand and earnings. Currency dealers are concerned that any kind of stimulus announcement would further debase the value of the dollar. Fixed income traders seem resigned to eternally low rates. After all, what are the chances that Bernanke will say that bond yields are too low when the purpose of quantitative easing is meant to depress yields to spark borrowing? But then again, how likely is he to pin the recent slide in yields on the U.S. credit-rating downgrade from Standard and Poor’s?
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Japanese yen – The Finance Ministry softened its tone over the yen’s appreciation by announcing a one-year subsidized loan program to help domestic companies contend with a strengthening yen. Mr. Noda said he would transfer an equivalent of $100 billion of Japan’s substantial forex reserves to the Japan Bank for International Cooperation to help domestic firms acquire or relocate offshore in an effort to circumvent an ever-strengthening yen. This seems to offer a limited compromise to those manufacturers suffering from either loss of demand or reduced overseas earnings as a result of surging demand for the yen. Applause from the Bank of Japan certainly appears to lessen the threat of currency intervention at this point. However, Mr. Noda hasn’t yet put away his sword. He also intends to shame the largest 30 currency players by requiring them to disclose their currency positions by the end of the quarter in September. The yen continued to make gains against the dollar following Wednesday’s announcement and at ¥76.51 is heading to its strongest level on the day per dollar with an eye on Friday’s post-war peak of ¥75.95.
U.S. Dollar – A strong durable goods report for the month of July during which orders for manufactured goods meant to last more than two years jumped by 4% temper bearish undertones ahead of the start of equity trading. The dollar nevertheless failed to find much comfort from the report and continued to decline. Against a basket of bedfellows the index slipped by 0.2% to 73.79. The Census Bureau showed off continuously strong manufacturing output in today’s report, which does depict a healthy manufacturing core. Unfilled orders continued to increase for the 15th month out of 16, as did the level of inventories, which rose to the highest since 1992 records began. And while that data might represent a bright spot it doesn’t change the outcome of Friday’s speech from Bernanke, whose words resonated in the August 9 FOMC statement when the committee judged that the economy was “considerably slower than expected.” Nor does the data offset evidence of a dead-in-the-water housing market. Not only are both existing and new home sales at multi-month lows according to recently posted reports, but also mortgage demand continues to decline. According to the MBA weekly mortgage index about 80% of current activity results from refinancing demand. In the recent week both the refinancing and purchase indices declined according to today’s report.