Still struggling after its worst recession in generations, Japan announced a long-term growth strategy Wednesday that seeks to tap into the dynamism of its Asian neighbors, create millions of jobs in new industries and fuel economic expansion of at least 2 percent a year over the next decade.
New York Times
US crude oil prices steadied close to the $79 a barrel mark on Wednesday ahead of the latest US weekly inventories data, while copper reached a fresh 15-month high as strikes threatened production in Chile.
Financial Times
GMAC Inc., the home and auto lender that counts the U.S. government as the largest stakeholder, is discussing with the Obama administration a third bailout of $3 billion to $4 billion. GMAC received two earlier rounds of government aid totaling $13.5 billion as it struggled with losses at home-mortgage operations.
Bloomberg
Currently there is little to write about as we approach the final two days in 2009. Traders and investors are happy to keep their powder dry until the ‘turn’. Last year on this day I penned this:
2008 is the Year never to be forgotten. It’s the year that brought global financial markets almost to its knees, the year that punished greed, leverage and irresponsible risk. A year that has managed to make some oligarchs much poorer and perhaps made us sit up and think about future society values a wee bit more. Brace yourselves for a historic 2009.
Again all we have to do is change the dates!
The US$ is stronger in the O/N trading session. Currently it is higher against 14 of the 16 most actively traded currencies in a ‘subdued, yet illiquid’ trading range.
Finally, yesterday we got some US data to chew on. US Home Prices rose in Oct. for a fifth consecutive month, again adding support to the idea that at long last the housing market and economy are moving along the ‘path to economic’ recovery. The S&P/Case-Shiller HP index increased +0.4% (seasonally adjusted) vs. the previous +0.2% rise in Sept. Putting it another way, year-over-year, the index was down -7.3%, the smallest drop since Oct. 2007. This turnaround and somewhat stabilizing prices could be attributed to the tax credits for first-time buyers and mortgage rates close to record lows may inhibit the market from falling any further. With yearly prices been so low, we have witnessed sales jump +35% in the first 11-months. However, starting at such a low watermark, any strength can easily be impressive and distorting. On the flip side, shadow inventory, mounting foreclosures and a higher unemployment level could still very much impede future gains.
US consumer confidence advanced for a second straight month yesterday (52.9 vs. 49.5), as the pessimistic outlook about job losses seems to have waned slightly. Digging deeper, the consumer 6-month expectation actually increased to 75.6, the highest recorded level in two years. The ‘future’ gain outweighed the decline in the Present Situation Index, which happened to retreat from 21.2 to 18.8 this month (on top of its 26-year low). Somewhat disheartening, consumer expectations over wages declined. This may result in the further slowing to the spending pattern, even with government incentives. Remember, the consumer is the Fed’s go to variable. Uncertainty and pessimism about the US jobless rate exceeding +10% in the 1st H 2010 may force policy makers and retailers to maintain tax breaks and incentives to lure ‘constant’ buyers. The sub-category of ‘jobs are plentiful’ declined to +2.9% from +3.1%. While the individuals who said ‘jobs are hard to get’ actually fell +48.6% from +49.2%.
The USD$ is currently higher against the EUR -0.03%, GBP -0.12%, CHF -0.10% and JPY -0.09%. The commodity currencies are weaker this morning, CAD -0.39% and AUD -0.16%. The loonie ended yesterday little changed, despite appreciating temporarily to a new month’s high on the back of stronger commodity prices and some traders returning after the festive season. The currency continues to outperform 16 of its largest trading partners this month. Elevated commodity prices and robust equity indices have kept the loonie in ‘demand’ territory. Over the last two week’s especially, it has rallied higher on speculation that stronger domestic fundamentals warrant the BOC to hike rates sooner than anticipated. It’s not surprising that Governor Carneys policy of timing may be going step ‘n step with the Fed’s. Year-to-date the currency is up 16% and the Canadian futures market is starting to price in rate hikes sooner than next May. If one prefers being long the greenback, crossing it with ‘this’ commodity sensitive currency is not the ideal answer as analysts continue to favor buying the loonie longer term. Historically, the CAD performs well during the month of Dec. In the short term, be wary of speculators wanting to short the loonie after the fortnights tentatively over exaggerated gains. Better buying on pullbacks.
The AUD softened in the O/N session, trimming the biggest annual advance vs. the greenback in 6-years, as falling Asian equities has persuaded investors to shy away from higher yielding assets. Speculators have managed to snap a 5-day winning streak. Similar to most currency pairings, the markets lack direction because of liquidity constraints and low volume. The RBA believes its monetary policy is ‘now back in the normal range’ after lenders raised business and home-loan rates by more than the RBA themselves have increased (+3.75%) the overnight cash rate target. Traders have aggressively pared bets that the RBA was in a position to hike rates for a fourth consecutive time in Feb. Investors continue to look for better levels to sell despite elevated equity and commodity prices (0.8924).
Crude is higher in the O/N session ($79.01 up +14c). What has happened to crude over the past month? Prices have been rising even as the dollar climbs, they are rising even as interest rates are rising. There is no correlation and it can only suggest that the market is beginning to believe that global demand is rising. Forget the dollar. The demand ‘variable’ seems to be back on the table again. Crude remains better bid after Weather Derivates predicted that US demand will increase +6.7% this week due to the North American cold snap. The black stuff managed to rise for a fifth consecutive day yesterday, supported by last week’s surprisingly weak inventory report. Now that most Capital Markets are tentatively open, albeit with liquidity remaining an issue, the commodity will probably find stronger support on any pull backs until year end. Various surveys again expect inventories to be lower today. Crude inventories fell -4.84m barrels to +327.5m last week. This month alone we have witnessed inventories plummet -3.6%. Digging deeper, last weeks report was even more bullish for prices. Distillate fuel (heating oil and diesel) slipped -3.03m barrels to +161.3m, the biggest decline in 8-months. Gas stockpiles fell -883m barrels to +216.3m. It’s worth noting that this was the first drop in a month and a half. Imports of the black stuff fell -0.8% to +7.71m barrels a day and the lowest level in 15-months. The trend of demand and consumption continues to climb. Gas demand averaged +9.05m barrels a day, w/w, that’s +2% higher than a year ago, while consumption of distillate fuel averaged +3.99m barrels a day, +5.2% higher w/w. Year-to-date, oil has climbed +76%, the largest increase in a decade.
Gold retreated for the first time in three days yesterday on the back of a strengthening greenback persuading investors to shy away from investing in the commodity as a hedging alternative to a weakening USD. The buck has managed to appreciate +3.4% this month, of course the million dollar question remains, is this month’s dollar strength sustainable and will it be repeated at the beginning of the New Year? As per usual, investors will be guided by the inverse relationship of the ‘yellow metal’ to the reserve currencies price movements. Month-to-date, the commodity had depreciated just under 12% after printing a record high of $1,227.50 early in Dec. Year-to-date, it has appreciated +25%, the ninth consecutive yearly gain. Not unlike other asset classes, this month’s holiday swings have been somewhat overly exaggerated on liquidity constraints ($1,093).
The Nikkei closed at 10,546 down -91. The DAX index in Europe was at 5,970 down -41; the FTSE (UK) currently is 5,417 down -21. The early call for the open of key US indices is lower. The US 10-year bond eased 5bp yesterday (3.80%) and are little changed in the O/N session. The US 5-year auction came in at 2.665% vs. the pre-auction levels of 2.655%. The bid-to-cover ratio was weaker than expected at 2.59 vs. Nov.’s print of 2.81 and Oct.’s 3.63%. However, it did match the average of the previous four auctions. Indirect bids (Primary dealers, Cbanks etc.) accounted for 44% vs. the 60.5% print in Nov and the 54.8% demand in Oct. Disappointingly it was well below the four auction average of 54.2%. Softening the blow was direct bids climbing to 13% vs. Nov.’s handle of 2.9%. Overall it was a so-so auction as the market had feared the worst. Today we get to see the final of the $118b worth of product to be issued this week. We should expect 7-years ($32b) to provide further concessions. Technically, these yields do look attractive.
This morning’s trading is marked by an increase in risk appetite, with the Australian dollar (AUD) and the New Zealand dollar (NZD) leading the way. AUD/USD is +1.33%, AUD/JPY +1.45%, NZD/USD is +1.74, NZD/JPY +1.86%. All this comes in anticipation of the US consumer confidence numbers, which are expected to have improved from previous readings.
Also to note is the increased feeling that the global economy is recovering as we get encouraging news from various regions and sectors of the world economy.
Two things I wanted to address:
I have written at length recently about the possibility of the US dollar’s inverse correlation to equity and commodity markets breaking down, as both the dollar and the equities seemed to be trading in tandem. And while I do think that there are definitely conditions where this can exist, I do feel that in the New Year we will see some sort of “reversion to mean”. This means that the recent break could be more of a short-term phenomena than the start of a long-term trend.
One of the reason the dollar could have strengthened is simply short covering. The trade this year has clearly been dollar down everything else up so investors could be lightening the load.
Another possibility that I haven’t mentioned before but got to thinking about was potential government involvement. We’ve all heard of the plunge protection team (PPT) in the equities market, so why not currencies as well? It seems like Larry Summers, director of the National Economic Council, has been awful quiet lately. Let’s not forget his involvement in running the Harvard Endowment into major losses under his watch. In other words, he’s no stranger to making large bets with other people’s money.
So what’s a few billion between friends? I would not be surprised at all to hear of “government market operations” used to “maintain order” in the currency markets. And while this is all speculation on my part, I wouldn’t be surprised to hear of Fed window dressing as well.
As we can see today, the Santa Claus rally is still in effect as stocks are up, yet we’re seeing more risk taking in the currency markets, particularly in the Kiwi (NZD).
Secondly, with regard to the risk trades, look for the Kiwi (NZD) to outpace the Aussie (AUD) as the vehicle of choice for the risk trade going forward. While the Aussie has been the the best performing currency of 2009, investors are betting that we’ve seen the last of the RBA rate hikes for a while and that New Zealand could be next.
Here’s a quick chart of AUD/NZD (click chart to enlarge)
So I expect to see some Kiwi strength against the Aussie in the near-term. There is support at 1.24 for this pair so it will be interesting to see what will happen if it gets there.
In the meantime, keep an eye on the USD to see if we “revert to the mean”.
To learn more about the exciting forex market, take a look at our currency trading courses!
Tags: AUD, Aussie, blog, course, currenc, currencies, currency trading, dow, economy, forex, forextrading, fxedu, Il, interest, invest, jpy, market, Mike Conlon, money, nzd, pair, rate, ssi, time, trade, trades, trend, USD
Global stock markets extended their year-end rally on Monday as a recent improvement in risk appetite showed few signs of abating, although volumes were predictably light.
“As the holiday fortnight drapes around the markets, risk appetites have grown amid optimism that 2010 will bring further joyful tidings of sustained economic improvement led by the Asian economic recovery and a turnround in the dollar,” commented Michael Wallace at Action Economics.
Financial Times
The parlous state of Britain’s finances and the uncertainty over UK fiscal policy could push the pound below parity with the euro in the next few months, a report by the Centre for Economics and Business Research (CEBR) has claimed.
The report warns that the British economy is:
walking “five yards away from the edge of a cliff” and could be toppled by an “unexpected gust”.
Telegraph UK
Currencies are trading in a narrow range, holding out for the ‘yearly turn’. To be fair to Bernanke, he has always impressed on us that the Fed’s would use alternative innovative exit tools. Yesterday, they touted one idea, the term deposit facility. Its objective is to withdrawn money from the monetary system, allowing financial institutions to earn interest on loans of ‘longer’ maturities at the Fed (unlike the interest on banks’ overnight reserves). One should expect exit strategies to dominate Capital Markets next year. However, for the remainder of the week we are just witnesses to various unexplained currency moves.
The US$ is weaker in the O/N trading session. Currently it is lower against 9 of the 16 most actively traded currencies in a ‘subdued, yet illiquid’ trading range.
Interest rates dictated yesterday’s movements in Capital Markets. Bank of Israel hiked rates for a third consecutive time since Aug. (+1.25%) as growth accelerated (GDP-3rd Q +2.2%) and inflation exceeded Governor’s Fischer target range (+3.8% in Nov.-target range 1-3%). In the US, 2-year auction took center stage. Will higher borrowing costs choke the pace of global economic recovery? Some dealers do not see short term US product close to being fair value just yet. With 2-years trading at +1.02%, fair value is seen at approximately +1.15%. Yesterday’s auction arrived with a tail, albeit small, not good news for today’s 5’s and tomorrow’s 7’s as the street remains half-staffed and has little risk tolerance. Indirect bidders (proxy for foreign demand) accounted for +35% of yesterday’s demand, unlike Oct. and Nov.’s demand averaging at +44.5%. The bid-to-cover ration was 2.91 vs. 3.16 in Nov. and 3.63 in Oct. Does the tentative global economic growth justify rates getting ahead of themselves?
The USD$ is currently lower against the EUR +0.39%, GBP +0.30%, CHF +0.47% and JPY +0.05%. The commodity currencies are stronger this morning, CAD +0.19% and AUD +0.74%. Despite the Canadian markets being closed yesterday, the loonie appreciation can be described like catching a ‘falling knife’. Once again, the currency managed to strengthen, recording its highest print vs. its southern neighbor in over a month this morning. The CAD strengthened against all 16 of its largest trading partners as commodities remain well sought after as we head for the yearly ‘turn’. Elevated commodity prices and robust equity indices have kept the loonie in ‘demand’ territory. It has rallied higher on speculation that stronger domestic fundamentals warrant the BOC to hike rates sooner than anticipated. It’s not surprising that Governor Carneys policy of timing may be going step ‘n step with the Fed’s. Year-to-date the currency is up 16% and the Canadian futures market is starting to price in rate hikes sooner than next May. If one prefers being long the greenback, crossing it with ‘this’ commodity sensitive currency is not the ideal answer as analysts continue to favor buying the loonie longer term. Historically, the CAD performs well during the month of Dec. In the short term, be weary of speculators wanting to short the loonie after the fortnights tentatively over exaggerated gains.
The AUD has grinded higher in the O/N session on the back of stronger commodity and equity prices. However, the currency is heading for its first losing month since last Jan. Some investors are speculating that stronger US economic data will warrant the Fed to hike rates ‘sooner that later’ and interest differentials will pressurize the AUD. The RBA believes its monetary policy is ‘now back in the normal range’ after lenders raised business and home-loan rates by more than the RBA themselves have increased (+3.75%) the overnight cash rate target. Traders have aggressively pared bets that the RBA was in a position to hike rates for a fourth consecutive time in Feb. Investors continue to look for better levels to sell despite elevated equity and commodity prices (0.8950).
Crude is higher in the O/N session ($78.96 up +19c). Crude remains better bid after Weather Derivates predicted that US demand will increase +6.7% this week due to the North American cold snap. The black stuff managed to rise for a fourth consecutive day yesterday, supported by last week’s surprisingly weak inventory report. Now that most Capital Markets are tentatively open, albeit with liquidity remaining an issue, the commodity will probably find stronger support on any pull backs until year end. Various surveys again expect inventories to be lower tomorrow. Crude inventories fell -4.84m barrels to +327.5m last week. This month alone we have witnessed inventories plummet -3.6%. Digging deeper, last weeks report was even more bullish for prices. Distillate fuel (heating oil and diesel) slipped -3.03m barrels to +161.3m, the biggest decline in 8-months. Gas stockpiles fell -883m barrels to +216.3m. It’s worth noting that this was the first drop in a month and a half. Imports of the black stuff fell -0.8% to +7.71m barrels a day and the lowest level in 15-months. The trend of demand and consumption continues to climb. Gas demand averaged +9.05m barrels a day, w/w, that’s +2% higher than a year ago, while consumption of distillate fuel averaged +3.99m barrels a day, +5.2% higher w/w. Year-to-date, oil has climbed +76%, the largest increase in a decade.
Gold speculators continue to be better buyers of the ‘yellow metal’ on pull backs, believing that the greenback is about to give up more of the positive ground it has managed to acquire this month. By the end of last week, the dollar showed signs of wilting which has boosted the demand for commodities as an alternative investment. Month-to-date, the commodity had depreciated just under 11% after printing a record high of $1,227.50 early in Dec. Year-to-date, it has appreciated +25%, the ninth consecutive yearly gain. Not unlike other asset classes, this month’s holiday swings have been somewhat overly exaggerated ($1,105).
The Nikkei closed at 10,658 up +19. The DAX index in Europe was at 6,007 up +4; the FTSE (UK) currently is 5,425 up +22. The early call for the open of key US indices is higher. The US 10-year bond backed up 1bp yesterday (3.85%) and are little changed in the O/N session. The 2-year auction came and went yesterday ($44b), resulting in the market pushing yields to their highest level in 2-months. The concession that we have witnessed in the FI market over the last seven business days will allow the market to digest the remaining issues this week with less trepidation. The fear that an accelerating US economic recovery will fuel inflation has dampened the demand for government debt and pushed the 2’s/10’s spread out close to a new record of 286bp. With more supply coming down the pipeline this week, 5’s (today-$48b) and 7’s (tomorrow-$32b), should provide further concessions. However, short term technically we are approaching some attractive yields.
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Going into the last week of 2009, the commodity currencies (NZD, AUD, CAD) have been gaining ground against the US dollar, showing a mild uptick from weakness and dollar strength. And while there is no major news on tap for this week and the forex market is expected to be calm, I’m watching other markets just in case.
Barring any major negative news (particularly out of the Euro Zone) I expect the US dollar to resume its major trends after the new year, so we could see some short-term USD weakness going into year end against all but the Japanese yen (JPY).
With the “Santa Claus Rally” underway, if stocks can continue higher into the New year then we could see a resumption of the “risk” trade that has recently decoupled over the past month. That is of course going into the FOMC meeting in late Jan., where odds of a change in interest rate policy have been increasing.
So I’ll be taking my clues this week from the stock market, and keeping my eyes and ears open for any potential negative news that could induce the “flight to safety” trade. Otherwise, I expect it to be quiet and range-bound, with a mild bias toward dollar weakness.
To learn more about how other markets can affect the forex market, be sure to check out our currency investing courses!
Tags: AUD, cad, commodity, course, currenc, currencies, currency, dollar, EUR, Euro, forex, free, fx, fxedu, Il, interest, interest rate, invest, Japan, jpy, market, Mike Conlon, news, nzd, stock, stocks, trade, trend, USD, Yen
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