Forex Blog

May 30, 2011

Euro Weakens on Greek Debt Worries

Filed under: OANDA News — Tags: , , , , , , , — admin @ 7:23 am

After several days of gains, the euro fell against the dollar today on heightened concern that global growth is slowing and growing fears that the debt crisis could be getting worse.

In Greece, opposition parties have refused to support Greek Prime Minister George Papandreou’s attempts to reduce government spending. This has caused some to suggest that Greece will be unable to meet its austerity targets which could result in the International Monetary Fund and European Union delaying support payments.

Source: Bloomberg

Euro Weakens on Greek Debt Worries

Filed under: OANDA News — Tags: , , , , , , , , , — admin @ 7:23 am

After several days of gains, the euro fell against the dollar today on heightened concern that global growth is slowing and growing fears that the debt crisis could be getting worse.

In Greece, opposition parties have refused to support Greek Prime Minister George Papandreou’s attempts to reduce government spending. This has caused some to suggest that Greece will be unable to meet its austerity targets which could result in the International Monetary Fund and European Union delaying support payments.

Source: Bloomberg

May 27, 2011

Slowing US Economy a Warning to Canada

Filed under: OANDA News — Tags: , , , , , , , , , , , , , — admin @ 12:06 pm

This has not been a good week for those hoping to see confirmation of an improving U.S. economy. If anything, evidence suggests the pace of growth is waning and April’s consumer spending numbers were particularly disappointing. Total purchases for the first quarter of the year were far behind those recorded during the final quarter of 2010. For the quarter, consumer spending rose by less than half a percent despite the sharp increase in energy and food prices.

Even more alarming than the faltering consumer spending is the employment outlook. Last week’s new unemployment claims were much higher than anticipated totaling 424,000 new benefits claims. There is little optimism that we will see an improvement in unemployment which, for several weeks now, has remained stubbornly stuck at nine percent.

U.S. officials are rightly concerned with these latest results and any talk of a return to higher interest rates before the end of the year has been silenced. But it is not only the Federal Reserve that should be concerned – alarm bells should also be ringing north of the border in the halls of the Bank of Canada as well.

Many years ago a Canadian Prime Minister described living next to the United States as akin to sleeping with an elephant – every twitch and move made by the elephant, intentional or not, was felt by the bedmate. The truth of the matter is that Canada and the United States are linked not just by their geography, but also by economic activity. Each year the U.S. buys roughly seventy percent of Canada’s total exports comprised largely of machinery and energy; likewise, the U.S. is responsible for some sixty percent of the imports shipped into Canada. For Canadian exporters and consumers, that makes America one important elephant.

Currency traders are fully aware of the impact the U.S. can have on the Canadian economy and the Canadian dollar. The Canadian buck – known as the “loonie” for the waterfowl depicted on the back of the one dollar coin – has been unable to maintain the torrid pace it was on earlier this year. The pullback in commodity prices has also contributed to downward pressure on the loonie which has declined more than three percent alone during the month of May.

Also hampering the loonie is a growing fear that demand for resources is on the decline in China. Inflation continues to push prices higher in the world’s second largest economy with consumer prices gaining more than five percent in the past year while food costs are up more than eleven percent. This has analysts predicting additional interest rate hikes and possible decline in the Chinese economy.

With two of Canada’s most important export markets possibly weakening in the coming months, there is little chance that Canada can avoid suffering a hit as well. This possibility has forced currency trades to push back the prospect of a rate hike in Canada by several months. Gross Domestic Product numbers are due on Monday and this will provide an up-to-date snapshot of the state of
Canada’s economy. The Bank of Canada is also scheduled to issue an interest rate statement early next week and you can bet traders will be looking for signs pointing to the Bank’s intent and expectations for the economy.

Forex Week in Review May 22-27

Filed under: OANDA News — Tags: , , , , , , , , , , , — admin @ 9:59 am

The dollar has given up all of its hard earn gains and then some this week. Investors seem to be happy selling the ‘mighty buck’ on the back of weaker US data. The lack of a rally in US benchmark yields combined with ‘this’ weak dollar ‘implies a market presumption that the weak US recovery will lead the Fed to stay easy for longer’. China too has done its bit this week. It’s reported that they are expected to represent a ‘strong proportion’ of buyers of EFSF issuance in the June auctions. Supposedly this will fund the Portuguese bailout. Analysts note that the depth and liquidity of the sovereign AAA market in EUR is growing, adding to the EUR’s attraction as a reserve currency. Liquidity now becomes a premium as we head into the US memorial long weekend. Below are some of the highlights of the week:


EUROPE

  • At the beginning of the week peripheral markets reacted badly to the results of Spanish regional elections. The poor Socialists performance will weaken the national government further and increase the risk of early elections at a national level.
  • Euro area PMI’s moderated sharply, falling to 54.8 from 58 last month while the services composite was slightly more resilient, falling by 1 point in May. Driving this weakness, German PMI’s weakened to the lowest level since the beginning of this year. The levels are still consistent with robust growth in core-Europe
  • German Ifo survey headline was unchanged at 114.2 in May. The expectations component fell to 107.4 from 107.7 while the current conditions rose to 121.4 from 121.0. Data suggest manufacturing remains resilient in the core of the euro area.
  • Mid-week, the Greek opposition leader declared he rejects the new austerity plan, perhaps a ploy in getting EU to approve additional aid.
  • UK public sector net borrowing (ex-financial interventions) rallied to £10.0bn compared with £7.2bn in April 2010, on a combination of lower total receipts and large spending.
  • BoE’s Fisher gave a fairly dovish interview in ‘The Scotsman’. He is more concerned about the weakness of consumer spending than the strength of inflation and indicated that he would vote for a hike only if there was a pick-up in wage growth. A new dove at the MPC, and close to BoE Governor King.
  • Norwegian mainland GDP grew +0.6%, q/q in 1st Q after a +0.3% rise in 4th Q, weaker than the +0.8% consensus. Analysts consider this as a one-off rather than the beginning of a soft patch for the consumer. Net trade also subtracted from growth with exports down -0.5%, q/q and imports up +10.7%.
  • There were reports of a possible Greek referendum on austerity measures.
  • UK 1st Q GDP was unrevised at +0.5%, leaving GDP level essentially flat in the six-months to March. Both consumption and investment deteriorated further, with the only encouraging sign was strength in exports. Sector was benefiting from sterling depreciation.
  • Swiss KoF was surprisingly strong at 2.30, its highest level since mid-2006, and is consistent with GDP growth above +3%. SNB have underestimated the Swiss economy’s ability to cope with an overvalued CHF.

Americas

  • Sales of new homes in the US beat market expectations (+323k), despite trumping the March print by +7.3%, sales are still down-23% from last years April print of +420k.
  • Richmond Fed’s manufacturing and services index were bad this month. The manufacturing component fell to -6 from +10, while the service sector revenue index dropped from +28 to +9.
  • The market was prepared for a weak April US durable goods number, however a -3.6% was much worse than the perceived -2.2% decline. The broad based nature of the decline suggests the US manufacturing sector has lost significant momentum for the beginning of the 2nd Q.
  • 1st Q US GDP of +1.8% fell well short of an expected upward revision of +2.1%. The surprise was consumer spending being revised lower five ticks to +2.7% and a larger downward revision to real disposable income
  • Number of claims filing for US unemployment insurance disappointingly advanced last week, up +10k to +424k
  • Pending US sales of existing homes drop -12% as foreclosures hurt values.

ASIA

  • Singapore CPI inflation fell to +4.5%, y/y, in April from +5.0%, partly due to the housing and utilities rebates in last month and base effects.
  • RBNZ two year inflation expectations series rose to +3% in 2nd Q from +2.6% and the highest in three years. The Kiwi has also benefited from New Zealand’s dairy co-op announcing a further small increase in forecast payouts.
  • Apparently power shortages in China are increasing. It seems that state fixing of prices below generation costs have given rise to coal prices and is encouraging producers to cut production to avoid losses. Expect industrial production data to disappoint over the next few months.
  • Australia construction activity only rose +0.7%, q/q in the 1st Q. Market forecasted +1.4%. Rates market expectations for RBA rate hikes over the next 12-months fell 3bp to 21bp mid week.
  • FT reported that China is expected to represent a ‘strong proportion’ of buyers of EFSF issuance in the June auctions. Supposedly this will fund the Portuguese bailout. Analysts note that the depth and liquidity of the sovereign AAA market in EUR is growing, adding to the EUR’s attraction as a reserve currency.
  • NZ Herald reported that the China Investment Corporation may buy up to NZD6bn of New Zealand assets, including government bonds.
  • Australia private capital expenditure grew +3.4%, q/q in March,
  • Aussie Bureau of Statistics revised up its estimate for growth in capital spending over the next year to +31%. It would be one of the fastest private investment growth rates of any OECD or emerging market economy.

Slowdown in US Hurts Canadian Dollar

Filed under: OANDA News — Tags: , , , , , , , , , , , — admin @ 7:36 am

The Canadian dollar – known as the “loonie” – continued to lose ground on fears that a slowing U.S. economy could impact the Canadian economy. Roughly seventy percent of Canada’s exports are sold into the American market and any appreciable slowdown south of the border, would directly impact the Canadian economy.

The currency traded at 97.62 cents versus the U.S. dollar at 8:12 a.m. in Toronto, compared with 97.77 yesterday. One Canadian dollar buys $1.0244. It has fallen 0.2 percent this week and 3.2 percent in May.

Source: Bloomberg

US Consumer Spending Lower Than Expected

Filed under: OANDA News — Tags: , , , , , , , , , , , — admin @ 7:32 am

Despite higher food and energy prices, consumer spending in the U.S. rose less than forecast for the month of April. Purchases rose 0.4 percent after a revised 0.5 percent gain the prior month that was smaller than previously estimated, Commerce Department figures showed today in Washington.

“When you account for higher food and energy prices there’s barely anything left for consumers” to buy, said Mark Vitner, a senior economist at Wells Fargo Securities LLC in Charlotte, North Carolina. “We need to see job growth pick up and we need to see commodity prices continue to cool.”

Source: Bloomberg

Turning A Negative Into A Positive!

Filed under: Forex News — Tags: , , , , , , , , , — admin @ 7:27 am

That’s what looks to be occurring in Japan, which for the first time in nearly 25 months is showing signs of inflation. Japan has been mired in economic stagnation for the last 20 years, other wise known as the “Lost Decade” which is ironic considering it is actually closer to 2 decades.

We are all aware of the earthquake, tsunami, and nuclear crisis that devastated Japan a few short months ago, and it is the disruptions of supply that has caused prices to rise. While the aftermath of the natural disaster is a negative thing, the economic growth that could come out of the re-building efforts could be a net positive. However, Fitch lowered Japan’s credit outlook.While silver linings may exist in Japan, this is clearly not the case in the US, as yesterday the GDP revision, personal consumption, and initial jobless claims figures all missed their mark. So we are seeing Dollar weakness in the marketplace, but don’t mistake this for risk appetite. Right now the fundamentals are starting to come back more into focus, as risk themes become more muddled.

One such beneficiary of risk themes has been the Suisse franc, which is now looking like the best safe-haven currency out there. It is hitting all-time highs vs. the Euro, the Dollar, and the Pound and the IMF just called for Switzerland to raise interest rates—which will make it more desirable if the Suisse do comply.

Later this morning, the US will report personal income and spending numbers, though it seems doubtful that these will impress the markets. Stocks are flat to slightly higher, with commodities stronger as next week is shortened due to the Memorial Day holiday here in the US. This means that banks are closed on Monday, which will reduce volume but not volatility.

In the forex market:

Aussie (AUD): The Aussie is mostly higher as yield-seeking is taking place on Dollar weakness. While there is still considerable risk in the market, the markets are becoming less enamored with the US dollar as a safe haven.

Kiwi (NZD): Another up day for the Kiwi on rumors that China has been buying in order to diversify it’s considerable currency reserves. It is at a 3-year high. (Click chart to enlarge)

nzdusd0527.JPG

Loonie (CAD): The Loonie is losing its luster as it is being sold because of Canada’s close ties to the US. As economic conditions decline here in the US, Canada will decline as well as the US is by far the largest importer of Canadian goods and services.

Euro (EUR): The Euro is mostly higher as the “anti-Dollar” is benefiting from US economic malaise despite the problems in the Euro zone with the periphery countries debt problems. Euro zone economic confidence figures came in lower than expected.

Pound (GBP): The Pound is mixed as market concern over weak economic recovery in the UK is near the forefront. However, home prices rose for the month more slightly more than expected showing that there is still price stability and inflationary pressures in the economy.

Swissy (CHF): The Swissy is making new all-time highs vs. EUR, GBP, and USD after the IMF called for a rate hike in Switzerland. The Swissy has been receiving a major bid from its safe-haven status as a better performing economy than both the US and Japan. (Click chart to enlarge)

eurchf0527.JPG

Dollar (USD): The Dollar is weaker across the board after the second day of weak economic data. Personal income figures came in as expected at .4%, but personal spending was slightly lower than expected at .4% vs. the expectation of .5%. Monday is a bank holiday in the US.

Yen (JPY): The Yen is mixed after Japanese CPI data ended 25 months of deflation after posting a .6% gain. Retail sales however fell 4.8%, though that was better than expected. The Fitch downgrade of Japan’s credit is a largely non-issue, and perhaps this will set the stage for some economic growth in Japan going forward.

The major theme of the last two days in US dollar weakness as negative economic data paints a picture of an economy in trouble. It is amazing that this makes the Dollar less desirable than the Euro, which is mired in its own problems with the debt problems of its periphery members.

Nevertheless, because Monday is a bank holiday here in the US, we could see some squaring of books this weekend though I don’t think the usual risk-off play of buying Dollars will happen.

Currencies like the Swissy and gold by proxy are taking away some of the Dollar’s attributes as the major safe-haven currency, which could be a problem if the US economy continues to sink.

With the problems that ail the US economy and no apparent solutions coming from US policy-makers, it could be a long summer for USD!

Enjoy the long weekend folks, I’ll be back on Tuesday!

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Buy the EURO High sell Higher

Filed under: OANDA News — Tags: , , , , , , , , , , — admin @ 4:12 am

So it seems. Some of us have been doing it so wrong for so long. The dollar has stopped dead in its tracks and done an aggressive about turn for a number of reasons. The aggressive session move is being attributed to a hedge fund selling the ‘mighty’ dollar on the back of yesterday’s weak US GDP data. Their actions seemed to have prompted the talk of QE3 in the Far East. Difficult to digest as the Fed has been rather transparent in their actions. Most likely, the lack of a rally in US benchmark yields combined with ‘this’ weak dollar ‘implies a market presumption that the weak US recovery will lead the Fed to stay easy for longer’.

Junckers comments should be discarded as political ‘brinkmanship’. He issued a warning to euro zone policymakers opposed to new funding for Greece that absent this there might be no IMF funding for Greece and a very disorderly process. The reality, the EU continues to give sufficient assurance to the IMF. His remarks were a political shot across the bow to all members to toe the line.

The most likely reason and the one most find difficult to admit to, China has done it again and come to the rescue after announcing that next month they will be actively buying EFSF issuance.Its this that may have called a top in the recent USD rally.

The US$ is weaker in the O/N trading session. Currently, it is lower against 13 of the 16 most actively traded currencies in a ‘volatile’ session.

Forex heatmap

Yesterday’s first quarter US GDP of +1.8% fell well short of an expected upward revision of +2.1%. The surprise was consumer spending being revised lower five ticks to +2.7%, with an even larger downward revision to real disposable income. Even the PCE price component saw a marginal downward revision. Stemming the plummeting factor were the expected upward revisions to both construction and inventories. Analyst’s note that the final and revised breakdown (GDP less inventories) fell to +0.6% from +0.8% does not bode well for the second quarter. Despite the temporary problems in the first quarter (weather and defense), the second quarter has its own negative affects to contend with (Japan and its ongoing distribution problems, especially in autos). This has the market already again revising numbers down a tad for the second quarter release to just below +3%.

If the market did not like digesting the growth numbers, weekly claims is becoming more difficult to swallow. The number of claims filing for unemployment insurance disappointingly advanced last week, up +10k to +424k. The trend may be broken now. The market had expected the ‘abnormality’ over the last few weeks to be priced out and expected this reading to push claims back towards that psychological sub +400k print. The fourth gain in the last seven weeks has many worrying about the current state of the labor market advancement. Analysts are already revising their projected NFP prints down (+168k headline with a private print of +180k jobs and an unemployment rate of +8.7%). What is more worrying some, the market is entering a period of volatile reporting with a strong seasonal bias, making it difficult for us to interpret unbiased layoff trends.
The four-week moving average fell ever so lightly, falling-1,750 to +438.5k.

The dollar is lower against the EUR +0.47%, GBP +0.11%, CHF +0.88% and JPY +0.29%. The commodity currencies are stronger this morning, CAD +0.01% and AUD +0.22%.

The loonie traded heavy all day yesterday, especially after weaker US data put commodities on the back foot and investors honed in on the strong trading ties between the two nations. The currency has underperformed on signs of slowing economic growth and reduced speculation that the BoC will resume increasing borrowing costs. For much of this month, the CAD has weakened outright versus the dollar, as crude-oil prices trade heavily amid mounting investor concern that global economic growth is faltering. The Bank next meet on the 31-May to determine their interest rate policy. The market is experiencing risk-on and off again trading, creating volatility within a tight range. To date, risk sentiment has been stung over Euro-zone debt restructuring and on doubts about the pace of global growth. Investors are better buyers on these pull backs (0.9779).

Earlier this week the AUD felt the wrath of the market, falling to a six-week low versus the greenback and against the yen as concern that Europe’s debt crisis is deepening sapped demand for higher-yielding assets. Domestic data had also being weighing on the currency, as a government report showed construction work completed rose less than economists forecast. It increased +0.7% in the three-months versus a +1.4% gain. Traders have reduced some of their bets on the amount of interest-rate increases by the RBA over the next 12-months to 22 basis points from 25 midweek. In the O/N session, the currency found its claws again and rallied to a new weekly high as the dollar faltered ‘across the board’ and regional bourses traded in the black.

Providing support for the currency is the belief that the local dollar is also gaining stature as a global reserve currency, similar in nature to that of the CAD. Aussie yields are still the highest in the G10 and always look attractive. The expected mix of trade surpluses and rising capital inflows should provide support for the currency on these much deeper pullbacks for the time being (1.0664).

Crude is higher in the O/N session ($100.53 +0.30c). It’s not surprising to see commodities temporarily stall after the US growth numbers yesterday. Oil fell from its two-week high as the US economy grew less than forecasted in the first quarter, a signal that fuel demand may struggle to recover. Crude rallied earlier in the week after the weekly EIA report showed that US inventories of distillate fuel (diesel and heating oil), plummeted to the lowest level in more than two-years as consumption increased. Also aiding prices to a certain degree was Goldman and Morgan Stanley increasing their oil-price outlooks.

Last week’s weekly crude supplies rose +616k barrels to +370.9m. Stockpiles were forecast to decrease by -1.5m barrels. A gentle surprise was gas inventories rising +3.79m barrels to +209.7m, above forecasts for a +300k build. The EIA data showed that gas demand fell over the last month by -2.1%, on average, versus the same period of last year. Distillate stocks fell -2.04m barrels to +141.1m barrels, well below projections for a +100k build. Refinery utilization rose +3.1% to 86.3%, much more than the +0.5% increase investors had expected.

Technically, the report could be seen as overall bullish because of the distillate number. However, the oil demand-supply situation is relaxed, and there’s no danger of any shortage. In theory, lower global interest rates should help the commodity which competes with yield-bearing assets for investors’ cash.

Gold prices traded modestly lower yesterday, paring some of this weeks gains and unable to get a firm footing after some negative economic news out of the US. Previously, the yellow metal rose to a three week high, on concern that that Europe’s sovereign-debt crisis may worsen, boosting demand for the metal as an alternative asset.

Strong buying recommendations from Goldman and Morgan Stanley have also been good enough reason to drag the commodity up from last week’s lows. The yellow metal is being used as a store-of-value and trades like a currency. Last week, the commodity had been moving in tandem with oil and the risk-on-risk-off commodity trade. So far this week that relationship has broken. Expect investors to remain nimble because of the gyrating greenback.

The metals bull-run is far from over with speculators continuing to look to buy gold on these deeper pullbacks. Interestingly, the sale of gold coins this month remains on track for the best month in a year amid the worst commodities rout in three-years, which would suggest that bullion’s longest ‘bull market’ still has room to run ($1,526 +$2.80c).

The Nikkei closed at 9,521 down-40. The DAX index in Europe was at 7,158 up+44; the FTSE (UK) currently is 5,937 up+56. The early call for the open of key US indices is higher. The US 10-year eased 7bp yesterday (3.06%) and is little changed in the O/N session.

The FI asset class was able to push yields to new record lows for this year yesterday, after a disappointing US GDP and weekly claims report encouraged investors to seek shelter in a safer asset class. Junker’s IMF remarks about withholding Greek funding had many risk traders running for the exit and entering new risk aversion trading strategies.

Dealers tried to cheapen up the curve ahead of the final auction this week, alas in vain, making the $29b seven-year issue an expensive piece of product to own along the curve. In a well bid auction, the issue yielded +2.429% (the lowest yield for this product this year). The sale was 3.24 times subscribed, above the four-auction average of 2.78. Indirect bidders took 47.6%, while direct bidders took the double of 13%.

May 26, 2011

Cable Gains on US Data, IMF Bailout Scare

Filed under: OANDA News — Tags: , , , , , , , , , , — admin @ 3:06 pm

The pound benefited from disappointing economic news out of the U.S. and a thinly-veiled threat from an official with the International Monetary Fund to make strong gains today on both the dollar and the euro.

Let’s start with the dollar. Weaker-than-expected economic data from the U.S. indicated that first quarter growth fell to an annualized rate of 1.8 percent compared to the 3.1 percent rate of growth recorded in the final quarter of 2010. The latest employment report was also discouraging with 424,000 new unemployment claims filed last week. This is an increase of 10,000 new claims and is considerably more than the 404,000 claims predicted.

Traders expressed their dissatisfaction by turning to sterling and by the end of the day, had pushed the pound to a two-week high against the greenback. While all this was going on, Jean-Claude Juncker, head of the Eurozone group of finance ministers, was hinting that the International Monetary Fund may not be prepared to hand over the next installment of emergency funding to Greece in June as originally scheduled.

The problem, according to Juncker, is that Greece (and by extension the European Union) has yet to provide sufficient financing guarantees as required by the IMF. Without formal assurances that Greece has the required financing in place together with a timetable to reduce government spending, the IMF may not release the funds it conditionally agreed to make available as part of the original rescue plan.

Naturally, this sent a shiver through the market leading ultimately to a sell-off of the euro in favor of the pound. For the day, sterling gained nearly half a percent on the euro rising to 86.26 pence per euro by 4:30 p.m. in London matching a high not seen since early March.

Dollar Weaker on Interest Rate Speculation

Filed under: OANDA News — Tags: , , , , , , , , , , — admin @ 12:19 pm

The U.S. dollar was down 0.7 percent in mid-day trading in New York today on reports that first quarter growth was less than expected. The latest employment news also indicated that 424,000 new unemployment benefit claims were filed last week exceeding predictions by more than 10,000.

The weaker-than-expected results gave rise to increased speculation that the Federal Reserve will continue to lag other Central Banks with respect to interest rate increases. Last month, the European Central Bank lifted the benchmark lending rate by a quarter point to 1.25 percent thereby ending a stretch of nearly two years of holding the line on rates. The Fed has maintained its record low 0.25 percent rate even longer and few expect an increase prior to the end of the year.

ECB President Jean-Claude Trichet added to the dollar’s troubles earlier today when he noted that the Bank was particularly concerned that rising commodity prices could lead to inflation and that the Bank would continue to monitor prices. Readings on this vary, and while it may not mean that rates will necessarily rise at next month’s meeting, it is clear that inflation is near the top of the Governing Council’s list of concerns.

At the very least, it is widely accepted by market observers that the ECB will move to raise interest rates long before the Fed makes a similar move. This reading of the situation – combined with the weaker U.S. employment and consumer spending data – is why the euro has gained ground on the dollar today. This advance comes despite concern over the fate of the shared currency in light of the European debt crisis.

Euro Still Dogged by Credit Crisis

Even as the euro gains on the dollar, it continues to lose against other currencies. In May alone the euro has lost nearly five percent to the yen on fears that the situation in Greece could deteriorate to the point that billions in debt could require restructuring. This really is unchartered territory and no one can say with certainty how markets will react should investors be forced to extend maturity dates or accept lower payouts as part of a restructuring.

Not helping matters is the growing public backlash against the so-called austerity programs ordered by the European Union and the International Monetary Fund in return for emergency funding. Greece has been plagued by large riots since government spending cuts were first announced and now opposition parties in Spain have said they will refuse to support the government in its attempts to trim the deficit.

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