A-hedge-against | Forex Blog

January 12, 2012

Gold Pushing Higher Toward $1700!

Filed under: Forex News — Tags: a-hedge-against, both-the-euro, chart of the day, gold, increased-money, its-alternative, latter-because, market, money-printing-, more-simplistic, moving-higher-, moving-lower, precious-metal, properties-but, supply-flooding — admin @ 7:48 am

Gold is by far the most interesting and difficult investment to handicap and analyze from a fundamental perspective as it has dual properties that can sometimes be seemingly in conflict with one another.

On the one hand, gold has traditionally been seen as a hedge against inflation, but on the other hand, gold can also trade like an alternative currency that cannot be debased by Central banks. The precious metal can flip-flop back and forth between these dual properties but make no mistake about it, gold is now moving back higher.

This move though is likely as a result of its alternative currency trait, as the Euro has been moving lower because of the risk in the market. However, gold has also been moving higher as the Euro has been moving higher, so which is it?

This is confounding the hard-core fundamentalists, so let’s take a more simplistic approach. Much of gold’s moves can be attributed to anti-US dollar sentiment which also used to be the way that he Euro traded. However, there is an overwhelming feeling that both the Euro AND the Dollar should be moving lower in tandem. The former should be lower because of the debt crisis, and the latter because of US Fed money printing. With increased money supply flooding the market the natural expectation is that there should be inflation, but that does not appear to be the case today.

So either way you slice it, gold will continue to get a bid and should move higher past the R2 daily pivot resistance we are seeing today at $1657, with the hope that it will continue higher to $1700!

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October 7, 2011

Is NFP an opportunity to sell EUR’s higher?

Filed under: OANDA News — Tags: a-commodity-and, a-global-crisis, a-hedge-against, aud, black, chf, crisis, europe, european, market, morning, possibility, previous, price — admin @ 4:12 am

This week, the market has had the credit crunch talk, the recapitalization debate and Trichet’s signing off with his future infamous phrase, “we are in a global crisis”. The week is nearly finished, just one more release of significance and it happens to be the grandaddy of all fundamental prints, non-farm payrolls.

There has been less banter than usual amongst dealers after ‘private’ payrolls and weekly claims. The market tends to hear some boisterous revisions. This morning’s release is more about a ‘hope and play’ print. The last minute chatter is leaning towards a weak payroll. Consensus is gathered somewhere between a +55k and +75K print. Weaker ‘positive’ data would be consistent with a freeze in hiring rather than a cutting of jobs, but will likely stoke recession fears. Investors should focus on ‘hours worked’, if it shrank for a second consecutive month recession fears could be correct.

The weekly claims announcement was but a blip on Trichet’s radar when he began delivering his final communiqué yesterday. The release ended up being a nonevent. New claims advanced a tad last week, +6k seasonally adjusted to +401k. The data was better than expected. However, it remains the wrong side of the psychological benchmark of +400k. The four-week moving average, a more reliable reading, fell-4k over the week to +414k. The numbers suggest that the labor market is stabilizing. Recent released indicators have generally pointed to continued weakness. Today’s NFP print will be able to prove or disprove that theory. Consensus this morning is looking for a +75k print or a drop in the unemployment print (+9.1%). Yesterday’s report showed that continuing claims hovered around +3.7m, down-52k on the week. It seems that individuals either found a job or simply ran out of benefits.

Trichet’s parting words “We are in a global crisis” and “risks have intensified”, well not exactly his parting words, but stuck somewhere in the middle of his communiqué. The market is looking for hope and Trichet’s blunt stoic remarks did not ‘light anybody’s fire’, that has been left up to other EU policy makers who are relying on “perception’ to instill confidence. Trichet gave us and the banks additional longer-term liquidity and a promise to restart its covered bond buying. The ECB will offer banks one 12-month loan, starting in October, and a second 13-month loan in December. Both will be operated as fixed rate, full allotment operations. It will also start buying EUR40b of covered bonds in November. The ECB will continue keeping the possibility to reverse this year’s +50bp hike in its back pocket to be used if the economic outlook deteriorates further.

The BoE remains on the path to ‘shock and awe’. Yesterday, the Monetary Policy Committee eased policy more than was expected, increasing its asset purchase program by a further £75b (to a new total of £275b). Policy makers believed that the financial and economic stresses from periphery Europe, coupled with domestic fiscal tightening and dwindling domestic disposable incomes were enough reasons to ease policy further. In truth, the MPC has downgraded its expectations for growth in the coming year or so, and the recent GDP revisions mean it continues to see substantial spare capacity in the UK economy. The Bank has explicitly stated that it is not concerned that inflation is likely to rise to above 5%, y/y, in the coming month. They believe it is likely to fall very sharply through next year.

What we are witnessing is a glut of countries new QE backed programs racing to covertly devalue their own currencies before being accused of manipulation, and to fend of a credit crunch shutting down financial markets. It’s maybe a tad strong, but a reality….

The dollar is higher against the EUR -0.09% and CHF -0.10% and lower against GBP +0.45% and JPY +0.04%. The commodity currencies are stronger this morning, CAD +0.41% and AUD +0.28%.

Until yesterday Canadian investors had little domestic data to chew on this week. It probably would have been better if they still had none. Initially, the loonie weakened outright and depreciated against most of its major trading partners ahead of this morning Canadian jobs report after weaker data north and south of the border. By day’s end, risk loving crept back into the market and with commodity prices dragged the loonie into the black.

Monthly building permits plunged in August (-10.4%) led by scaled backed construction in Ontario. The accuracy of this release is questionable after the deep revisions to July’s release going from +6.3% to -0.4% decline. The IVY PMI continue to be in expansion territory at 55.7, however, some of the subindexes are a concern. The employment index for this month was at 47.5, indicating employment was lower than in the previous month. Price pressures remain with the price index at 61.9 this month.

In a risk aversion trading environment, the loonie, a commodity and interest rate sensitive currency, movements generally become over extended in one direction or another. A better-than-expected employment report on both sides of the boarder should boost risk appetite and give commodities a lift, allowing the loonie to back away from its 13-month lows. To date, the probability of a Greek default has been capable of keeping a lid on risk rallies. It’s all eyes down for the job reports (1.0397).

The AUD has maintained its four day old rally on optimism that European policy makers are moving to insulate banks from the region’s sovereign debt crisis, increasing demand for higher-yielding assets. European official’s and policy makers are stumbling about and at long last seem to be stepping up and taking ownership of the European debt crisis. The market is expecting the ‘creation of a new Euro rescue plan that will be positive for risk’.

For most of this week, it seems that investors and speculators have been liquidating long Aussie positions at a record pace, as the ‘underlying flow trend among long-term players had turned decidedly negative’ on the back of the Euro crisis.

On Monday, the RBA hinted at rate cuts, despite Governor Stevens leaving key rates unchanged at +4.75%. The Bank communiqué was very cautious on the outlook, leaving the door open for easing. The RBA concluded its policy statement by describing its current policy stance as appropriate, but nonetheless opened the door to an easing policy change stating that “an improved inflation outlook would increase the scope for monetary policy to provide some support to demand, should that prove necessary.” FI dealers increased the pricing for rates cuts at the 1 November meeting by +18bps to +44bps.

It’s not a surprise to understand that the RBA is still being heavily dependent on how the crisis in Europe affects global growth over the next month. An increase in risk and cuts again will be off the table and visa versa. However, similar to other growth and commodity sensitive currencies, the market bias prefers to be better sellers of the AUD on rallies, until the panic flows have abated (0.9782).

Crude is lower in the O/N session ($82.04 down-0.55c). Oil rose for a second day as shrinking US crude supplies, better-than-expected economic data and signs Europe can control its debt crisis lessened concerns that fuel consumption will suffer.

The weekly EIA report showed that the US commercial crude inventories decreased by -4.7m barrels from the previous week. At +336.3m barrels, oil inventories are above the upper limit of the average range for this time of year. Total motor gas inventories decreased by -1.1m barrels are above their upper limit of the average range. Analysts were expecting crude gain by +2.5m barrels and gas stocks to move up by +1.30m barrels last week. Oil refinery inputs averaged +15.1m barrels per day during the week, which were +73k barrels per day below the previous week’s average as refineries operated at +87.7% of their operable capacity.

The old support levels now become the new key resistance points. Weaker growth predicted by the IMF, which points to lower oil demand, will have dealers thinking of shorting the market again. Expect investors to run into technical selling on some of these rallies.

Gold prices yesterday stayed close to home despite the toing and froing rhetoric from Global policy makers. Are we to trade the commodity as a safe haven? Are we to cash the profitable trade for margin requirements? Will the QE policies require a hedge against inflation? These are some of the question on why the commodity has been behaving in such an erratic manner this week. Trichet indicating that downside risks have intensified encouraged them to introduce covered bonds purchases and reintroduce yearlong loans for banks after keeping rates on hold yesterday due to heightened concerns over the prospect of a Greek default.

After last months rout, investors remain very cautious about this trade. In the last two weeks, gold has had one of its “steepest corrections in history, weighed down by a sharp margin increase, the fourth hike this year and heavy liquidation by hedge funds in a technically overbought market”. Demand for ‘physical’ gold is again expected to support the market. Under normal conditions, the Indian festival season helps drive buying from the world’s biggest gold consumer. Retail gold demand traditionally gains pace from August. The Fed’s efforts to drive interest rates lower to support lending should, by default, support commodity prices in theory ($1,654 up+$1.30c).

The Nikkei closed at 8,605 up+83. The DAX index in Europe was at 5,624 down-21; the FTSE (UK) currently is 5,264 down-28. The early call for the open of key US indices is higher. The US 10-year backed up +7bp yesterday (1.99%) and is little changed this morning.

Treasuries fell for a third day as speculation that EU policy makers are finally stepping up to the plate to resolve the debt crisis reduced demand for the safest assets. Longer term maturities backed up from their lowest yields in two years after Ben’s testimony in congress stated that the Fed has more ammunition in their arsenal and would implement it if need be to boost the US economy. The IMF indicating that the ECB still has room to maneuver after keeping rates on hold has pressurized the FI market.

This morning is NFP and even with yesterdays better than expected weekly claims print and midweek’s unchanged private payroll numbers, the market has been reluctant to get to far ahead of itself. To date, investors have been pricing in a double dip, and the possibility of us not going down that route will bring in sellers. This morning’s employment print will provide a big piece of jigsaw for the growth puzzle.

Under the $400b Operation Twist, the Fed has been purchasing long dated securities financed by selling the short end (yesterday they sold $8.75b Treasury coupons and had bids for +$242b). The program provides no liquidity, but is expected to lower longer term rates and hopefully kick start growth again in a stagnant US economy. Analysts guesstimate for 10-year yields is 1.50%.

Investor’s fearing that the US unemployment report could disappoint this morning will covet product on these pullbacks. In a low growth and deflationary environment, coupled with policy maker’s accommodative positions should keep global rates low for years.

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September 26, 2011

Gold Losing Its Luster!

Filed under: Forex News — Tags: a-commodity-and, a-hedge-against, currency, euro, forecasts-have, global-grwoth, have-considered, heavily-on-the, hit-extra-hard, its-tradtional, markets, week-as-risk, what-it-really, with-the-euro — admin @ 7:33 am

Gold has been hit extra-hard after the intense market sell-offs we saw last week as risk aversion and US dollar strength have reduced demand for the precious metal. For some time, market participants have considered gold a “safe-haven”, though last week’s selling has shown gold for what it really is: an alternative currency.

Thus it has been trading more like a commodity and its tradtional role as a hedge against inflation is markedly different than a safe haven. With the Euro debt crisis in focus and weighing heavily on the markets, risk aversion has decreased fears of inflation and have in fact stoked fears of deflation as the global economy slows. Recent global grwoth forecasts have been cut by just about everyone.

As a result, we may continue to see more US dollar strength in the near-term, and this would be negative for gold. While gold has bounced this morning off of its daily S2 pivot support at around $1550, its upside potential may be limited to $1700 with possible further downside pressure to resume to $1425 if the Euro debt crisis continues to drag out.

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June 30, 2011

EUR following the Script?

Filed under: OANDA News — Tags: a-hedge-against, cad, eur, europe, governor-carney, greece, greek, house, market, morning, week, year — admin @ 4:15 am

Papandreou clinched enough votes to pass the first part of an austerity plan aimed at meeting EU aid requirements and staving off a default. The EUR did what most anticipated, rally up towards 1.45 as residual speculative shorts are closed. Now what?

According to the script, upside momentum is expected to stall around these levels as markets turn their focus to this morning’s Greek vote on implementation of the various fiscal measures, weekend discussions on private sector participation in the 2012 bailout, and risks around key US PMI data due out tomorrow.

On the flip side, the EUR is certainly looking prettier than GBP and the USD this morning, proving to be market resilient. Certainly strong proof how fundamentally flawed the markets treatment of the dollar and sterling is!

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

Finally, a pleasant surprise or is it? May’s US pending home sales index rose +8.2%, well above the market expectation of +3.2%. Analysts note that we should be appreciating the rise in the context of the -11.3% decline that was registered in April. It’s this print that verifies the unimpressive trend in existing home sales. Last month’s spike looks like a correction from the April release. Housing data reported of late does not point to any correction. Yesterday’s pending numbers are consistent with existing sales data, while mortgage information from NAHB and MBA points to further market weakness. The +13.4%, y/y, pending home sales figure is caused by the May 2010 tax credit expiry, which pushed the numbers to move below the underlying trend from the ‘previously inflated levels’. The future trend remains flat at best.

The dollar is lower against the EUR +0.31%, CHF +0.03% and JPY +0.47% and higher against GBP -0.28%. The commodity currencies are stronger this morning, CAD +0.40% and AUD +0.47%.

The Canadian headline inflation number yesterday can be seen as a total ‘head-fake’ (+0.7% vs. +0.3%). Analyst’s noted that the spike can be explained away by seasonal adjustments, gas clothing and footwear. The surprise print does not speak to a ‘fanning out of inflationary pressures’. While headline (+3.7%, y/y) and core-CPI came in higher than expected in unadjusted terms, adjusting for seasonality, inflation still remains well contained with both headline and core-CPI up +0.2% m/m, one-tenth below that registered in the prior month, a scenario that Governor Carney has already alluded to. On an unadjusted basis, both food and gas prices continued to move up in May. However, next months report will likely show ‘modest’ headline gains as gas and energy prices decline.

Investors liked the data, pricing in a BoC hike for October and pushed the currency to a monthly high outright, aided by rising oil prices. Any fear about rate hikes after yesterday’s print may be tempered by this morning’s GDP data. It’s expected to be weak and underscore the headwinds facing the economy, again backing up Governor Carney’s recent rhetoric.

Will the second leg of Greek voting today have investors looking to pare some of their recent risk appetite? With the Fed cutting its growth objective for the remainder of the year should have higher yielding growth sensitive currencies trading under pressure. Expect the Canadian dollar to be subjected to the pull of either risk or risk aversion trading strategies. CAD is vulnerable now with US data likely to continue to print weak into mid-July (0.9662).

The AUD has ignored the slew of mixed domestic data and traded higher in the O/N session. Job vacancies in the three-months to May fell -4.5% from the previous period. Rismark House prices continued to decline last month and fell -0.3%. Private sector credit growth remained a subdued +0.3% in May and personal and business credit growth softened, while housing credit increased +0.5%, following an increase of +0.4%in April.

The currency advanced for a third consecutive day against the dollar as traders pared bets on a cut in interest rate by the RBA. Investors have been buying equities, pulling markets higher as a relief buying spilled into another session after Greece moved closer to receiving more aid to avoid a sovereign default.

Gains have been capped on fear that that a Greek austerity plan will not resolve Europe’s sovereign-debt crisis. Technically, the market is waiting for funding schedule clarity. Currently, the market is pricing a no hike in August unless inflation and employment surprised on the upside and the situation in Greece clears up sufficiently for a powerful rebound in risk appetite. Global data needs to improve before we can embrace any rate hike policy thinking. Investors remain better sellers on rallies (1.0724).

Crude is lower in the O/N session ($94.50 -0.27c). Crude extended this week’s gains after the weekly EIA report showed a larger-than-expected decline in inventories and as more Americans signed contracts last month to buy previously owned homes, a sign that the real estate market may be rebounding from its lows. Also aiding prices was a market concern that the Saudis would cut production in response to the IEA dumping move last week. Tropical Storm Arlene seems to be causing a stir in the Gulf of Mexico.

The market is concerned that the ‘tightness’ in the oil market will continue to undermine the fragile global economic recovery and the reason why the IEA and its members agreed to release crude from their SPR’s to ease some of this market tension. According to analysts, this supply move is significant, as it ‘represents a reach by member countries for the remedy of last resort to high oil prices’.

Oil inventory fell much more than expected last week as imports declined and gas stocks recorded a surprise fall. Crude stockpiles dropped for the fourth-consecutive week by -4.38m barrels to +359.47m. The market had been expecting a drawdown of -1.4m barrels. Weekly crude imports fell-271k barrels per day to +8.84m. A surprise was gas stocks unexpectedly falling -1.43m barrels to +213.1m. Analysts had projected a build of +600k barrels. Distillates (heating oil and diesel), rose +258k to +142.2m. Refinery utilization came off its 10-month high, falling -1.1% to +88.1%.

This year’s energy spike is being cited ‘as the reason for the global economic slowdown. Analyst’s note, that from its peak, crude is off-20%.The technicals see strong support first appearing at around $87.

Gold rallied for a second consecutive day after dropping to a five-week low, encouraging some investors to buy the precious metal as a protection of wealth and alternative to currencies. Last week, the commodity fell -4.4% and is up +6% this year.

After a positive Greek vote, the market had been wishing to see more of a pull back as people reduced their safe heaven position taking. This has not occurred because too many speculators have had the same thought.

Gold is viewed by some investors as a hedge against inflation, and the surprise release of crude oil stockpiles last week from developed nations’ reserves has dampened sentiment amongst investors for rising prices. However, commodities dependency on the buck and the outlook for US rates is likely to remain intact for now. This ‘one directional trade’ is far from over, with speculators continuing to look to buy the metal on these deep pullbacks ($1,509 -0.90c). Technical analyst’s see $1,485 as the first level of real support.

The Nikkei closed at 9,816 up+19. The DAX index in Europe was at 7,302 up+9; the FTSE (UK) currently is 5,895 up+39. The early call for the open of key US indices is lower. The US 10-year backed up 5bp yesterday (3.09%) and are little changed in the O/N session.

The US yield curve rose from almost a record low ahead of this week’s three-treasury auctions ($99b-2’s, 5’s and 7’s), on bets that the Greek Socialist Party will get parliamentary approval for its austerity measures needed to secure a troika bailout. So far, they are two-thirds of the way there.

The US 10-year benchmark was able to back up for a third consecutive day as Greece’s lawmakers passed the first part of an austerity plan needed to assure further bailout funds, damping demand for a refuge in US government paper. Today, they get to vote for implementation of austerity. Ten-year yields have gained +21 basis points over the past three days, a volatile market or what?

This week’s five-year auction was not well received and drew the lowest demand in a year as the sharp drop in yields has turned off investors. Dealers were able to create a small concession for yesterday’s 7-year auction, however, the concession was not deep enough, as it too was a horrible auction with dealers having to take down over half of the issue (+56.1% vs. +45%).

After the auction, bond prices hit new session lows. The issue tailed a whopping +3.25bp at a record low yield of +2.43%. The tranche had a 2.62 bid-to-cover ratio (smallest since July 2010) compared to an average cover of 2.87 in the six-prior auctions. Indirect bidders took +32.2% of the issue (the smallest take down in two-years) versus an average of +50.5%.

The jump in yield spreads between 2-year US and Japanese bonds (17 basis points to 30) had been partially responsible for pushing USD/JPY up into the large resting offers of 81, temporarily at least.

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March 17, 2011

What to expect with Yen G7 intervention

Filed under: OANDA News — Tags: a-hedge-against, a-sharp-decline, backup, bahrain, chinese, consumer, currency, earthquake-will, eur, europe, futures-on-the, gbp, housing, short — admin @ 9:37 am

The immediate effect of the sharp rise in risk aversion has been to push the JPY and the CHF sharply higher. Markets are now focusing on the growing likelihood of intervention. The G7 will hold a conference call to discuss the yen tomorrow.

What can we expect? The minimum, clear authorization from the G7 members to intervene to stop this yen appreciation on the back of repatriation fears. The market can expect joint intervention to have the biggest affect and send the strongest signal to investors. Direct intervention may not create that major reversal higher for the dollar, but, it will provide a floor and possibly reduce volatility in the currency pair.

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

Weaker fundamental data out of the US yesterday has taken a back seat to Japan and the Middle-Eastern concerns. Investors continue to add to their risk aversion trading positions.

Yesterday’s US housing starts posted a sharp decline (+479k vs. +618k), plummeting -22.5% month-over-month. This is again strong proof that the US housing market will be a drag on this quarters GDP. Homebuilders sentiment remains depressed, influenced by excess supply, rising sales of distressed properties and a US labor market that remains vulnerable.

Digging deeper, single units came in at +375k (-11.8%, m/m), while the print for multi units was +96k (-47%, m/m). Year-over-year, starts have declined -20.8% from last Februarys print.

Certainly not helping the housing sector was building permits maintaining their downward trend last month (-8.2%, m/m), with declines reported right across the whole sub-sector.

Other data revealed a headline surge in US PPI, rising +1.6%, the biggest gain in nearly two-years. Digging deeper, the surprise was the aggressive spike in food prices, up +3.9% (largest month-over month increase in 37-years). The market should expect some pass through effect to CPI. Energy prices were not being left behind, rising a sharp +3.3% and the fifth straight month-over-month gain. I wonder what Ben is thinking of inflation now?

The USD is lower against the EUR +0.55%, GBP +0.24%, CHF +0.62% and JPY +0.75%. The commodity currencies are stronger this morning, CAD +0.14% and AUD +0.05%.

The CAD recent moves are oblivious to stronger domestic fundamentals and that includes yesterdays manufacturing sales surprise. The headline print surged +4.5%, m/m, the most in three-years and again should provide strong positive first quarter GDP results. Strength was recorded across all subcomponents and especially in the transportation sector. In price-adjusted volume terms, gains came in even stronger, up +5.5%, breaking the no-growth trend that persisted throughout much of 2010.

With risk aversion trading strategies dominating and investors heading to the sidelines fundamental and technical analysis tends to be thrown out with the bath water. The loonie has been whipped, like growth sensitive currencies, and is eyeing parity outright as investor’s aggressively unwound higher yielding, commodity growth sensitive currencies, as fear becomes infectious across asset classes with hourly Japanese developments.

Close to parity, CAD buying interest is expected to appear again. Logically, there should be a strong demand for the currency because of its fundamentals, however in this ‘fight or flight’ trading environment, logic is mostly ignored. Expect the depth of the backup to be dictated eventually by cross-action. These dollar rallies provide an opportunity to want to own some of the commodity and growth sensitive currency that is supported by stronger fundamentals and a sound fiscal position (0.9887).

Despite being one of the biggest currency losers earlier this week, falling to its lowest level vs. JPY in four months, the AUD has whipped back in the O/N session, but any further gains are a struggle. The currency remains under pressure on fears that its second largest trading partner, Japan, will have a deepening affect on the Australian economy, forcing the RBA to ease rates.

Investors’ expectations for an RBA rate increase have reversed since the March 11 quake and now factor in a possibility of a cut in the overnight cash rate target (+4.75%). Investors are betting there is a 27% chance that Governor Stevens will cut the cash-rate by-25bp at their April 5 meeting. That is up from 22% on Tuesday.

Earlier this week, the RBA minutes were in line with recent official rhetoric and supports markets view that the RBA is likely to sit back and assess the developments in other markets. However, investors are betting that with circumstances continually changing from Japan, risk aversion trading strategies continue to favor JPY and CHF buying, despite the threat of intervention, and the selling of higher yielding commodity currencies.

By day’s end, its all about what happens at the Fukushima nuclear plant and how the G7 members will attempt to calm the markets (0.9859)

Crude is higher in the O/N session ($98.91 +0.93c). Big picture, oil remains under pressure as Japan’s demand loss continues to outweigh Middle-East tensions despite the commodity settling higher yesterday. Technical analysts believe that the commodity has the potential to print $92 in the short term after registering a 29-month high last week.

The turmoil in Bahrain has been providing the market with enough support to withstand the global equities slump and the growing nuclear concerns in Japan. Also providing some support is an IEA report estimating that the outlook for global oil demand this year is little changed, stating that more time is required to determine the impact of Japans earthquakes.

Prices also got a boost from a smaller-than-expected increase in the weekly EIA report. Crude inventories rose +1.7m barrels last week, less than the +2.1m barrels expected. Gas supplies fared no better, declining -4.2m barrels, vs. expectations of a decline of -1.5m. Stocks of distillates (heating oil and diesel) decreased -2.6m vs. a drawdown of +1.4m barrels.

It’s basic economics, supply and demand, Middle-East potential supply constraints being cancelled out by the worlds third largest economy. Japan has closed 29% of their domestic refining capacity. This has affected about +1.3m barrels of the country’s total of +4.52m barrels per day of capacity. With future consumption questionable, demand from the region is expected to remain soft in the short term.

On deeper pull backs the Bahrain situation will eventually dominate. Saudi troops have entered the country, irritating Iran, and are expected to protect ‘vital installations in Bahrain and maintain stability and security’.

Gold has found some traction. The market believes that the recent price plummet was a ‘tad’ overdone. Over the last week the commodity has fallen just under +4%. The commodity’s bull run is not over, and investors are looking to buy the metal on dips as this asset class has been very much a profitable lemming trade this year. These price pullbacks are viewed as favorable opportunities for investors to continue to diversify into safe-haven assets.

Big picture, commodity prices are being supported by geopolitical factors and inflation threats. Even hawkish global rhetoric has managed to support higher commodity prices. Before last week’s unfortunate events, consumer prices were also boosting the demand for the precious metal as a hedge against global inflation. Recent data reveals that Chinese’s inflation has accelerated the most in six years, and UK consumer prices the most in two years. Even US data is showing that their inflation numbers are edging higher. With the commodity being used as a store of value, the asset class is expected to remain better bid on deep pullbacks. The metal has climbed +26% in the past year ($1,396 +0.80c).

The Nikkei closed at 8,963 down-131. The DAX index in Europe was at 6,565 up+51; the FTSE (UK) currently is 5,623 up+26. The early call for the open of key US indices is higher. The US 10-year eased 6bp yesterday (3.23%) and is little changed in the O/N session.

Ten-year notes are pushing yields to their lowest level in a year as risk aversion trading strategies intensified after last weeks Japanese earthquake. Investors are speculating that Japanese insurers will need to sell the longer dated maturities to pay claims for damage. The BOJ is trying to dispel this thought process.

The BOJ efforts to provide more liquidity and expand an asset-purchase program have thus far failed in halting the sale of global equities by risk avers investors. Even the Fed delayed buying back product yesterday as a plunge in yields at the time of the schedule close of the transaction added to volatility. With this risk aversion momentum, ten-year yields are in danger of breaching 3% in the short term.

Japanese investors are the second-largest foreign holders of US debt and own $882b of US Treasuries. The market is expecting them to be a net seller to finance their immediate operations.

Investors can expect geopolitical and event risk in the Middle-East to continue to support FI gains in spite of stronger economic data.

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February 18, 2011

Market apathy favors EUR for now

Filed under: OANDA News — Tags: a-hedge-against, against, chf, chinese, emergency, eur, food, gbp, north, price, water — admin @ 11:20 am

It appears that very little is making sense, but, there is something for everyone in these market moves. The soft side of the EUR is still higher, the bears will attest to that as they hold their breath every time we breach 1.3600. Currently, the market seems to be ignoring Euro-periphery issues. Investors seem more comfortable buying EUR’s on Suez rumors, rather than dollars, because the risk is that the US will be dragged into the Middle-East situation. Do we need EUR’s for the G20 and weekend insurance? Maybe. The most logical reason for not wanting the dollar, despite the US inflation components edging higher, is the belief that an ambivalent Fed is falling behind the curve. The lack of confidence in the US administration’s ability to deal with its issues has investors questioning buying the dollar. If that was truly the case, would we not be buying gold? China’s RRR hike this morning, despite being another G20 goodwill gesture, is not a surprise, there is more to come.

The US$ is mixed in the O/N trading session. Currently, it is higher against 10 of the 16 most actively traded currencies in a ‘whippy’ O/N session.

Forex heatmap

Yesterday’s broadly stronger US data did little to influence new dollar buyers. The market was more focused with geopolitical concerns and ‘boat’ watching. The strong rise in US inflation data was mostly driven by gas prices. Despite a higher weekly claims report, the positive downward trend is expected to support a firmer February NFP print. The bullish Philly print on headline and the details suggests that ISM itself has yet to peak.

US inflation (+0.4%) is still being bullied by gas prices. Strip transportation (+0.23%) and the gas component out of the report, and we have inflation going nowhere in the US economy (+0.2%). Analysts note that it’s not generalized inflation, but, price shock being ‘expressed mostly by commodities, forced upon households with weaker incomes via higher food and energy prices’. The danger, it will continue to risk crowding out discretionary spending on other elements of the CPI basket’. The market would require a much stronger trickle down effect for the hawks to to be shouting louder.   Thee US jobless claims headline (+410k) happened to give back some of the previous week’s gains. Initial jobless claims increased by +25k. Apart from last week’s +385k print, it is the second lowest level seen this year. Recent reports have been rather volatile, hovering between +385k to +457k since November. Claims have retreated in three of the past six-weeks. The less volatile four-week moving average moved a touch higher to +417.8k and remains supportive of a firmer NFP report for this month. Digging deeper, continuing claims (+1k to +3.9m) and extended benefits (+42k to +873k) climbed higher, however, a deep downward correction in the emergency benefits (-127k to +3.63m) category provided a strong offset.

The Philly Fed print blew everyone out of the water (35.9 vs. 19.3). This is strong proof that ISM may not have peaked. The strength can be attributed to a surge in shipments and higher prices. The gain in shipments is on the back of a solid quarter of new-orders. The unfilled order back log is also climbing, which when combined with strong new orders, suggests a brighter future for shipments. Analysts note that inventories remain lean as sales occur mostly out of current production. This is an ideal situation for growth to expand even further. Digging deeper, eight of the nine subcomponents are moving further into expansion territory. The employment scenario remains robust. Companies continue to boost hiring and the average workweek improved +2.2pts to +12.8, the strongest reading in three months. On the price front, price pressures continued to increase for the sixth consecutive month. It’s worth noting that with a tame CPI reading the pass through pricing effect is yet to be felt. It must be hurting the producer’s margins? The six-month forward index saw its second-straight month of moderation and the biggest slowdown was registered in capital expenditure intentions.

The USD$ is higher against the EUR -0.40%, CHF -0.40% and JPY -0.20% and lower against GBP +0.10. The commodity currencies are weaker this morning, CAD -0.06% and AUD -0.22%. Canadian data yesterday was again pro-loonie. Wholesale trade (+0.8%) is expected to add to December’s GDP print. To date, net exports and trade should provide an unexpectedly strong contribution to GDP, while housing starts, hours worked and manufacturing sales will act as a drag. It is the fifth-consecutive month of gains and came with a significant price effect. In price-adjusted volume terms, trade posted strong results, up +1.2%. This is the print that will contribute positively to GDP. The data and stronger commodity prices briefly pushed the CAD to a three year high yesterday. Big picture, healthier risk appetite, stronger commodity prices, the North American phenomena are all contributing to investors wanting to acquire the CAD on dollar rallies. Stronger domestic fundamentals has helped push the loonie higher against most of its major trading partners on speculation that Governor Carney will hike borrowing costs quicker than other Cbank. Parity and premium, the new reality, is becoming well adjusted too by investors, consumers and manufactures. This morning Chinese RRR hike and Canada’s CPI number may provide better opportunities again to own the CAD (0.9850).

The AUD is heading for a weekly gain on speculation that Bernanke is expected to reiterate that the pace of the US recovery is too slow to require tighter monetary policy. Some of her gains will obviously be tempered by China hiking Banks required reserve requirement another +50bps this morning. Already the AUD has strengthened to a nine month high vs. JPY with investors betting that the AUD will maintain its yield advantage amid global growth. RBA member comments has also giving the currency a leg up. Philip Lowe stated that ‘global commodity prices are likely to remain elevated for an extended period and tighter monetary policy in the region may be needed’. Chinese inflation data saw CPI rising less than expected (4.9% vs. 5.3%) earlier this week. This has boosted the demand for higher-yielding assets. Also aiding the currency was the RBA minutes from this month’s meeting stating that a ‘slightly restrictive’ policy stance was appropriate as a resources boom boosts incomes. The minutes offered no new real news, but stated clearly that the medium-term outlook for the Australian economy remains robust. Policy is ‘appropriate’ in ‘restrictive’ territory, and is dependent on the consumer when rates will rise again. With risk appetite on the up and Chinese CPI less than expected has investors wanting to acquire the carry trade again (1.0102).

Crude is little changed in the O/N session ($85.53c-53c). Crude prices are gathering support from various corners of the globe. Fear that supply disruption is on the horizon in the Middle-East continues to provide support on pullbacks. This week’s EIA report showed a smaller than expected increase in weekly stocks. Inventories rose +900k barrels vs. a market expectation of a rise of +2.8m. Gas fared no better, inventories increased by +200m barrels. Analysts had been expecting an increase of +1.7m. The supplies of distillates (heating oil and diesel) happened to decrease by -3.1m barrels vs. an expected decline of -1.1m. On the face of it, the report was bullish. Concerns about the Middle East and production problems in the North Sea are boosting Brent relative to WTI. Lower-than-feared Chinese inflation tentatively supported oil prices earlier this week. Even the value of the Yuan is lending a helping hand, especially after reaching a 17-year high vs. the dollar making it much cheaper for them to acquire ‘their’ coveted commodities. It is the fear of a sudden reduction in supply from the Middle-East that will support commodities longer term.

Gold futures have climbed to the highest level in a month as rising consumer prices is boosting the demand for the precious metal as a hedge against inflation. Despite the market not witnessing the same level of speculative fund and ETF participation that occurred throughout December, the commodity is receiving support from Chinese’s inflation, which accelerated the most in at least six years, and on UK consumer prices rising the most in more than two years. US inflation numbers also edged higher yesterday. The commodity that every investor hated last month continues to find support on deeper pullbacks. This is because the Middle-East remains the unknown variable. The yellow metal is being used as a store of value. Has the commodity peaked or is it simply a short-term correction? Gold continues to attract technical buyers after rallying above its 20-day moving average. On deeper pullbacks, the metal should remain better bid on speculation that currency volatility will boost demand for a safe heaven investment once the Euro contagion fears raise its ugly head again over the coming weeks during the Euro-periphery refunding season ($1,386 +$1.10c)

The Nikkei closed at 10,842 up+6. The DAX index in Europe was at 7,390 down-28; the FTSE (UK) currently is 6,058 down-28. The early call for the open of key US indices is lower. The US 10-year eased 5bp yesterday (3.57%) and is little changed in the O/N session. Geopolitical pressures pushed treasuries higher yesterday despite the uptick in US inflation numbers. Even the softer weekly claims headline print convinced traders that any improvement in the US labor market is going to take time. The treasury announced that they will issue $99b new product next week (2’s, 5’s and 7’s). Expect the short end to provide some concession and allow dealers to take down the issues comfortably.

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February 17, 2011

EUR Bulls don’t’ be Fooled

Filed under: OANDA News — Tags: a-hedge-against, a-much-stronger, aud, chf, commodity, consumer, currency, december, governor, jpy, market, weather — admin @ 11:08 am

These tight trading ranges has no one chasing their tail. The lack of new directional reasons has taken some of the punch out of the forex market. Bring back volatility, it’s always easier to justify a trading direction excuse. For the moment, investors can expect further window dressing to occur ahead of the G20, like lower dollar yuan fixes by the Chinese, at least they are working on ‘their’ global perception. This morning’s focus will be on US CPI and Philly Fed. It will not be a surprise to see energy prices pushing the headline inflation up, however, the core is not expected to deviate. The Philly print should get a boost from the recent improvement in Empire manufacturing. Expect jobless claims to be weather effected, again distorting claims negatively. The first market move will be the wrong move. Strong US data requires owning those currencies tied to US growth. Look to north and south of its borders. Fed speakers will hog the headlines today and we should be anticipating the same old message.

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

Forex heatmap

Yesterday’s data has led to further optimism about the pace of the US recovery. January housing starts rise of +14.6% to +596k easily trumped market expectations of +540k. The aggressive rise offset the softer permits surprise of -10.4% declines to +562k. Analysts note that even with the abnormal weather variable and regulatory changes, the print looks ‘consistent with a moderate underlying improvement’. Digging deeper, the rise in starts came fully in multiples (+80%). Single starts fell-1%, to their lowest level in two-years. It’s worth noting that other regional surveys continue to look weak (NAHB) and with mortgage rates continuing to tick higher, the overall housing picture though somewhat upbeat will definitely not be leading US economic recovery any time soon.

Are we seeing inflation yet? US producer prices advanced for a seventh consecutive month in January (+0.8%). It’s not surprising to see that most of the support came from energy prices (+1.8%). Logically, we can conclude that some of the rise in costs is being passed onto the consumer as CPI began its rise hand in hand with PPI last year. We should expect an increase in prices from the consumer’s point of view in this morning data. The stronger than expected core-PPI reading (+0.5% vs. +0.2%), coupled with stronger data of late, is expected to eventually pressure the Fed’s doves to abandon any plans of further monetary accommodation, like QE3 for instance. The market is beginning to expect the debate over monetary policy to ‘return to more normal lines’ in the second half of this year. This line of thinking is being supported by various manufacturing surveys showing considerable concerns about rising input prices.

US industrial production disappointed yesterday, declining -0.1% vs. a market expected rise of +0.5%. However, the surprise is palatable when we take into account December’s upward revision from +0.4% to +1.2%. The main negative in the details was the -1.6% drop in utilities. This weather sensitive category fell in a month of cold weather following a +4.1% surge in December that was also cold. Maybe it was the actual temperature that was behind this huge swing?

The FOMC minutes did not sway from recent market opinion. The improved economic views were not enough to change the outlook very much. Near term growth, unemployment and prices all improved, but this strength does not seem to be carried through to the longer term view. We have witnessed the split on the speakers circuit of late, however, consensus does not need to change policy just yet. Some members felt that ‘if more data showed stronger evidence of recovery it could justify changing the pace and size of current asset purchases’.

The USD$ is lower against the EUR +0.02%, GBP +0.24, CHF +0.28% and JPY +0.16%. The commodity currencies are stronger this morning, CAD +0.24% and AUD +0.05%. The loonie has shrugged off a big downward miss on the December manufacturing data (+0.4% vs. +2.3%) yesterday. Analysts note that the impact was eased somewhat by the modest positive prints on capital inflow (+9.63b) and leading indicator data (+0.3%). The lack of a negative reaction indicates that the currency is been drive by various global themes. Healthier risk appetite, stronger commodity prices, the North American phenomena are all contributing to investors wanting to acquire the CAD on dollar rallies. Stronger domestic fundamentals (trade surplus and employment) has helped to push the loonie higher against most of its major trading partners on speculation that Governor Carney will hike borrowing costs quicker than other Cbank. Swaps traders are pricing that the BOC will raise its target lending rate by +0.83% over the next 12-months, up from +0.60% a week ago. Parity, the new paradigm, is becoming well adjusted too by investors, consumers and manufactures (0.9850).

The AUD has strengthened to a nine month high vs. JPY with investors betting that the AUD will maintain its yield advantage amid global growth. RBA member comments is also giving the currency a leg up. Philip Lowe stated that ‘global commodity prices are likely to remain elevated for an extended period and tighter monetary policy in the region may be needed’. Chinese inflation data saw CPI rising less than expected (4.9% vs. 5.3%) earlier this week. This has boosted the demand for higher-yielding assets. Also aiding the currency was the RBA minutes from this month’s meeting stating that a ‘slightly restrictive’ policy stance was appropriate as a resources boom boosts incomes. The minutes offered no new real news, but stated clearly that the medium-term outlook for the Australian economy remains robust. Analysts believe that Governor Stevens is waiting for the consumer to start consuming before looking to hike rates again. For the time being, policy is ‘appropriate’ in ‘restrictive’ territory, and is dependent on the consumer when rates will rise again. Last week, the market pricing for rate hikes over the next 12-months fell-4bp to +34bp. Analysts note that with futures dealers interpretation, combined with such a clear message from Stevens, still leaves the rates market vulnerable to the weaker data on lending and consumption over the next few months. With risk appetite on the up and Chinese CPI less than expected has investors wanting to acquire the carry trade again (1.0038).

Crude is little changed in the O/N session ($84.62 -0.37c). Crude prices are gathering support from various corners of the globe. Fear that supply disruption is on the horizon in the Middle-East continues to provide support on pullbacks. Yesterday’s EIA report showed a smaller than expected increase in weekly stocks. Inventories rose +900k barrels vs. a market expectation of a rise of +2.8m. Gas fared no better, inventories increased by +200m barrels. Analysts had been expecting an increase of +1.7m. The supplies of distillates (heating oil and diesel) happened to decrease by -3.1m barrels vs. an expected decline of -1.1m. On the face of it, the report was bearish. Concerns about the Middle East and production problems in the North Sea are boosting Brent relative to WTI. Lower-than-feared Chinese inflation tentatively supported oil prices earlier this week. Even the value of the Yuan lent a helping hand, especially after reaching a 17-year high vs. the dollar making it much cheaper for them to acquire ‘their’ coveted commodities. Fundamentally there is far more oil in storage, more fuel capacity and more idle oil wells to limit a much stronger market rally. It is the fear of a sudden reduction in supply from the Middle-East that will support commodities longer term.

Gold futures have climbed to the highest level in a month as rising consumer prices is boosting the demand for the precious metal as a hedge against inflation. Despite the market not witnessing the same level of speculative fund and ETF participation that occurred throughout December, the commodity is receiving support from Chinese’s inflation, which accelerated the most in at least six years, and on UK consumer prices rising the most in more than two years. The commodity that every investor hated last month continues to find support on deeper pullbacks. This is because the Middle-East remains the unknown variable. The yellow metal is being used as a store of value. Has the commodity peaked or is it simply a short-term correction? Gold continues to attract technical buyers after rallying above its 20-day moving average. On deeper pullbacks, the metal should remain better bid on speculation that currency volatility will boost demand for a safe heaven investment once the Euro contagion fears raise its ugly head again over the coming weeks during the Euro-periphery refunding season ($1,379 +$4.20c)

The Nikkei closed at 10,836 up+28. The DAX index in Europe was at 7,415 up+1; the FTSE (UK) currently is 6,082 down-3. The early call for the open of key US indices is higher. The US 10-year backed up 1bp yesterday (3.61%) and is little changed in the O/N session. Treasuries seem to be trading in a vacuum as the market debates the merits of US fundamental data this week and the spread of geopolitical concerns in the Middle-East. Market should expect yields to edge higher on FED optimism that the US recovery is on a ‘firmer footing’.

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January 7, 2011

Expected NFP fallout

Filed under: OANDA News — Tags: a-hedge-against, cad, chf, dean's fx, december, dollar, europe, first, government, markets, previous, time, week, yellow — admin @ 11:01 am

The risk this morning is being too optimistic. The market is geared for a strong employment report with consensus of +150k and an unemployment rate of +9.7%. Anything close to expectations or softer will have us quickly unwinding the premium thats been priced in all asset classes since Wednesday’s euphoric private employment number. A strong reading would be consistent with firmer risk appetite and should help riskier currencies. A strong reading will likely push US yields even higher. With Euro stress concerns limiting Trichet’s options, a stronger jobs numbers will have the dollar continuing to outperform its European counterpart, in contrast to the risk-appetite Euro driven rallies that we have witnessed in the last quarter. Capital Markets focus will shift towards the Spanish bond auction next week. Later this afternoon, expect helicopter Ben to provide some insight into their ‘fairly high threshold’ for adjustments to their QE2 plan.

The US$ is stronger the O/N trading session. Currently, it is higher against 13 of the 16 most actively traded currencies in a ‘subdued’ range ahead of employment.

Forex heatmap

Yesterday’s reading of weekly jobless claims came in slightly better than expected, allowing investors to pare some of their pro-dollar positions ahead of today’s litmus test supporting recent US indicators that the economy is actually picking up steam. The number of workers filing new claims for jobless benefits rose slightly less than expected (+409k vs. +410k) and has failed to give the dollar a sustainable boost, that will be left up to a strong surprise with NFP. The four week average of applications for jobless benefits dropped to +411k, the lowest level in over two-years. Digging deeper, continuing claims fell by-47k to +4.1m, while emergency and extended payments decreased by about-23k to +4.51m.

The USD$ is higher against the EUR -0.11%, GBP -0.11%, JPY -0.24% and lower against CHF -0.20%. The commodity currencies are weaker this morning, CAD -0.37% and AUD -0.23%. Canadian Ivey PMI was unchanged yesterday (50-neither contracting nor expanding). Analysts usually take little notice of the December reading, believing that it will always have kinks as the sample of 175 companies is too small and the seasonal factors tend to be widely distorted. That been said the major disappointment was the employment index, which was 47.3, lower than the previous month. It’s worth noting that a decline is not out of historical context for the December reading. Inventories were 54.1, higher than the previous month and a similar scenario for prices paid at 62.3. Month-to-date, the loonie has taking flight on the back of its largest trading partners expected ‘re-acceleration in activity in the first few trading sessions. Stronger data down south reinforces many analysts’ views that the US economy is beginning the year in upward momentum and reason enough for short term chartists to be eying 0.9750 CAD in the first-quarter. This morning’s employment report is expected to surprise to the upside, coupled with Euro peripheral stress should further support Canadian government debt as an alternative to the dollar and the EUR. Investors will take their cue after NFP unless we are side swiped with the Canadian data released beforehand (0.9997).

The AUD fell to its two week low vs. the dollar and is headed for its biggest weekly loss in almost two months after Fitch Ratings said ‘flooding will affect the state of Queensland’s fiscal position’. There is fear that worsening floods will impair resource exports that has driven Australia’s economic growth. Analysts have pointed out that the Aussie is ‘trapped between the dollar strengthening and an economic recovery led by the US’. Weaker data this week down under is expected to slow the pace of tightening, but unlikely to end the hike cycle as employment growth remains so strong. Policy member’s statements this week believe that the government’s stimulus measures will pressurize Governor Stevens to hike rates (4.75%) and that the flood in Queensland ‘may exacerbate already constrained supply conditions and lead to inflationary pressures’. These are good reasons supporting the currency on deeper pullbacks as investors seek to cross the currency vs. the EUR. Last year the currency rose +14% against the dollar which drove down the cost of imports and eroding exporters’ competitiveness. The currency has been trading under pressure outright as US Treasury yields climb, narrowing the yield advantage of assets down-under. Short term offers again appear above parity (0.9920).

Crude is higher in the O/N session ($88.68 +30c). Crude has fallen ahead of the employment report, a precaution, unraveling some of the strength recorded after a surprising gain in the ADP report and growth in the services sector which has boosted optimism that the US economy’s recovery is gathering sustainable momentum. The weekly EIA inventory report revealed that oil stocks fell -4.16m barrels last week, three times more than expected. At +335.3m barrels, inventories are above the upper limit of the average range for this time of year. Gas inventories increased by +3.3m barrels and are in the upper half of the average range, while distillates increased by +1.1m barrels. Again, there are too many hurdles to overcome ahead of the psychological $100 barrier crude. Technically, the market is not showing a tighter supply or demand balance. OPEC believes that supply and demand are ‘in balance,’ and expect demand growth will slow as the global economy struggles to recover, amid ample supplies. The market expects to meet price resistance above $90 as there is far more oil in storage, more fuel capacity and more idle oil wells to limit a stronger market rally in theory.

Gold prices continue to fall on speculation that an economic recovery will curb demand for the metal as a haven. Fast money and the reducing of flight to quality positioning has been pressurizing the yellow metal, as equities, being used as an alternative, is providing more of an appeal in the first week of the New-Year. On deeper pullbacks, the commodity should remains better bid on speculation that currency volatility will boost demand for a safe heaven investment once the Euro contagion fears raise its ugly head again over the coming weeks. The commodity last year completed its tenth annual advance with bullion rallying +30%, it’s largest rally in three years. Even though the one direction trade feels overdone, investors continue to hold gold as a hedge against long-term inflation and have some strong technical support levels to breach before the markets witnesses a mass exodus. The Euro-zone contagion issues continue to put a floor on metal prices on demand for a haven. Technical analysts believe that gold ($1,359 -$12.50c) will outshine other precious metal in 2011 and peak somewhere above $1,600 in 2012.

The Nikkei closed at 10,541 up+11. The DAX index in Europe was at 6,969 down-12; the +FTSE (UK) currently is 5,991 down-28. The early call for the open of key US indices is lower. The US 10-year eased 3bp yesterday (3.42%) and is little changed in the O/N session. The big boy’s, Goldman and PIMCO, have put a dampener on the ADP report translating into a strong NFP print this morning. Their opinions carry weight and has forced investors to pare some of their optimism. Fundamentally, the US job market has not gone far enough for the Fed to consider raising interest rates or significantly influencing the unemployment rate. In a few hours we will get to see just how far? Next week the Treasury Department will auction a total of $66b of fresh supply, unchanged from last month and matched market expectations ($32b-3’s $21b-10’s and $13b long bonds).

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January 5, 2011

Portugal provides the excuse to short EUR

Filed under: OANDA News — Tags: a-hedge-against, a-mass-exodus-, aud, dean's fx, dollar, eur, gbp, government, governor, portugal, usd, week — admin @ 11:09 am

The FOMC minutes reveled that the Fed was more optimistic in its view of US economic growth, but has no plans to raise interest rates or normalize policy at an aggressive pace soon as the FOMC committee sees a ‘fairly high threshold for making changes to the QE2’. With them out of the way, the market will focus on this morning’s fallout of a disappointing Portuguese auction. The good news, Portugal sold the issue, 500m 6-month bills, the bad news, the average yield represents a +164bp increase compared to a similar sale in September and a +28bp increase compared to the most recent 3-month bill auction last month. The market can be expected to further pressurize the EUR as we begin to shift our focus towards employment data.

The US$ is stronger the O/N trading session. Currently, it is higher against 13 of the 16 most actively traded currencies in another ‘whippy’ O/N session.

Forex heatmap

On the face of it, yesterday’s US Factory Orders surprise (+0.7% vs. -0.7%) seemed to have already been discounted in the December equity rally because it was a November print. The headline print was saved by nondurables. Digging deeper, durables fell -0.3%, while nondurables advanced a healthy +1.7%. Year-over-year, orders have advanced +12.5%. Despite the upward momentum, the recent four-month average trend (+0.8%) is only half the pace of the spring and summer readings. With durables down for a second consecutive month the largest metal gain in several years (+10.2) could not outweigh losses in other major categories (Transport -11.1%, Autos -1.8% and non-defense -50.6%). If the market excluded these major categories orders would have risen +2.4%. In the nondurable sub-sector, all the categories increased (petroleum +4.2%, chemicals +1.1% and food +0.9%). Orders for non-defense capital goods (ex-aircraft) rose +2.6%, previously they fell -3.2%. It’s worth noting that gains in demand for capital equipment imply that business investment and exports will keep contributing to US economic growth.

The USD$ is higher against the EUR -0.36%, GBP -0.04%, CHF -0.20% and JPY -0.02%. The commodity currencies are weaker this morning, CAD -0.08% and AUD -0.30%. The loonie has taking flight on the back of its largest trading partners expected ‘re-acceleration in activity in the first few trading sessions of the New-Year. This week’s US data, PMI and factory orders, reinforces many analysts views that the US economy is beginning the year in upward momentum and reason enough for short term chartists to be eying 0.9750 in the first quarter. The loonies year-end buying had been supported by rising oil prices as well as increased front-end interest rate spread support for CAD. With commodity prices plummeting yesterday happened to reverse some of the loonies’ gains, albeit a modest decline. This week’s Canadian Ivey PMI (Thursday) and employment data (Friday) is expected to surprise to the upside, coupled with Euro peripheral stress should further support Canadian government debt as an alternative to the dollar and the EUR. On the flip side, Governor Carney continues to highlights the dangers of a persistently strong domestic currency. Bids for dollars are accumulating on pullbacks (0.9993).

The AUD eased again O/N, hurt by a weaker volatile home sales survey (-0.2% vs. +6.1%). Making matters more interesting was RBA board member McGauchie stating that the government’s stimulus measures will pressurize Governor Stevens to hike rates (4.75%) and that the flood in Queensland ‘may exacerbate already constrained supply conditions and lead to inflationary pressures’. These are good reasons supporting the currency on these pullbacks as investors seek to cross the currency vs. the EUR. Last year the currency rose +14% against the dollar which drove down the cost of imports and eroding exporters’ competitiveness. The currency has been trading under pressure outright as US Treasury yields climb, narrowing the yield advantage of assets down-under. The FOMC minutes this week and the Fed commitment to QE2 will should also reduce some of the currency’s pricing pressures (1.0008).

Crude is lower in the O/N session ($88.58 -80c). With too many hurdles to overcome ahead of the psychological $100 barrier crude plummeted yesterday, aggressively retreating from its 27-month high, the most in two-months, amid speculation that a recovery by global economies will curb demand for the commodity sector. Investors have been using commodities as the currency of last resort for storing value. In December, oil advanced +8.6% while the dollar declined-3%. In today’s weekly inventory report the market expects a fifth consecutive seasonal decline in stocks. Technically, the market is not showing a tighter supply or demand balance, it’s the result of refinery shenanigans to avoid tax at year end in December. Last week’s EIA report showed that crude inventories decreased by -1.3m barrels. OPEC believes that supply and demand are ‘in balance,’ and expect demand growth will slow as the global economy struggles to recover, amid ample supplies. Technically, expect the market to meet price resistance above $90 as there is far more oil in storage, more fuel capacity and more idle oil wells to limit a strong market rally in theory.

Gold prices, like most commodity prices, plummeted yesterday, recording its largest decline in six-months on speculation that a global recovery will curb demand for the metal as a haven asset. Fast money and the reducing of flight to quality positioning has been pressurizing the yellow metal, as equities, being used as an alternative, is providing more of an appeal in the first week of the New-Year. On deeper pullbacks, the commodity should remains better bid on speculation that currency volatility will boost demand for a safe heaven investment once the Euro contagion fears raise its ugly head again. The commodity last year completed its tenth annual advance with bullion rallying +30%, it’s largest rally in three years. Even though the one direction trade feels overdone, investors continue to hold gold as a hedge against long-term inflation and have some strong technical support levels to breach before the markets witnesses a mass exodus. The Euro-zone contagion issues continue to put a floor on metal prices on demand for a haven. Technical analysts believe that gold ($1,384 +$5.40c) will outshine other precious metal in 2011 and peak somewhere above $1,600 in 2012.

The Nikkei closed at 10,380 down-17. The DAX index in Europe was at 6,896 down-79; the +FTSE (UK) currently is 5,999 down-14. The early call for the open of key US indices is lower. The US 10-year eased 5bp yesterday (3.31%) and is little changed in the O/N session. US debt reversed some of the previous day’s losses as investors believed that December’s biggest monthly rout in a year went a wee bit too far and provided favorable buying opportunities despite the strong November factory order print. The market is focusing on Friday’s employment report to gauge if the market has more run to it or if it pauses. Both technically and fundamentally the US unemployment situation (+9.8%) is still too high to have any type of sustained selloff. With the Fed committed to its QE2 plans, debt remains better bid on pullbacks at the moment.

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December 29, 2010

A EURO trader’s Christmas

Filed under: OANDA News — Tags: a-hand-despite, a-hedge-against, auction, chartered, chf, china, christmas, dallas, gbp, loonie, pace, published-today, year — admin @ 11:01 am

T’is the season where analysts struggle to vindicate market movements. In reality, technical and fundamental reasons can be thrown out with the bath water when it comes to deciphering the justification of a currency’s move. Thinly staffed trading desks tend to be trigger happy and non-committal all at once, hence the wild EUR swings we have witnessed over the last three trading days. The macro view has not changed: Euro contagion exists, the Fed battles to make QE2 work and keep yields low, and China has many more rate hikes to go before the rest of the world experiences the negative trickle down effect. This is the reality that’s lost amongst holiday traders. It’s a safer bet to cheer in 2011 and start again next week.

The US$ is weaker in the O/N trading session. Currently, it is lower against 11 of the 16 most actively traded currencies in a ‘subdued’ O/N session.

Forex heatmap

US data yesterday disappointed, however, the thinly staffed desks seemed to have dismissed the fundamental reports and concentrated on the year end deal flows. The Standard & Poor’s/Case-Shiller composite index of 20 metropolitan areas declined for a fourth straight month in October (-0.8% vs. -0.6% y/y), pressured by supply, home foreclosures and high unemployment. The housing market has been struggling since the US home buyer tax credits expired earlier this year. All 20 cities showed monthly price declines, strong proof that a double-dip is currently in the making.

Positive consumer momentum took it on the chin yesterday with the US consumer confidence index reporting weaker than expected, falling -1.8pts to 52.5, and this after other confidence indicators showing an improved sentiment amongst consumers this month. Analysts note that both the recent US midterms and the resolutions of the tax issues continue to be trumped by a woeful labor market. On a positive note, sluggish consumer sentiment does not seem to be affecting retail sales during this holiday season. Digging deeper, both the current and future appraisals both fell. Business conditions being ‘good’ softened from +8.5% to +7.5% and that job’s were ‘plentiful’ eased to +3.9% from +4.3%. Consumer’s views on the job market have again taken a dive, falling to +14.3% from +15.1%. It seems we are back to ‘give us a job and we will spend’ mentality.

Finally, the Richmond Fed’s manufacturing general business index jumped to 25 from 9 this month and hot on the heels of NY, Philly and Dallas Fed’s showing that their activity continued to expand in December. The report said ‘manufactures assessments of business prospects for the next six-months were generally more optimistic’.

The USD$ is lower against the EUR +0.17%, GBP +0.04%, CHF +0.04% and JPY +0.37%. The commodity currencies are stronger this morning, CAD +0.23% and AUD +0.43%. Sovereign wealth funds happened to chew through most of the corporate loonie bids around parity yesterday. The currency has stalled ahead of October’s lows of 0.9975. In this holiday shortened week there has been much noise with minimum conviction. Investors and dealers seem to be happy to wait out the year and ply their wares next week with Canadian data providing support for their trading strategies. The news that China has cut back rare earth exports by +11% is boosting commodities and providing support for commodity sensitive currencies like the loonie and AUD, temporarily at least. Canadian policy makers remain weary of Europe’s funding challenges, US growth risks and with benign domestic Canadian inflation worries will not pressurize the BOC to tighten monetary policy any time soon. This month the loonie has gained +1.6% outright vs. its largest trading partner. The currency has only witnessed modest strength compared to other growth sensitive currencies as Governor Carney highlights the dangers of a persistently strong domestic currency. The market remains better buyers of dollars on dips.

The AUD is fighting it out with JPY to see who amongst the majors has been the best performing currency this year. The AUD looks like a safer bet as the carry trading strategy seems to be prevailing. The dollar has weakened again vs. commodity sensitive currencies, as rising commodity prices is boosting demand for currencies linked to raw materials exports. AUD extended gains to a fresh two month high in holiday thinned markets O/N. Ongoing M&A talks for Aussie companies is lending the currency a hand despite the PBOC hiking rates +25bp at the weekend. A higher risk appetite is spurring a shift of money to the Aussie and other commodity sensitive currencies, temporarily at least. The currency had been trading under pressure outright as US Treasury yields climb, narrowing the yield advantage of assets down-under. Year-to-date, the currency has climbed +12%, on prospects for commodity-driven economic growth and the yield advantage of the nation’s debt compared with other developed markets. The market is running into offers at 1.0150-60 (1.0132).

Crude is lower in the O/N session ($91 -50c). After peaking at its two-year high on Monday, oil prices have retreated as the market digested a Chinese interest rate hike having an impact and yesterdays mixed economic releases in the US. Colder conditions along the US east coast and throughout Europe seem to be providing a bid on pull backs in this weeks thin market action. Last week’s EIA report showed that crude inventories decreased by -5.3m barrels. At +340.7m barrels analysts note that current stocks are above the upper limit of the average range for this time of year. There was a similar scenario with gas inventories, they increased +2.4m and remain in the upper half of their range. OPEC believes that supply and demand are ‘in balance,’ and expect demand growth will slow as the global economy struggles to recover, amid ample supplies. Technically, expect the market to meet resistance all the way up to the psychological $100 limit as refiner’s actions to avoid year-end tax liabilities are priced in.

Gold prices again advanced yesterday on speculation that currency volatility will boost demand for a safe heaven investment. The dollar weakening has also come to the commodity’s aid. Year-to-date the commodity has gained +27% as Europe’s debt crisis and low US interest rates has encouraged global investment in precious metals. The yellow metal continues to garner ‘physical’ interest on pull backs despite China hiking interest rates by +25bp on Christmas Day. Even though the one direction trade feels overdone, investors continue to hold gold as a hedge against long-term inflation. The Euro-zone contagion issues continue to put a floor on metal prices on demand for a haven. The commodity is poised to record its tenth consecutive annual gain ($1,405 -30c). Technical analysts believe that gold will outshine other precious metal in 2011 and peak somewhere above $1,600 in 2012.

The Nikkei closed at 10,344 up+52. The DAX index in Europe was at 6,988 up+16; the +FTSE (UK) currently is 6,013 up+5. The early call for the open of key US indices is higher. The US 10-year backed up 10bp yesterday (3.43%) and is little changed in the O/N session. Treasuries remain under pressure, heading for their biggest monthly decline in a year, as the market prepares to take down the last of this weeks $99b of new product. Yesterday’s Richmond manufacturing gains trumped consumer sentiment concerns making it easier for dealers to cheapen the curve ahead of the 5-year auction. The second of the three auctions was ‘not’ well received (5’s $35b) and was met with weak demand in thin holiday trading conditions. Dealers took down the notes at 2.149%, above WI’s at 2.103%. The bid-to-cover was 2.61 vs. the 2.82 four auction average.

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