Forex Blog

December 21, 2010

EURO-three strikes your out

Filed under: OANDA News — Tags: , , , , , , , , , , , — admin @ 11:12 am

With Moody’s promoting contagion fears by constantly credit threatening, has the EUR eyeing new-lows. It will be easily achieved in this illiquid, disinterested market, that’s focused on the weather channel. The chances of receiving Euro-periphery clarity before year-end looks unlikely. We probably would get better odds that the SNB would step into the currency markets, exploiting thin end-of-year liquidity to halt the currency’s rise than anything of meaning to support the EUR. Investors continue to flock to own the CHF due to the lack of progress in periphery issues. With spreads widening, liquidity remaining thin, will promote some irrational unexplained market movements. Try not to over think, the game plan remains the same.

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

The EUR has too many strikes against her not to trade lower. Continued worries in the Euro-zone that the regions leaders still are not doing enough to prevent contagion fears has led to the recent strength in the CHF and the dollar. At the Euro summit last week, leaders agreed to form a permanent sovereign debt resolution mechanism after 2013, but failed to expand the current bailout fund. Another waste of Euro time and resources as personal agendas continue to cloud a solution.

The USD$ is lower against the EUR +0.18%, CHF +0.52%, JPY +0.05% and higher against GBP -0.15%. The commodity currencies are stronger this morning, CAD +0.03% and AUD +0.20%. The loonie continues to modestly underperform against its major trading partners despite the stronger fundamentals out of the US. It weakened for a third consecutive day yesterday as commodity and equity prices fluctuated, Canadian wholesale prices disappointed and ahead of perceived weaker CPI data this morning. 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 +0.5% 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 loonie continues to struggle within striking distance of parity because of the strong corporate interest to own dollars there. Better dollar buying remains on dips.

‘Monetary policy was judged to be mildly restrictive’ according to the RBA minutes last night, the reason Governor Stevens left rates unchanged two week’s ago (+4.75%). Household ‘restraint, if it continued, would provide some scope for investment to rise without causing aggregate demand to grow too quickly and inflationary pressures to build’ according to policy makers. Members ‘observed that the restraint being shown by households, and the pickup in the saving rate, would help reduce the medium-term risk from household balance sheets after a long period when debt ratios had risen, and would help to make room for the expected increase in investment’. The AUD got a lift from Chinese remarks stating that they had taken steps to help the European Union with its debt problems, supporting demand for higher-yielding assets. A higher risk appetite is spurring a shift of money to the Aussie and other commodity sensitive currencies, temporarily at least. The currency has 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 +9.7% (second biggest winner after JPY), on prospects for commodity-driven economic growth and the yield advantage of the nation’s debt compared with other developed markets. Investors remain better buyers on dips, planning an assault on parity again (0.9951).

Crude is higher in the O/N session ($89.66 +29c). Oil is trading close to a two-year high as cold weather boosts demand for heating fuels in Europe and North America. Investors continue to speculate the US economic recovery will accelerate next year, again boosting fuel demand. Last week’s EIA report showed that stocks plunged -9.85m barrels to +346m vs. an expected decrease of -2.5m barrels. Also aiding prices was imports falling-15% to +7.69m barrels, the lowest level in two years, and refineries operating at +88% of capacity, the most in three months. It’s worth noting that inventories along the Gulf Coast (where 50% of US refiners are located) fell -9.02m to +173.4m as the region levies taxes on year end supplies. The large draw down is mostly due to end of year inventory management at refineries. Coupled with OPEC announcement to maintain their production quotas and the PBOC refraining from tightening monetary policy is supporting the market, probably to the year end at least. 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 again at the $90 high printed earlier this month.

Gold prices continue to fluctuate as the EUR slumps vs. the dollar amid mounting Euro-zone debt concerns. Investors have also been booking year end profits following a +25% rally this year, temporarily eroding demand for the precious metal as an alternative asset. The stronger US data of late points to a recovering economy with a low inflation rate. However, thus far, the commodity remains supported on deeper pull backs by the persistent concern over Euro debt levels. Even though the one direction trade feels overdone, investors continue to hold gold as a hedge against a currency debasement and long-term inflation. The Euro-zone backdrop is trying to put a floor on metal prices on demand for a haven. The commodity is poised to record its 10th consecutive annual gain ($1,388.90 +$2.80c). Technical analysts believe that gold will outshine other precious metal in 2011 and peak somewhere above $1,600 in 2012.

The Nikkei closed at 10,370 up +154. The DAX index in Europe was at 7,058 up+39; the FTSE (UK) currently is 5,932 up+41. The early call for the open of key US indices is higher. The US 10-year backed up 2bp yesterday (3.34%) and is little changed in the O/N session. Treasuries erased yesterday’s early morning gains after US equities recovered from the lows of the day, diminishing the refuge appeal of government debt. Previously, the demand for government safety increased on the back of South Korean military drills and on the Fed’s buyback schedule. Liquidity remains a premium as we enter the holiday stretch. The 2/10’s spread has widened to 278bp. The market seems cautious about anything good for bonds ‘coming out of the tax-cut extension’. With the US economy continuing to improve and the fear of deflation gradually disappearing will eventually push yields higher.

December 20, 2010

EURO Jackals lie in wait

Filed under: OANDA News — Tags: , , , , , , , , , — admin @ 11:16 am

A five notch downgrade by Moody’s is not much of a surprise, however with EU policy makers being rather vocal and having serious concerns that recent Irish legislation introduced to fix its banking system threatens the ECB’s ability to run its liquidity operations will certainly have the EURO bulls questioning their current positions. Fundamentally and technically, the EUR remains under pressure after the EU summit failed to produce a breakthrough. Add a little Korean military tension into the mix, thin liquidity and some nervous traders and we have a currency that is preparing for its next downward leg, unless one of the variables change.

The US$ is weaker in the O/N trading session. Currently, it is lower against 9 of the 16 most actively traded currencies in a ‘subdued’ O/N session.

Forex heatmap

Trichet again is thinking out loud and every time this happens little develops. He believes that the EUR is not the root of all the ills and that Governments should act responsibly, manage their day to day spending. The Euro-zone members should do more individually and collectively to combat the crisis. In theory its an extremely sound thought, however, most of the periphery countries are beyond maintenance and are currently on the cusp of requiring intervention. The EUR jackals smell blood.

The USD$ is higher against the EUR -0.28% and lower against GBP +0.11%, JPY +0.21% and CHF +0.14%. The commodity currencies are stronger this morning, CAD +0.07% and AUD +0.17%. The loonie continues to modestly underperform against its major trading partners despite the stronger fundamentals out of North America. On Friday, the currency completed is second consecutive losing week as investors lost some of their appetite for risk. The positive commodity and equity markets have been trumped by EU contagion concerns and the flight to own US assets. Data in this holiday shortened week may also provide little support for the loonie. Canadian policy makers remain weary of Europe’s funding challenges, US growth risks and with benign domestic inflation worries will not pressurize the BOC to tighten monetary policy any time soon. This month the loonie has gained +1.1% 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 loonie continues to struggle within striking distance of parity because of the strong corporate interest to own dollars there. Better dollar buying remains on dips.

AUD is finding it difficult to gain traction, trading near a one-week low against JPY on concern that the Europe’s debt crisis will worsen and tensions on the Korean peninsula will intensify, again curbing demand for higher-yielding assets. The currency has been trading under pressure outright as US Treasury yields climb, narrowing the yield advantage of assets down-under and on fear that China will act in answer to slow inflation, reducing the demand for growth sensitive and higher-yielding assets. Year-to-date, the currency has climbed +9.1% (second biggest winner after JPY), on prospects for commodity-driven economic growth and the yield advantage of the nation’s debt compared with other developed markets. Domestic data remains strong, this months employment data blew all analysts expectations out of the water and supports the currency on pullbacks. Not aiding the currency is the concerns for long dated interest rates in the US. Analysts are beginning to agree that the tight labor market will bring the RBA back into the picture, but believe that Governor Stevens is not behind the curve just yet and will not be required to hike rates in February. With consumers boosting their savings significantly in an environment of rising job and wage growth, suggests that the RBA is still ahead of that curve. Governor Stevens has also mentioned that rates are ‘appropriate’ for the economic outlook. Demand for the currency will remain limited on speculation the minutes from the RBA’s previous policy meeting will signal the central bank won’t increase rates. Investors remain better buyers on dips, planning an assault on parity again (0.9896). There has been interest to short AUD/CAD as a hedge vs. long gold trades.

Crude is higher in the O/N session ($88.08 +6c). Crude prices are being supported by positive economic US data, but with inventories remaining high there is limited top side potential ahead of year end. Last week’s EIA report showed that the category of distillate fuel (includes heating oil and diesel) increased +1.09m barrels to +161.3m. This supply print will provide some bearish proof for the report, unlike the weekly headline print showing supplies plunging the most in eight years as imports tumbled and refineries bolstered fuel output. Stocks plunged -9.85m barrels to +346m last week vs. an expected decrease of -2.5m barrels. Also aiding prices midweek was imports falling-15% to +7.69m barrels, the lowest level in two years, and refineries operating at +88% of capacity, the most in three months. It’s worth noting that inventories along the Gulf Coast (where 50% of US refiners are located) fell -9.02m to +173.4m as the region levies taxes on year end supplies. The large draw down is mostly due to end of year inventory management at refineries or in other words cooking someone’s books. The black-stuff had previously garnered support from reports revealing that China’s refiners increased their processing rate last month. The world’s biggest energy consumer boosted their net imports of the black stuff by +26%, m/m, and increased their processing rates to ease a diesel shortage. Coupled with OPEC announcement to maintain their production quotas and the PBOC refraining from tightening monetary policy is supporting the market, probably to the year end at least. 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 again at the $90 high printed earlier this month.

Being long the lemming gold trade has the weaker bulls tentatively worried after last week’s price action. Gold pared some of its advances on Friday, on speculation that the dollar will extend its rally, eroding demand for the precious metal as an alternative asset. Investors are booking year end profits following a +25% rally this year. It’s speculated that the selling has been caused by ‘year-end posturing, or even movements of large funds out of the market’. The stronger US data of late points to a recovering economy with a low inflation rate. However, thus far, the commodity remains supported on deeper pull backs by the persistent concern over Euro debt levels. For most of this year, debt contagion has driven investors into the third ‘reservable’ currency as they seek a store of value. Even though the one direction trade feels overdone, investors continue to hold gold as a hedge against currency debasement and long-term inflation. The Euro-zone backdrop is trying to put a floor on metal prices on demand for a haven. The commodity is poised to record its 10th consecutive annual gain ($1,384 +$5.40c). Technical analysts believe that gold will outshine other precious metal in 2011 and peak somewhere above $1,600 in 2012.

The Nikkei closed at 10,216 down-87. The DAX index in Europe was at 7,006 up+24; the FTSE (UK) currently is 5,875 up+3. The early call for the open of key US indices is higher. The US 10-year eased 16bp on Friday (3.32%) and is little changed in the O/N session. Bonds completed their third consecutive weekly drop last week. Their longest stretch of declines in three months, as evidence that the US economy is recovering reduced demand for the safety of government debt. Investors it seems are tentatively paring their holdings of US debt as risk appetite improves. Liquidity remains a premium as we enter the holiday stretch. The 2/10’s spread has widened to 278bp. The market seems cautious about anything good for bonds ‘coming out of the tax-cut extension’ , however liquidity remains a premium.

December 7, 2010

Market seeks excuses to short Euro

Filed under: OANDA News — Tags: , , , , , , , , , , , — admin @ 11:22 am

The news that two Irish independent MP’s will support the Governments budget vote later today has increased the likelihood that the Irish ‘austerity’ budget will pass. An unsuccessful vote would trigger an early election and push back the implementation of the ECB/IMF rescue plan. The knock on effect would increase risk aversion and warrant the immediate fresh selling of EUR’s. On the other hand, the improvement in global risk appetite from a successful budget vote is expected to be limited as Capital Markets shift their focus to Portugal and Spain. It’s up to Trichet to keep buying those periphery bonds to shore up investor confidence, otherwise the market will find more excuses to add to their short EUR positions.

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 ‘whippy’ trading range.

Forex heatmap

History repeats itself. Proof being the boringly quiet first trading session yesterday after a disappointing NFP report last week. The first Monday generally ends up being the quietest trading day of the month and none of the asset classes were able to break with tradition. However, the O/N session did not disappoint. News that President Obama is extending the Bush-era tax credits and the potential for further QE has again piqued investors interest. Event risk remains on the radar. The market is keeping a watchful eye on the Euro-finance ministers meeting this morning. Yesterday, members stated that the EFSF did not require any more capital to handle the difficult situation with the current sovereign debt crisis and will rely on the ECB bond purchase program to calm investors. The market remains nervous about sovereign debt, as the focus now shifts from Ireland to Portugal and Spain. Elated movements will be limited.

The USD$ is lower against the EUR +0.51%, GBP +0.51%, CHF +0.39% and JPY +0.01%. The commodity currencies are stronger this morning, CAD +0.24% and AUD +0.52%. The loonie was still the second-best performer against the greenback yesterday among its G10 counterparts as sovereign-debt concerns weakened the EUR. Even mixed domestic data did little to upset the currency ahead of this morning’s interest rate decision by the BOC. On the crosses, and especially vs. the EUR, the loonie remains in demand. The Ivey PMI unexpectedly rose last month (57.5 vs. 56.7). The print has had little influence on the overall movement of the currency, the most important component, the employment index stood at 54.8, further proof that the job situation was still expanding. The currency has had to deal with much ‘noise’ over the last week with potential mergers, takeovers and Cbank interest pushing the currency towards parity outright. The degree of strength of the CAD is at odds to what has been happening elsewhere and that tends to lead to speculation of customer flow execution. It’s unanimous that Governor Carney is expected to remain on hold at +1% well into the New Year. For the time being, the loonies demand remains a function of investors risk desire and not on its softer fundamentals of late. Parity and beyond will be the ‘flavor du jour’ for dealers agendas next year, for now we have Governor Carney to wait for.

It was not much of a surprise last night to see the RBA keeping its benchmark interest rate on hold (4.75%) as the country’s growth slows and risks to the global economic recovery persist. Policy makers expect inflation to be contained through mid of next year. Governor Stevens said monetary policy is ‘appropriate for the economic outlook.’ The currency’s strength ‘will assist, at the margin, in containing pressure on inflation over the period ahead.’ Year-to-date, the Aussie has risen +8.5% outright vs. the dollar and the second best performing currency this year. Several domestic releases show that the Australian economy had decelerated of late. Retail sales declined in October, it’s largest decline in twelve month and business profits also dropped last quarter, the first decline in more than a year. Futures traders are now betting that there is an 88% chance Governor Stevens will leave borrowing costs unchanged through the first quarter of 2011. Currently, like all growth and interest rate sensitive currencies, demand for the AUD depends on investors appetite for risk as they continue to assess the severity and likelihood of the Euro-zone debt crisis spreading. There is natural resistance at parity(0.9960).

Crude is higher in the O/N session ($89.46 +8c). Crude prices were little changed yesterday as the dollar strengthened and the psychological resistance level of $90 was difficult to penetrate just yet. Investors have shrugged off a disappointing NFP report and instead have focused on the recent stronger fundamental releases that signal that the US economy s growing, albeit at a slower pace. Investors have also dismissed last weeks surprising increase in weekly stock levels. Oil inventories rose +1.1m barrels last week vs. an expected decline of -1.1m. Gas stockpiles rose -600k barrels compared to expectations for no change, while stocks of distillates (heating oil and gas) fell by -200k barrels, analysts had expected a -1.1-million-barrel drop. Demand for oil and fuel products has fallen to the lowest level since mid-October. The increase follows two consecutive months of mostly steady declines after levels reached 27-year highs in September. The market continues to look past the increases and is focusing on the improving economic data in the US and China, as well as the possibility that the Fed may extend stimulus measures. Also aiding prices is Goldman predicting that a second stage recovery in oil markets will occur next year ahead of oil prices trading above $100 in 2012.

Gold continues its upward momentum, making an assault on its record highs, on concern that the US economy may need more stimuli, boosting the appeal of the metal as an alternative to holding currency. Even with the dollar strengthening, the commodity remains supported by the persistent concern over Euro debt levels and with NFP barely growing last month, with the jobless rate unexpectedly hitting a seven-month high, should create more US deficit spending and support for the metal. To date, debt contagion has driven investors into the third ‘reservable’ currency as they seek a store of value. Despite the fear that China will tighten their monetary policy next year, a move to curb speculation and dampen inflation, global demand remains robust. Even though the one direction lemming trade seems to be overdone, investors continue to hold gold as a hedge against currency debasement and long-term inflation. The Euro-zone backdrop puts a floor on gold prices as these pullbacks have been somewhat supported on demand for a haven in the midst of Europe’s sovereign-debt crisis. Year-to-date, the metal is up + 24.8% and is poised to record its 10th consecutive annual gain ($1,423 +$7.70c).

The Nikkei closed at 10,141 down-26. The DAX index in Europe was at 6,996 up+43; the FTSE (UK) currently is 5,804 up+34. The early call for the open of key US indices is higher. The US 10-year eased 1bp yesterday (2.93%) and backed up 7bp in the O/N session (3.01%). Bernanke’s comments that the Fed may boost purchases of the securities to prop up the recovery, again pushed yields down from their four-month low print last week during yesterday’s session. The 2/10’s spread narrowed to +251bp ahead of this week’s Government auctions ($66b-3’s, 10’s and bonds). While fundamentals have improved, there is still much uncertainty out there and Bernanke and other policy makers continue to buy which will limit yield rises. Fundamentally, for 10’s to break through the +3%, the market will require better economic data to do so or perhaps Obama agreeing to extend tax cuts will offset Europe’s debt crisis spreading further.

December 6, 2010

PD is a Short Seller of the EUR

Filed under: OANDA News — Tags: , , , , , , , , , , , , — admin @ 11:10 am

Political diversity is a short seller of the EUR. Trichet can continue buying Portuguese and Irish bonds and prevent contagion, however the ECB’s actions will not save the Euro-zone alone. Capital Markets expected a QE solution from Euro policy makers last week. Why? They do not need to address weak growth and low inflation in the region, but a market which that has mispriced assets to a degree that there might be broader systemic risks. Their role is to provide liquidity not a resolution to a political crisis. All eyes will be on the Irish budget vote tomorrow. The improvement in global risk appetite late last week relied on expectations that the budget will be passed. An unsuccessful vote outcome will trigger an early election, pushing back the implementation of the ECB/IMF rescue plan, promoting more risk aversion and dumping of the EUR.

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

Forex heatmap

Friday’s anemic net gain in jobs came despite analysts gradually showing more optimism of late. Weekly initial unemployment claims have recently been trending lower and has had little influence on the job scenario. On both the headline and the details, job growth disappointed. A gain of only +39k jobs reverses the optimism that had crept into markets following the acceleration in job gains for October. It’s now expected of helicopter Ben and the Fed to complete its full +$600b purchase program and perhaps even expand it. With an uptick in the unemployment rate, the Fed’s exit strategy looks a long way off. Digging deeper, the previous months revisions had little affect. They were revised only +38k higher, and were split between a stronger gain of +172k in October (151k initial print) and fewer jobs lost in September (-24k vs. -41k initial). Aggregate hours worked were up +0.1% m/m, moderating from +0.4% growth posted in October. The unemployment rate backed up two-tenths to +9.8%. The private sector added +50k, with gains concentrated in the services sector. Overall, the number of full-time jobs was down, a decline offset by increased part-time hiring and self-employed.  

The USD$ is higher against the EUR -0.90%, GBP -0.60%, CHF -0.76%and JPY -0.07%. The commodity currencies are mixed this morning, CAD +0.34% and AUD -0.02%. The loonie ended Friday’s session little changed after the weaker than expected North American employment reports. The currency has had to deal with much ‘noise’ again last week. Potential mergers, takeovers and Cbank interest happened to push the currency towards parity with its largest trading partner, even stronger risk appetite boosted stocks and commodities and reduced the demand for havens such as the dollar. The degree of strength of the CAD is at odds to what has been happening elsewhere and that tends to lead to speculation of customer flow execution. Dealers will be looking towards tomorrows BOC interest rate announcement. After the softer jobs data, its unanimous that Governor Carney is expected to remain on hold at +1% well into the New Year. For the time being, the loonies demand remains a function of investors risk desire and not on its softer fundamentals of late.

The AUD has ended its three day rally ahead of the RBA rate meeting this evening, partly on speculation that policy makers will signal they are in no hurry to increase interest rates (4.75%). The growth currency also came under pressure on concern that the sovereign-debt crisis in Europe will damp demand for higher-yielding assets. Traders have pared bets on any rate increases down under after Governor Stevens stated late last month ‘there’s unlikely to be anything from us imminently’ on borrowing costs. Weaker domestic data has also curbed the currency gain of late, retail sales unexpectedly declined in October (-1.1%) and imports slumping to the lowest level in nine-months (-3%). A tighter monetary policy by the RBA over the last year has encouraged a +7.4% gain in the currency vs. the dollar and the second best performer among the 16 major currencies. Demand for Australia’s currency has also damped as signs that China’s economy is accelerating fueled speculation the PBOC will take more steps to slow it down. The Chinese have indicated that they will strengthen liquidity management and ‘normalize’ monetary conditions, damping demand for higher-yielding currencies. With them concentrating on containing strong inflation rather than boosting growth will affect commodity sensitive currencies longer term. As the leading commodity currency, the AUD is highly vulnerable to any Chinese monetary actions and risk aversion strategies (0.9871). There is stronger market interest to sell AUD on rallies.

Crude is higher in the O/N session ($89.24 +5c). On Friday, crude rallied for a third consecutive day, printing its highest price level in two-years on the back of a weaker dollar index and with investors shrugging off a disappointing employment report. They focused on the recent stronger fundamental releases that signal that the US economy s growing, albeit at a slower pace. Investors have also dismissed last weeks surprising increase in weekly stock levels. Oil inventories rose +1.1m barrels last week vs. an expected decline of -1.1m. Gas stockpiles rose -600k barrels compared to expectations for no change, while stocks of distillates (heating oil and gas) fell by -200k barrels, analysts had expected a -1.1-million-barrel drop. Demand for oil and fuel products has fallen to the lowest level since mid-October. The increase follows two consecutive months of mostly steady declines after levels reached 27-year highs in September. The market continues to look past the increases and is focusing on the improving economic data in the US and China, as well as a weakening dollar. Also aiding prices is Goldman predicting that a second stage recovery in oil markets will occur next year ahead of oil prices trading above $100 in 2012. Next stop, investors will become weather experts as European deals with an unseasonable cold snap.

On Friday, Gold rose for a fifth consecutive day after the dollar weakened, boosting the appeal of the precious metal and commodities as alternative investments. Bullion climbed more than +3% last week, its biggest advance in seven-months. Even with the dollar strengthening in the O/N session, the commodity remains supported by the persistent concern over Euro-zone debt levels and with NFP barely growing last month, with the jobless rate unexpectedly hitting a seven-month high, should create more US deficit spending and support for the metal. To date, debt contagion has driven investors into the third ‘reservable’ currency as they seek a store of value. Despite the fear that China will tighten their monetary policy next year, a move to curb speculation and dampen inflation, global demand remains robust. Even though the one direction lemming trade seems to be overdone, investors continue to hold gold as a hedge against currency debasement and long-term inflation. The Euro-zone backdrop puts a floor on gold prices as these pullbacks have been somewhat supported on demand for a haven in the midst of Europe’s sovereign-debt crisis. Year-to-date, the metal is up + 24.3% and is poised to record its 10th consecutive annual gain ($1,414 +$8.20c).

The Nikkei closed at 10,167 down-11. The DAX index in Europe was at 6,953 up+6; the FTSE (UK) currently is 5,741 down-4. The early call for the open of key US indices is lower. The US 10-year backed up 5bp on Friday (3.01%) and eased 8bp in the O/N session (2.93%). Yields have been pushed all over the place in the last two trading sessions. Despite a weaker employment report, concerns initially eased that the Euro debt crisis would spread coupled with US growth reports last week weighed on owning Government debt. Bernanke’s comments that the Fed may boost purchases of the securities to prop up the recovery, again has pushed yields down from their four-month low. Dealers will want to steepen the curve ahead of this week’s Government auctions ($66b-3’s, 10’s and bonds) to take down supply. While fundamentals have improved, there is still much uncertainty out there and Bernanke and other policy makers continue to buy which will limit yield rises.

July 6, 2010

EUR stalking to pounce higher

Filed under: OANDA News — Tags: , , , , , , , , , , , , , — admin @ 10:29 am

The majority will be surprised to see the EUR testing Friday’s highs again this morning, especially with the amount of negative EU copy being distributed since the weekend. EU fear mongering from inadequate ‘stress testing’, which may be unable to dictate hidden losses to unmanageable sovereign debt issues, has had a limited negative impact on the currency thus far. The negative Swiss CPI print for June this morning may have re-awakened a fear that, despite what Hildebrand communicated to the market earlier this month, there may be an SNB intervention. Even reports that China is expanding its investment in JGB’s, coinciding with Europe’s fiscal crisis, has done little to dissuade the market. Technically, the market is still trying to decipher the fundamental data. Gut reactions are expensive in this market volatility.

The US$ is weaker in the O/N trading session. Currently it is lower against 12 of the 16 most actively traded currencies in another ‘volatile’ trading range.

Forex heatmap

Enough has been written about last weeks NFP numbers. There was a certain amount of relief that the headline print came in close to expectations. That been said, it’s difficult to put a positive spin on a release that saw +650k people remove themselves from the labor force and an average work week falling. The trickle down effect will lead to less monies being pumped back into any economy. This week is a slow week for US data. This morning we get the ISM non-manufacturing index for last month. Market consensus has the past several months trend remaining intact. Various chain store sales data/index will keep us occupied Wed. and on Thursday, expect the market to focus on the weekly claims report. Over the last few weeks the trend has been itching to test the upside. Will a ‘break-out’ be sustainable? Amongst the various Cbanks interest rate releases this week, investor’s sentiment will determine what risk actions we should be taking, risk-on or off. Equity markets are pushing for risk-on this morning.

The USD$ is lower against the EUR +0.41%, GBP +0.38%, CHF +0.24% and higher against JPY -0.14%. The commodity currencies are stronger this morning, CAD +0.48% and AUD +1.08%. The loonie again underperformed yesterday, amidst the US holiday, on the back of questionable global growth directly affecting interest and growth sensitive currencies. This morning, global bourses have managed to push it higher. The CAD has been the worst performing currency vs. its southern neighbor from a basket of most traded currencies over the past month. In the grand scheme of things, fear and hesitation is supporting risk aversion currencies like the CHF, JPY and USD for the time being. Dealers are somewhat backing down and even questioning whether the BOC remains in a ‘normalizing’ rate mood after last months expected rate hike. Over the past few week’s the global economic landscape and attitude has definitely changed, pointing to a tough 3rd Q, and even a negative 4th Q. Last week the loonie plummeted to a three week low as GDP data showed that the Canadian economy unexpectedly stalled in April and below market expectations +0.0% vs. +0.2%. With the risk-off trading scenario, the CAD was down -4.2% last quarter, recording its first quarterly decline in a year. On the crosses, CAD is trying to hold its own and under normal conditions is seen as a safer way to play a global economic recovery with links to commodities and less banking. Speculators had been betting that Cbanks will up the ante and use the currency as a safe haven destination for capital. Technically, if USD support around 1.0585 remains intact short term, coupled with risk-aversion trading strategies, could threaten the top-side resistance levels of 1.0750-800.

There was certainly some trepidation about last nights RBA interest rate announcement. Consensus had expected rates to remain on hold. However, various other voices were being heard from the market. Governor Stevens left the cash O/N rate unchanged for a second consecutive month (4.50%). The currency rallied, aided by the regional bourses and investor demand for higher yielding assets. In its following communiqué, the RBA stated that consumer spending and business investment are expanding, this again pushed the currency to outperform all its major trading partners. Policy makers are ‘reinstating their view that domestic growth will be about trend’ and are ‘not alarmed by the global demand backdrop’. In retrospect, policy makers remain ‘very upbeat’. This is certainly disappointing the ‘doves positioning’. The market continues to speculate that the Fed will keep interest rates at a record low to aid a ‘waning US recovery’, is preserving the regions yield advantage. With the crisis in Europe not having a material impact on the Australian economy has ‘bulls’ better buyers on pull backs. Be wary of commodity prices (0.8478).

Crude is higher in the O/N session ($72.62 up +48c). Crude, for a sixth consecutive trading session yesterday fell on global concerns over slower growth and demand for fuel. With China and the US economies showing signs of fatigue, by default would reduce the demand for the black-stuff. Weaker manufacturing and employment reports is keeping the ‘black-stuff’s’ prices at the lower end of a tightly defined trading range. Fear that the global economy is heading for a double dip recession will have crude fighting for every dollar uptick as the bear’s continue to have a stranglehold on prices since last week. Last week’s EIA report showed that gas inventories rallied for the first time in 2-months while crude stocks fell. Gas stocks rose +537k barrels to +218m vs. an expectation of a decline of -400k barrels. On the flipside, crude stockpiles fell -2.01m barrels to +363m vs. an expectation loss of -1m barrels. Supplies of distillate fuel (heating oil and diesel) also managed to climb to a two month high print. Distillate fuel climbed +2.46m barrels to +159.4m. The market had been expecting a +950k barrel gain. It was a market bearish report as the build in gas and distillates are offsetting the larger than expected drop in crude. Oil was down -9.8% for the quarter and -4.8% this year. Crude stocks remain well above the five-year average level, and are +3.2% above a year ago, the biggest year-on-year surplus in 6-months. Currently there are too many negative variables that support the bear’s short positions. Direction is dictated by demand and investor confidence, with ample supply and global growth worries, speculators continue to sell on rallies.

Gold fell -3.4% last week, again retreating from the record $1,264 print recorded last month, as the extreme risk-aversion linked to fears over sovereign debt issues in European countries abated. A firmer dollar over the US holiday period had also limited the gains. Fundamentally, in the short term the metal will find it difficult to rally aggressively, as historically, this is the ‘slower’ season for physical demand and naturally after reaching such heights, in a strong first 6-month, has investors booking profits and limiting their exposure. Despite this, on the longer term view, market concerns over global economic growth are expected to support the ‘yellow’ metal and push prices to new record highs in the 4th Q. The upward bias trend remains intact as long as $1,185 holds. Year-to-date, the commodity has gained +12.5%. Generally, it has become the benefactor when all other currencies fail. Thus far, Europeans have been content in using the commodity as a hedge against their European holdings, believing that the EUR has not bottomed out just yet ($1,212 +400c)!

The Nikkei closed at 9,338 up +71. The DAX index in Europe was at 5,907 up +91; the FTSE (UK) currently is 4,901 up +78. The early call for the open of key US indices is higher. The US 10-year had backed up 5bp since Friday (2.97%) and is eased 2bp in the O/N session (2.95%). Treasury prices for the safer-haven product eased after the NFP headline was not as bad as had been feared, leading to a mild bout of profit-taking. This is a new week with little data. Where does the market go from here? With the US economic outlook not looking so hot will have the market providing some support on these pull backs in the short term (3.00%). Investors are still trying to decipher recent headline prints. Is the US economy sliding into a double-dip recession or are we witnessing a tepid recovery from the worst downturn in 70-years? No matter what, yields will remain low for ‘an extended period of time’.

June 28, 2010

Canada $1 billion G20 answer

Filed under: OANDA News — Tags: , , , , , , , , , , , — admin @ 10:20 am

What did Canada get for the ‘billion-dollar’ boondoggle? G20 members set deficit-reduction targets and agreed to pursue higher capital requirements for banks ‘once’ economic recoveries take hold. The advanced economies will aim to stabilize their debt-to output ratios by 2016. In the real world, too many pledges never seem to sway investor confidence. The tight pledge timing does not take into account the economically unexpected and the unplanned, where is your time table then? Market reaction, muted at best, it will focus on confidence and US employment numbers out later in the week. It certainly should be more ‘headline’ grabbing that the G20’s past weekend exploits.

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

Forex heatmap

G20 has come and gone and investors again seem to be playing lip service to ‘whatever’ was said. The Capital markets trend remains intact with investors concerned about the imbalance of global growth and if growth itself is sustainable. The G20 has endorsed European austerity plans. For PM Cameron it’s a must, as the country was in danger of losing market support and perhaps spiraling into a Greek like effect. The market is back to focusing on this weeks numbers. This morning we get US consumer spending, analysts anticipate little change as Americans are expected to have used wage gains to rebuild savings. Later in the week, we need to see a good US employment print to drag investors back into the market.

The USD$ is higher against the EUR -0.12%, GBP -0.27%, JPY -0.13% and lower against CHF +0.42%. The commodity currencies are mixed this morning, CAD +0.12% and AUD -0.20%. The loonies four day weakness on the back of declines in equities and commodities had investors seeking sanctuary in some risk-aversion currencies abruptly came to an end on Friday. It has continued its impressive run in the O/N session trying to test strong support at 1.0300 levels. With oil and gold prices doing an about turn gave the CAD its bid again. The recent weakness has given the stubborn bulls a better average to enter new long CAD positions. Despite domestic fundamental data showing that the Canadian economy is ‘firing on all cylinders’, the recent bid to the loonie may have been a tad overdone and a healthy purge is what we got. Speculators continue to place bets that Governor Carney will raise interest rates faster than other developed countries. Big picture, the CAD is holding its own as the currency is seen as a safer way to play an economic recovery in the US with linkage to commodities and less banking. Now, with talk that the currency is to be used as a Cbanks safe haven destination for capital should lend even more support to the currency in the medium term. Do not be surprised to see the currency trade beyond parity in the coming months.

The AUD got a temporary lift on speculation that new PM Gillard may compromise on a proposed mining tax after, however, signs that a weaker global economic may exhaust demand for higher-yielding assets in the near term. The initial aftermath of the G20 has not materially changed risk attitude. Traders continue to take the high as global risk sentiment, on the whole, is weakening, which causes growth related currencies such as the AUD to succumb to increased selling pressures. Earlier this month, comments from the RBA, who said that Europe’s debt crisis would ‘inevitably weigh’ on global growth, had fueled speculation that the Governor Stevens may keep rates unchanged until at least the end of the year. It seems that that ‘previous rate rises has given them flexibility to leave borrowing costs unchanged at next month’s meeting’. To date, the crisis in Europe has not had a material impact on the Australian economy, but, that’s been called into question. With European stress test disclosures lined up failing to calm investor’s fears has technical analysts wanting to sell the currency on rallies despite the positive fall out from a compromise on the mining tax (0.8730).

Crude is lower in the O/N session ($78.61 down -25c). Crude prices temporarily managed to advance in the O/N session on weaker global bourses after the dollar lost traction vs. the EUR, increasing the investment appeal of commodities. The commodity ended last week under pressure after the EIA inventory release reported an unexpected gain in supplies and US data showed that the purchases of new homes tumbled the most on record m/m. Oil stockpiles rose +2.02m barrels to +365.1m vs. an unexpected fall of -800k barrels. On the flipside, gas supplies fell -762k barrels to +217.6m vs. an expected market decline of -180k barrels. Imports of crude oil climbed +4.3% to +10.1m barrels a day, the highest level in 18-months. The headline print certainly fly’s in the face of the ‘bulls’ way of thinking. Crude stocks remain well above the five-year average level, and are +3.2% above a year ago, the biggest year-on-year surplus in 6-months. Distillate stocks (diesel and heating oil) rose +297k barrels, less than expected as demand dropped to its lowest level in 7-months. Currently there are too many negative variables that support the bear’s short positions. The fear that a double dip is on the cards has the speculators wanting to sell. Year-to-date, the commodity has appreciated +11%. Direction is dictated by demand and with ample supply and global growth worries has speculators once again wanting to sell on rallies.

Bigger picture, Gold continues to be a safe heaven attraction. With the Fed indicating last week that they are willing to keep rates low for an extended period of time pared some of the dollar recent gains and by default the yellow metal is providing an alternative investment vehicle. The commodity price ended the week on a bid note as ongoing credit worries and concerns about a global economic recovery trigged a safe-haven demand for the metal. Technically, pull-backs have been bought. The commodity’s prices will remain robust on speculation that European’s Economic woes will be prolonged. With broader risk appetite under pressure, the market is capable of printing new record highs again. The upward bias trend remains intact as the ‘yellow metal’ is trading with a greater consideration of its safe haven status. The asset class is well sought after, technically encouraging individuals to want to own more of it for hedging purposes. Year-to-date, gold has gained +16%. Generally, it has become the benefactor when all other currencies fail. Thus far, Europeans have been content in using the commodity as a hedge against their European holdings, believing that the EUR has not bottomed out just yet. For now, buyers are waiting in the wings to purchase product on all pull backs as equities remain under pressure ($1,255 -30c).

The Nikkei closed at 9,639 down -44. The DAX index in Europe was at 6,127 up +58; the FTSE (UK) currently is 5,075 up +28. The early call for the open of key US indices is higher. The US 10-year eased 1bp on Friday (3.11%) and 2bp in the O/N session (3.09%). All last week, Treasury prices remained better bid because of the disappointing US housing data and on the Fed’s announcement that they will keep ‘rates low for an extended period of time’. This week’s direction will depend on how North America interprets G20’s solidarity on deficit target reductions and are they in fact a realistic goal. The main event will be NFP this Friday. The cost of Greek CDS’s surging to a new record is again pressurizing global bourses and given the FI asset class support. The belief that the US economy’s momentum is not being built upon should continue to provide a better bid on deeper pullbacks.

June 18, 2010

EUR positions require their own Stress Tests

Filed under: OANDA News — Tags: , , , , , , , , , , , — admin @ 10:05 am

The thought of even being transparent with the EU Financial Stress Tests has restored some market confidence. To investors, the biggest concern is how tough are these tests? If there are shortcomings, according to Merkel, the EU has ‘taken precautions’ including a 750B EUR financial backstop. Under US stress testing, the government pledged to provide capital when need be. The EU undertaking is short on details, not even a mention of including sovereign debt exposure, hence, the concerns of its stringency. Technically, the EUR is rounding off the week on a high and chartists continue to plot more upside with a bullish close (above 1.2330). The short futures positioning and weaker cash shorts that have been selling into this rally all week will most likely want to lighten up again before day’s end as the squeeze continues towards 1.2550.

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

Forex heatmap

US data yesterday did not help the ‘sustainable growth camp’s’ cause. It was a mixed and worrisome bag of headline prints. The number of people filing for initial claims for UI surprisingly advanced by +12k to +472k claims. Seasonally adjusted, increases were reported in construction, manufacturing and educational services. The four-week moving average (ex-volatile components) fell by only -500 to +463.5k. Digging deeper, the number of people continuing to file UI rose by +88k to +4.57m. However, continuing claims four-week moving average fell by -21k to +4.6m. Not to be outdone, emergency unemployment compensation dropped from +4.995m to +4.804m. Overall, it was again a discouraging report adding to a long string of disappointments from the claims series dating back to the end of last year. Analysts will argue that the headline prints may be somewhat distorted by the ‘ramping up contraction of temporary Census hires’. The sluggish pace of declining claims may suggest that employers remain reluctant to hire and are relying on existing workers to fill demand. This was certainly evident in this week’s production report.

Another report showed that US consumer prices fell for a second consecutive month (-0.2%) and underlying inflation rose slowly (Core index, the Fed’s go to variable, +0.1%), giving Bernanke and Co. room to support their economy with a record low interest rate policy. Benign inflation is certainly supporting the FI asset class.

Finally, the most disappoint release yesterday was the Philly Fed Economic Index. The headline print plunged from +21.4 to +8 this month. The market had expected only a slight dip. Digging deeper, the underlying sub-components were more mixed. The forward looking new orders index rose from +6.1 to +9, shipments softened from +15.8 to +14.2, while inventories rose from -7.9 to +4.6. The prices indices fell, paid from +35.5 to +10, while received fell from +3.5 to -6.5, mostly on the back of weaker energy prices. However, the most discouraging sub-component was employment. It fell from +3.5 to -1.5, its first negative reading in 7-months.

The USD$ is lower against the EUR +0.09%, GBP +0.35%, CHF +0.11% and JPY +0.30%. The commodity currencies are mixed this morning, CAD -0.03% and AUD +0.18%. The loonie got it between the eyes yesterday, the first time in three days, as weaker equities, commodities and a surprisingly subdued wholesales sales report (-0.3%) had investors paring some of their bullish growth positions. BOC Governor Carney said earlier this week that ‘the uneven global recovery and prospects of renewed weakness in Europe mean that future increases in the central bank’s benchmark interest rate are not preordained’. Up until yesterday’s price action, the loonie remained coveted as speculators increased their bets that economic growth will eventually fuel demand for commodities. Big picture, the CAD is holding its own after the BOC’s rate hike and somewhat muted and directionless communiqué earlier this month. It remains the world’s second best performer vs. its southern neighbor. Using the loonie as a safer way to play an economic recovery in the US with linkage to commodities and less banking or fiscal noise has speculators better buyers of the currency on dollar rallies.

The AUD has retreated from its one month highs but is in pole position to record back to back weekly gains as investors risk appetite increased. Earlier this week, comments from the RBA, who said that Europe’s debt crisis would ‘inevitably weigh’ on global growth, is fueling speculation that the Cbank may keep rates unchanged until at least the end of the year. It seems that that ‘previous rate rises has given them flexibility to leave borrowing costs unchanged at next month’s meeting’. When global bourses back peddle on concerns that the world economy may falter always affects growth currencies. Last week, stronger domestic fundamentals aided the currency. Employment data added +26.9k new jobs vs. an expected +20k. It was the third consecutive month of job gains, emphasizing the RBA’s call that that economic growth will accelerate this year. This pushed dealers into increasing their bets that Governor Stevens will resume the country’s most aggressive round of monetary tightening. So far, it seems that the crisis in Europe has not had a material impact on the Australian economy. With European stress test disclosures lined up will calm investor’s fears. Technically, the market continues to want to buy AUD on dips (0.8686).

Crude is lower in the O/N session ($76.19 down -60c). Crude prices retreated from their six week high yesterday after a jump in US weekly claims and higher weekly inventories ignited fears that that global economic growth will stumble. Earlier this week, the EIA report initially gave the market its bullish sentiment, however, weaker global economic releases has encouraged ‘risk-off’ trading strategies. The report was dominated by the drop in refinery capacity rates. US refineries operated at +87.9%, down -1.2% from the previous week. Gas stocks declined -636k barrels to +218.3m last week with gas demand advancing +1.6% to +9.34m barrels a day (the highest level in nearly a year). Historically, gas consumption peaks sometime between US Memorial and Labor Day in Sept. (the height of the US driving season). On the flipside, crude oil rose +1.69m barrels to +363.1m vs. an expected -1m barrel decline. Inventories of distillate fuel (diesel and heating oil) increased +1.8m barrels to +156.6m vs. an expected +1m barrel gain. Even with demand creeping higher, there is sufficient supply and this has encouraged some profit taking after four days of consecutive gains. Direction is dictated by demand and with ample supply and growth worries has speculators selling oil futures on rallies.

Gold continues to be a safe heaven attraction. Over the past four trading sessions all pull backs have been bought. The commodity’s prices remain robust on speculation that European’s Economic woes will be prolonged. With broader risk appetite declining, the market can expect to print new record highs. Technically the ‘yellow metal’ is trading with a greater consideration of its safe heaven status. The asset class is well sought after as prices have been difficult to break down, which is, by default, technically encouraging individuals to want to own more of it for hedging purposes. Year-to-date, gold has gained +14%. Generally, it has become the benefactor when all other currencies fail. Thus far, Europeans have been content in using the commodity as a hedge against their European holdings, believing that the EUR has not bottomed out just yet. For now, buyers are waiting in the wings to purchase product on pull backs ($1,245 -280c).

The Nikkei closed at 9,995 down -5. The DAX index in Europe was at 6,233 up +10; the FTSE (UK) currently is 5,277 up +23. The early call for the open of key US indices is higher. The US 10-year eased 8bp yesterday (3.20%) and is little changed in the O/N session. Treasuries prices rallied after US data yesterday reported a rise in weekly claims, coupled with consumer prices falling reinforced speculation that Bernanke and Co. will keep rates low for an extended period of time. The slumping Philly Fed Economic Index also added its support to the FI asset class. Basically, with inflation remaining somewhat benign and no future inflation pressures on the horizon are evidence that Bernanke and Co. have no reason in thinking about moving rates. Stronger rumblings that the US economy’s momentum is not being built upon should continue to provide some sort of bid on deeper pullbacks. With no normalization of rates on the horizon, yields should remain low and test recent lows once again.

June 16, 2010

EUR squeeze not policy induced running flat

Filed under: OANDA News — Tags: , , , , , , , — admin @ 10:12 am

It feels like an old fashion short squeeze. Yes, we did see the EUR advance in early May from a low of 1.2529 to a temporary high of 1.3109, albeit short lived. It was a detailed bail-out package induced spike. The ‘World Cup’ squeeze has not been policy or spread induced, just plain old s/l and option related gains. Short squeezes eventually run out of steam and this morning’s daily rumor of Spanish credit lines being put in place, not new, has managed to push the EUR lower and redirect focus back to debt crisis issues. Many believe that the ongoing asset allocation shift away from the Euro-zone has further to go and by the end of the 3rd Q we will witness fresh EUR lows. This is very much a possibility, even sooner perhaps, as this EUR squeeze seems to be running on ‘near’ empty.

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

Forex heatmap

US data yesterday was mixed and the dollar received a thumb’s down from capital markets. The Empire State June business conditions index increased to 19.57 from 19.11 last month. The print is stable and stability is good for the market. The upward trajectory signals that factories are weathering the turmoil in financial markets and driving the economic recovery. Technically, the US has seen no signs of a spillover from Europe thus far. Economists are expecting the manufacturing sector to ‘boost the US economy and in the process increase hiring’. Even though the need to restock inventories may be less pressing in the coming months, household spending and exports will be expected to fuel production. All being equal, that’s the utopia scenario, however, digging deeper into the report, the employment index weakened (supporting this months overall NFP print), retreating to12.35 from 22.37, m/m. The workweek index jumped to 8.64 from last month’s flat reading, which suggests that employers are choosing to work their employees longer rather than hire new staff. Year-to-date factories have added +126k new workers to payrolls, last month alone they added +29k to the payroll for a fifth consecutive gain. Manufactures make up +12% of the US economy.

The TICS report on foreign capital flow revealed net buying of $83b in long term US securities in April (backward looking). Market reaction can only be muted on this release, despite the previous month’s print of a revised $140.5b. It’s worth noting that the final numbers exclude transactions that do not occur on the open market.

Finally, a surprise to the market was yesterday’s US Homebuilders Confidence plummeting (17 vs. 22). It has returned back to last winters levels before the temporary home buyers’ tax incentives. Analysts believe that the details suggest that worse is yet to come. The headline pint is also seasonally adjusted. The traffic through ‘model’ homes slipped this month, which seems to support the declining mortgage purchase applications theory. This will eventually have a direct impact on new home sales and housing starts numbers. All of the sub-components that make up the index experienced declines (present sales conditions, sales expectations etc).

The USD$ is higher against the EUR -0.48%, GBP -0.30%, CHF -0.10% and JPY -0.33%. The commodity currencies are weaker this morning, CAD -0.36% and AUD -0.36%. Canadian data did not aid the loonie in its rise yesterday per se, that was left to the EUR directly. The manufacturing sales print (+0.2% vs. +1.4%, m/m) is expected to be a drag on April’s GDP. In retrospect, the details are the exact opposite to the export numbers recorded last week. Dollar sales climbed while the volume of manufacturing shipments fell. A lower volume will translate into a negative impact on GDP. How much of an impact? The market believes that there is sufficient underlying strength to negate the drag. This should not influence Governor Carney. Other data showed that Canadian productivity advanced less than expected (+0.7% vs. +1.2%). What will the World Cup do to Global productivity numbers? In Canada, the productivity slow down was due to a large gain in hours (+1.1% vs. +0.4% in the 4th Q), a plus for incomes and a negative for profits. That being said, the loonie remains somewhat coveted. Investors and dealers are quietly increasing their bets that economic growth will eventually fuel demand for commodities. The CAD is holding its own after the BOC’s rate hike and somewhat muted and directionless communiqué earlier this month. It remains the world’s second best performer (+13.0%) vs. its southern neighbor after the JPY. Using the loonie as a safer way to play an economic recovery in the US with linkage to commodities and less banking or fiscal noise has speculators better buyers of the currency on dollar rallies.

The AUD retreated from one month highs in the O/N session after regional equities pared gains after a strong start. Earlier this week, comments from the RBA, who said that Europe’s debt crisis would ‘inevitably weigh’ on global growth, is fueling speculation that the Cbank may keep rates unchanged until at least the end of the year. It seems that that ‘previous rate rises has given them flexibility to leave borrowing costs unchanged at this month’s meeting’. With Asian bourses back peddling from its highs on concerns that the world economy may falter is affecting growth currencies. Last week, stronger domestic fundamentals aided the currency. Employment data added +26.9k new jobs vs. an expected +20k. It was the third consecutive month of job gains, emphasizing the RBA’s call that that economic growth will accelerate this year. This pushed dealers into increasing their bets that Governor Stevens will resume the country’s most aggressive round of monetary tightening. So far, it seems that the crisis in Europe has not had a material impact on the Australian economy. Let’s see how the Spanish rumors play out this morning. Technically, the market continues to want to buy AUD on dips (0.8625).

Crude is lower in the O/N session ($76.72 down -22c). Crude prices happened to record an intraday month high print yesterday as the EUR remained somewhat stoic in its advance coupled with speculation that the weekly inventory reports will show a build up in demand today. This morning’s EIA report is anticipated to reveal the third consecutive drawdown on stocks. The market again seems to be embracing fundamentals. Equities and a weaker dollar have been pulling a jaded commodity market higher. Overall it’s a ‘sentiment-driven rally driven by bargain-hunting by investors’. Positive global expansion reports have aided this asset class over the past five-trading sessions. Last week’s EIA report has also contributed to the underlying bid to the market. The report revealed that oil inventories fell for a second straight week, easing worries about excessive domestic supply. Crude stocks fell -1.8m barrels, more than double the streets estimate of a -700k decline. It’s worth noting that the decline in inventory was not accompanied by a clear decline in demand. The US demand was at +19.376m bpd, down -3.2%, or 645k barrels w/w. On the flipside, gas inventories were expected to fall -400k bpd were little changed, down by just -8k barrels, to +218.9m. Distillates stocks (including diesel and heating oil) increased by +1.8m barrels, about six times the expected increase. Refineries lifted operations relative to capacity to 89.1% from 87.5% last week (the highest rate in two years). It’s all about demand and as long as there is a perception of stronger demand then pull back is to be bought.

Gold has been one of the most difficult of asset classes to trade of late. Even with global bourses advancing, there is an appetite for the commodity. Technically the ‘yellow metal’ is trading with a greater consideration of its safe heaven status. Pull backs are being supported by doubts of sustainable global growth and by the technicals indicators showing that the metal wants to test higher. The metal remains well sought after as commodity prices are finding it difficult to break down, which is, by default, technically encouraging individuals to want to own it for hedging purposes. It’s worth noting that the ‘yellow metal’ has outperformed equities, FI and other commodities this year because of the European Sovereign debt crisis. Gold has gained +12% as the EUR plunged -14%. Generally, it has become the benefactor when all other currencies fail. Year-to-date, Europeans have been content in using the commodity as a hedge against their European holdings, believing that the EUR has not bottomed out just yet. For now, buyers are waiting in the wings to purchase product on pull backs ($1,237 +300c).

The Nikkei closed at 10,067 up +179. The DAX index in Europe was at 6,185 up +11; the FTSE (UK) currently is 5,228 up +11. The early call for the open of key US indices is lower. The US 10-year backed up 4bp yesterday (3.29%) and is little changed in the O/N session. Lack of new evidence affecting growth had the FI market trading under pressure. Speculation that the global economy will weather the Europe’s sovereign-debt crisis is questioning the demand for the safest assets. It seems that investors are ‘gradually shifting attention back to economic fundamentals, which are signaling continued improvement’. Will this pressurize Treasuries? The benchmarks 10’s sit close to strong yield resistance levels. Some investors do not get the sense that the ‘US economy’s momentum is being built upon, at least according to what the Fed is looking at’ should provide some sort of bid on deeper pullbacks. Various analysts foresee 10’s ending the second quarter at 3.45%. The flipside to this scenario is that the record-low inflation and prolonged unemployment worries means that the Fed will hold off on raising interest well into next year. For now risk-on has been dominating intraday action. The 10-year yield resistance is now at 3.30-32%.

December 17, 2009

Oil Falls on Weaker Demand

Filed under: OANDA News — Tags: , , , , , , , , — admin @ 8:02 am

Oil slipped below $72 a barrel on weaker demand and a strengthening US dollar. By early afternoon in Europe, benchmark crude for January delivery was down 70 cents to $71.96 in electronic trading on the New York Mercantile Exchange.

Some analysts are skeptical that demand growth can continue beyond the middle of next year as the impact of massive government stimulus spending begins to ebb.

London-based Capital Economics expects oil to fall to near $50 a barrel by the end of next year on weaker than expected demand and a stronger U.S. dollar. Investors have often bought commodities such as crude this year as a hedge against inflation.

“As the boost from policy stimulus starts to fade and underlying weaknesses reassert themselves, demand should slow again,” Capital Economics said in a report.

“If we are right that the U.S. dollar resumes its recent recovery and fears of inflation and asset bubbles fade, oil prices should drop back next year too.”

Associated Press

November 11, 2009

Obama Dollar to ‘Devalue the Way to Prosperity’!

Filed under: OANDA News — Tags: , , , , , , , , , , , — admin @ 3:48 am

Contrarian long USD positions remain costly. Forget the Japanese housewife, it’s the Brown’s, Smiths, Jones etc who have been piling into a global carry trade, similar to Japans’ lost years, using the USD as a vehicle currency. It will end in tears. Is the Obama’s administration policy one of quiet, steady dollar devaluation? A weaker domestic currency gives way to cheaper exports and the potential for increased employment opportunities. With a 26-year high unemployment rate sitting at 10.2%, itching to go higher (real rate supposedly near 17%), is begging Obama to ‘devalue the way to prosperity’!

The US$ is weaker in the O/N trading session. Currently it is lower against 14 of the 16 most actively traded currencies in a ‘subdued’ trading range.

Forex heatmap

Fed voting member Janet Yellen and her dovish comments gave little support to her domestic currency yesterday. She stated the obvious when committing the Fed to a tighter monetary mandate ‘at some point’ in the future. She highlighted that US unemployment could stay elevated ‘for years to come’, and that the countries recovery will ‘be gradual and vulnerable’ to shocks. The Fed expects the commercial real estate sector to weigh down this recovery as their prospects are rather ‘worrisome’ to the committee. Despite the equity rally going some ways to rebuild household wealth, ‘strength, durability of expansion are in question’, as prospects for ‘consumer spending remain cloudy’. Not a strong endorsement to wear a train driver’s hat Buffett style.

The USD$ is currently lower against the EUR +0.35%, GBP +0.18%, CHF +0.35% and JPY +0.00%. The commodity currencies are stronger this morning, CAD +0.35% and AUD +0.22%. At 96c or 1.0417 expect the BOC to be drawing ‘their’ line in the sand. Governor Carney has insisted that they will use a combination of currency intervention, credit and quantitative easing options to influence the loonies’ value. The BOC believes that a strong currency is detrimental to economic growth. In the O/N session, the loonie has appreciated to its strongest level in 2-weeks vs. its southern trading partner on the back of the G20 maintaining their economic stimulus measures. Keeping the status quo is boosting speculators risk appetite for the higher yielding asset classes and commodity based currencies. Last week the Canadian economy managed to pare -43k jobs in Oct. (the market was expecting a gain of +10k) and push the unemployment rate up 2-ticks to an unexpected +8.6%. The data provides much stronger evidence that Canada has some ways to go to exit this recession, but, the data will make it easier for Governor Carney to follow through on his pledge to keep borrowing costs at record lows until June of next year to promote growth unless of course the inflation outlook changes materially. For now the loonie remains in a tight 3cent trading range with dealers continuing to play the support and resistance levels until fundamentally or technically told otherwise or commodity prices start to fall off a cliff!

The AUD near its strongest level in over a year as China, their largest trading partner, said that their industrial production (+16.1%) and retail sales (+16.2) accelerated last month. The currency has also climbed on speculation that the Fed will now have to keep its O/N borrowing costs low for a considerable period of time after Friday’s disappointing headlines, thus boosting demand for higher-yielding assets. It’s the same story, but at a different pace! Last week, Governor Stevens indicated that the Aussi economy will expand at more than three times the pace forecasted in Aug., and signaled he and his policy makers will continue to lead the world in raising borrowing costs. The currency is well supported by commodity prices and expects dealers to remain better buyers on pullbacks (0.9308).

Crude is higher in the O/N session ($79.54 up +49c). Crude prices have remained close to home after ‘Ida’ weakened in the Gulf of Mexico on its way to the US coast, thus reducing the potential of further supply disruptions. Initially, she dragged prices from their one week lows as she entered the Gulf and forced both BP and Chevron to cut production and evacuate some staff for safety reasons. It’s worth noting that the Gulf of Mexico produces 27% of the domestic US Oil production and 15% of its gas output! Earlier in yesterday’s session, prices declined after an official from OPEC said the group is unlikely to change production levels in Dec. Its does not help the commodity that the IEA cut its long-term forecast for global oil demand yesterday on the back of this economic crisis sapping consumption in developed economies and the uptick in alternative energy use. Last week the black-stuff prices plummeted after the 26-year high US unemployment rate conjured up fears that future fuel demand will once again weaken. To date, it has not been able to retrace all of its 3% losses from Friday. The commodity is contained within this $7 trading range for the time being, however, support levels are questionable as demand destruction remains strong and healthy in the US. Even last weeks bullish inventory report has provided little support. Weekly inventory reports appear tomorrow due to the Memorial Day holiday today.

Gold rose to a record in London this morning as the greenback is struggling for a 3rd consecutive day, thus boosting demand for the yellow metal as a hedge against further currency depreciation. The holiday shortened week had some speculators booking well earned profits earlier, however, disappointing US employment numbers along with the RBI purchase of 200 metric tons or $6.7b of the yellow metal from the IMF has speculators wanting to buy on pull backs push commodity higher ($1,115).

The Nikkei closed at 9,871 up +1. The DAX index in Europe was at 5,695 up +82; the FTSE (UK) currently is 5,289 up +60. The early call for the open of key US indices is higher. The US 10-year bonds eased 2bp yesterday (3.47%) and are little changed in the O/N session. Treasuries prices rallied yesterday despite the market setting itself up to absorb another $41b’s worth of US debt this week. Dealers managed to take down $25b 10-year product with another record of indirect bids. Dovish comments from the Fed’s Lockhart and Yellen gave way to risk reduction strategies being implemented. Money is being taken off the side-lines and been put to work in the FI asset class. The US treasury will issue $16b 30-year bonds tomorrow. One would have expected dealers to cheapen the curve a wee bit more, however, demand is there!

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