Forex Blog

January 4, 2012

Other Dollars trade in a Vacuum

Filed under: OANDA News — Tags: , , , , , , , , — admin @ 11:38 am

The loonie (1.0126) has been doing what’s expected of her when there is no domestic interest involved and that is move on innuendo and little volume. Big picture, the currency is performing rather well despite being put under pressure from a shift in risk assets and as oil prices appear to be technically retreating from recent highs. The currency continues to outperform the other commodity and risk sensitive assets. This mornings Bund issuance, a German January 2022 Bund bid-to-cover ratio of 1.3 for EUR+5.14b and Euro PMI has the EUR on the back foot, confirming in black and white that the EU zone is heading for a recession, assuming that the first quarter will also be in contraction.

The global investor is consistently worried about Euro refinancing. Italy, the recent focus of the crisis, must borrow to cover €53b in expiring debt in the first quarter alone in a series of debt auctions beginning next week. The CAD had started this year on a constructive note yesterday, climbing to its strongest level against its larger neighbor and biggest trading partner, the US, in nearly four-weeks, as rising oil prices and stronger than expected global economic data encouraged investor risk appetite. A day later and the markets are able to give back all and then some, allowing the loonie to wallow in a non constructive trading range. Investor’s interests seem to be elsewhere.

In truth, traders are looking to North American employment data this Friday for reassurance the US will be able to avoid slipping back into recession. The market expects that the US economy will been able to crank out about +140k jobs during December, up from +120k in November and an unemployment rate to edge up a tick to +8.7%. In Canada, many are just hoping for a positive print (+15.3k and unemployment rate of +7.4%), in contrast to last months surprisingly poor return (-18.6k). Before then we will have CAD Ivey PMI (57.5) and ISM non-manufacturing PMI to contend with. For now expect the market to play the percentages and recent range until they can get some fundamental guidance to “hang their hat on”.


Loonie

August 23, 2011

Yen Falls as Officials Pledge Action on Currency

Filed under: OANDA News — Tags: , , , , , , , , , , , , , , — admin @ 7:47 am

In response to a record high of 75.95 yen to the dollar, Japan’s Finance Minister Yoshihiko Noda promised “bold actions” noting that he “won’t rule out any possible options” in dealing with the yen’s appreciation. The strong language helped push the yen lower during Monday’s trading session but few believe Noda’s pledge will have a long-term effect.

In early April, one U.S. dollar could buy 85.25 yen but currently, one dollar can barely buy 76 yen. This is an increase of nearly 12 percent for the yen in a matter of less than five months.

As one of the world’s largest exporters, Japan’s dependence on the U.S. market cannot be overstated. In 2010, Japan’s trade surplus with the U.S. extended to $60 billion on total exports to the U.S. of $120.3 billion. This represents an increase of 25.6 percent – or $24.5 billion – over the previous year with the U.S. market accounting for about 16 percent of Japan’s total exports.

The yen’s continued appreciation represents a threat to these sales. This threat is further amplified by the slowing U.S. economy and as consumers look for savings, a stronger yen makes Japan’s goods more expensive to the American market.

In recent weeks, officials have intervened to weaken the yen. The first salvo came when the Bank of Japan sold an estimated 4.5 trillion yen (US$57.8) into the currency markets. The intervention attempted to increase the supply of the currency in a bid to halt the yen’s advance.

It is demand for safe haven that is pushing the yen higher. In uncertain markets, the yen is one of the few opportunities available to investors in which to preserve capital. Stock markets have been very volatile with deep losses and the dollar and euro are both experiencing selling pressure. As a result, the yen – as well as the Swiss franc – is gaining in popularity.

December 21, 2010

O (No!) Canada!

Filed under: Forex News — Tags: , , , , , , , , , , , , — admin @ 2:43 pm

This morning, Canadian CPI figures came in less than expected prompting further selling in the Loonie.  The headline figure came in at 2% vs. an expectation of 2.3%, both of which were lower than the last reading.  With slowing inflation taking place, it should keep the BOC on hold with rate hikes for a while.

Meanwhile, the British pound is under pressure this morning as UK net borrowing rose to a record high, coming in at 22.8 billion pounds vs. an expectation of around 16.8 billion.  This does not bode well for the UK heading into next year, and tomorrow’s minutes from the BOE rate policy meeting are likely to confirm.  Austerity measures set to kick in may be starting on shakier ground than expected.

In the EU, Spain’s borrowing costs increased as investors are beginning to balk at the prospect of a Spanish debt crisis.  Portugal’s credit rating is also under review as sluggish growth is problematic.  However, reports are that China may have come to the rescue as they claim to have taken “concrete action” to help limit the debt crises.

Minutes from the RBA rate policy meeting show that they have judged current rate policy as “mildly restrictive” which could keep inflation in check as household demand lessens.

Japan kept rates unchanged overnight at .1% and left their commitment to purchase assets and the size of that plan unchanged.

So this morning is setting up to be driven by the fundamentals with mild risk appetite to start the day, though there is still considerable risk in the market from the Korean shenanigans and the weather that has rocked Europe and impacted commerce.

In the forex market:

Aussie (AUD):   The Aussie is higher and back near parity with USD as the minutes from the rate policy meeting showed a strong economy that has a mildly restrictive monetary policy, with rates at 4.75%.  With global economic risk still heightened, reduced demand should keep inflation subdued.  (Click chart to enlarge)

audusd1221.JPG

Kiwi (NZD):   The Kiwi is also higher this morning ahead of tomorrow afternoon’s GDP report.  GDP for the quarter is expected to have slipped to .1%, after the earthquake that rocked NZ slowed housing and manufacturing growth.  Nevertheless, should inflation pick up early in 2011, then we could see the RBNZ move on rates.

Loonie (CAD):  The Loonie is lower across the board as CPI data showed slowing inflation figures.  However, retail sales figures came in better than expected so moderate growth going forward should keep the BOC on the sidelines unless commodity inflation picks up due to a weak US dollar.  (Click chart to enlarge)

usdcad1221.JPG

Euro (EUR):  The Euro is higher despite rising borrowing costs in Spain as perhaps the “Chinese backstop” is giving investors more confidence.  German consumers were less confident than expected, as the potential for further credit downgrades (Portugal) is high.

Pound (GBP):  The Pound shares the booby prize with the Loonie this morning as much larger than expected borrowing has spooked the market.  With austerity measures set to begin in January, increased debt burdens contribute to the mess, though this may be a case of “get it while you can”.  Tomorrow’s minutes from the rate policy meeting should show no change in sentiment, as the BOE has gone “all in” on the thesis that austerity will reduce demand and hence inflation.  Time will tell.

Dollar (USD):   The Dollar is mostly lower this morning as risk appetite has increased with stocks and commodities higher to start the morning.  There’s no real data due for the US today, but tomorrow will bring the personal consumption data, as well as existing home sales.

Yen (JPY):   The yen is mixed this morning, showing strength against the N. American currencies but weakness against its Pac Rim counterparts.  The fact that the BOJ did not expand asset purchases to weaken the Yen has provided it with strength, though that sentiment could change if tonight’s exports figure comes in lower than expected.

While things are seemingly slowing down headed into the Christmas holiday, there is still a ton of action in the forex market.

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November 10, 2010

Irish Bond Rates Hit Record High

Filed under: OANDA News — Tags: , , , , , , , , , , , , , , — admin @ 1:57 pm

Fears that Ireland’s debt crisis could worsen have forced the yield on 10-year bonds to a record high of 8.16 percent. Analysts believe the likelihood that Ireland will require emergency funding to meet debt obligations has increased and is now all but a certainty.

Source: The Associated Press

September 1, 2010

Lack of Confidence in the FED would never happen almost never

Filed under: OANDA News — Tags: , , , , , , , , , , , , — admin @ 10:24 am

Month end flow beats logic, even option expiries and market fix’s beat logic. Yesterday’s stronger US data wilted in its glory as individuals eager to accumulate EUR’s waited in the wings. Stronger manufacturing data out of China and Australia last night is yet to convince the market to go all-in before we get to see the employment data in the US. The market is nervous and lacks conviction proven by the trading strategies being employed thus far this week. Yesterday’s Fed minutes did not exude acute dissension amongst its members to the degree the market had been expecting. In that sense it ended up a non-event.

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

Forex heatmap

Yesterday’s US S&P/Case-Shiller Home Price Index was consistent with Market expectations and advanced +0.3% to +4.2%. This print is considered a victory of sort, especially after the plethora of poor housing data of late. The data is technically a 3-month moving average ending in June. The data would include some of the effects ‘the final boom in sales driven by the tax-credit’.  So be warned and brace yourself as future releases will be dominated by the ‘post-credit collapse in housing market activity’. Analysts expect the month-over-month changes to turn ‘negative’ in the 3rd Q, and the year-over-year growth rate to plummet.

The one piece of poor data yesterday happened to be sandwiched between the surprises. The Chicago PMI was weaker than generally expected.  The headline index fell more than five points to 56.7 and superimposing it, using the ISM-equivalent index, declined by four points to 55.2. The Chicago region is rather sensitive to what goes on in the auto-sector (the reason why it has outperformed the national ISM). Digging deeper, new-orders fell to 55.0 from 64.6 (lowest in 12-month), inventories fell to 46.5 in from 50.8 in July. A strong signal that inventories will not be as significant a contributor to growth as it was earlier in the recovery. It was nice to see that employment managed to hold it together and decline one point to 55.5. Finally, prices paid fell to 57.2 from 58.1. It is now officially at its weakest level in 9-months, proving that inflation pressures
remain subdued.

Last month’s consumer confidence release was no ‘biggie’. Surprisingly, the headline index rose +2.5 points to 53.5. Analyst’s note that the inflated print continues to remain 40 points below its 30-year average! The improvement is attributed to the 5-point jump in the outlook component, as the present situation index fell -1.5 points to a lowly 24.9. In other sub-categories, the labor market differential deteriorated by -1.2 points, to 41.9. Even with this series being loosely correlated to the unemployment rate, the results are proof that the market should expect an up-tick in the UE rate component to +9.7% on Friday. Finally and again, the inflation expectations index was unchanged at 4.9%.
 
The USD$ is lower against the EUR +0.61%, CHF +0.08% and JPY +0.06% and higher against GBP -0.02%. The commodity currencies are stronger this morning, CAD +0.26% and AUD +1.26%. The loonie is trying to solidify its worst monthly performance in three (-2.4%) this month. Yesterday, the CAD slumped to new lows vs. the greenback after a government report showed that the domestic economy in the 2nd Q contracted more than analysts had predicted (+0.5% vs. +1.4%). A slide in commodity prices also drove investors away from the resource-linked, interest rate and growth sensitive currency. Annualized GDP grew +2% during the 2nd Q quarter, falling short of estimates calling for +2.5%. General global uncertainty has been capable of pushing the currency to test its medium term support levels. Month-to-date, the currency has lost just over -4% vs. its largest trading partner. General nervousness in global markets is testing the loonies resolve. Canada is not immune to weaker data reported south of its borders. This ‘faltering economic recovery means the chances for a further BOC interest-rate increases this year weakens day over day’. OIS have moved to a 50% chance that Governor Carney goes next week. It is only natural that growth and interest rate sensitive currencies would be dumped even more aggressively. Traders are happy to play the risk-aversion card with longer term CAD bulls looking to pick up cheaper loonies on dollar rallies. At least until something new comes along.

It was a pleasant surprise to see the AUD rise from the depths of it lows recorded last week O/N. Government reports showed that the Australian economy grew at its fastest pace in 3-years last quarter and that Chinese manufacturing expanded (+51.7% vs. +51.2%), its largest trading partner. Australian GDP grew for its sixth straight quarter (1.2% vs. +0.9%). The currency has managed to recoup most of this weeks losses vs. both the dollar and JPY. It seems that the currency is ‘more resilient than some other risk currencies’, like the loonie, recently. Earlier this week the AUD fell against the yen on speculation that the BOJ decision to expand its loan program will fail to halt the currency’s appreciation and pared its advance vs. the dollar as the size of the CBanks step disappointed investors, causing Asian bourses to unwind some of their earlier advances. On the whole, concerns that global growth is slowing has damped investor appetite for higher-yielding assets. The currency has underperformed against all of its major trading partners and is expected to do so until there is a new Government formed. The commodity rich currency is not isolated, as other growth sensitive currencies are suffering the same fate. Government data has also happened to put a lid on the recent rally. Net result traders are adding to their bets that the RBA will leave interest rates unchanged for the next 12-months. Risk aversion will likely force the bull’s hand, capping rallies with better sellers on up-ticks (0.9051).

Crude is higher in the O/N session ($72.73 up +31c). Crude prices are making a beeline for that psychological $70 a barrel. The commodity yesterday, for a second consecutive trading session, gave up ground on the back of weaker business activity recorded in the Chicago district. The market seems to be anticipating another relatively bearish inventory report later this morning. The dollar temporarily climbing vs. the EUR had also helped to heap pressure on the commodity. Oil hovers just above this month’s low, on concerns that weaker economic data will push the US into a double-dip recession. The market should be wary that the underlying situation has not changed, the fundamentals remain very weak, demand does not look good and stockpiles of crude and products remain at a record high. Last week’s inventory report showed an unexpected increase for all energy products. Analysts note that the ‘commercial supplies of oil and oil products are at the highest level in nearly 27-years, with gas stockpiles well above 5-year averages’. Speculators remain better sellers on up-ticks in the short term.

Gold prices happened to print a 2-month high this morning as US equity futures fluttered in and out of positive territory, as investors contemplated boosting their demand for the commodity as a safe heaven. For the month of Aug., bullion has appreciated just under +5%. All last week investors have sought sanctuary in the safer heaven asset classes on the back of weaker equity markets. Investors are trying to put there cash somewhere more solid on mounting evidence of a US economic slowdown. Speculators again are supporting the various safe heaven assets on pullbacks, avoiding risky assets due to uncertainties in the markets. With a genuine fear for global growth, by default, should boost the demand for the metal as a protector of wealth in the grand scheme of things. With treasury yields expected to remain close to their lows, could promote a quickening inflation rate, which would promote pushing commodity prices even higher. The opportunity costs of holding gold are low due to falling interest rates ($1,252 +$2.50c).

The Nikkei closed at 8,927 up +158. The DAX index in Europe was at 5,913 down -13; the FTSE (UK) currently is 5,256 up +30. The early call for the open of key US indices is higher. The US 10-year eased 6bp yesterday (2.51%) and is little changed in the O/N session. Treasuries pared some of their earlier advances after the surprising consumer sentiment and house price data recorded yesterday. Investor’s mood seems to be to continue to lower yields, despite economic news being relatively positive. The market has taken back the entire product they offloaded last week and then some. Helping treasuries to maintain their bid was the BOJ’s comments highlighting uncertainty about the US economy and various analysts cutting their US GDP forecasts. The 2’s/10 spread happened to narrow 1-tick to +207bp and again flatten the US curve. Despite product becoming expensive on the curve, NFP uncertainty has debt better bid on pullbacks.

August 31, 2010

Eurozone Unemployment Remains at 10%

Filed under: OANDA News — Tags: , , , , , , , — admin @ 1:06 pm

For the fifth straight month, unemployment in the eurozone remains mired at a record high 10 percent. Nearly 16 million people in the region are out of work but the pain is not spread evenly amongst the eurozone member countries.

Austria at 3.8 percent, and the Netherlands at 4.4 percent, recorded the lowest unemployment rates, while the German unemployment rate fell from 7.6% to 6.9%. Contrast this to Spain which has the highest rate of unemployment at 20.3%.

“We have the periphery countries, where the labour market is showing no improvement, and we have the core eurozone, where the labour market is actually pretty good and continues to show good news,” said Carsten Brzeski, an economist at ING.

Source: BBC News

India’s Economy Growing at 8.8%

Filed under: OANDA News — Tags: , , , , , , , — admin @ 1:01 pm

During the second quarter of the year, India’s economy grew by 8.8 percent over the same time period last year. This is the best single-quarter result in over two years for the world’s second-fastest growing economy. An increase in manufacturing and mining helped propel the economy with gains of 12 and 9 percent respectively.

The other area of growth that has potential to carry the economy for years to come is domestic sales. A growing consumer class, aided by an increase in employment particularly in well-paying high-tech jobs, has resulted in an increase in disposable income for a growing number of workers.

Source: BBC News

December 31, 2009

In 2010 Beware Of the Keynesian Hangover

Filed under: OANDA News — Tags: , , , , , , , , , , — admin @ 3:10 am

2008 and 2009 are the Years never to be forgotten. They nearly brought global financial markets to their knees. They punished greed, leverage and irresponsible risk. Years that have managed to make some oligarchs much poorer and perhaps made us sit up and think about future society’s values a wee bit more. A pessimist will tell you to brace yourselves for the possibility of more of the same, while an optimist has confirmed an ending to the recession with little chance of a ‘double dip’. Whatever is in store for us let’s have a happier NEW YEAR.

The US$ is weaker in the O/N trading session. Currently it is lower against 15 of the 16 most actively traded currencies in a ‘volatile, yet illiquid’ trading range.

Forex heatmap

Yesterdays Chicago PMI beat all analysts’ expectations (60 vs. 55.2). It seems that US companies expanded this month at the fastest pace in nearly 4-years, perhaps providing us with stronger proof that the economic recovery is gaining momentum. Stimulus programs have boosted a rebound in global sales that is reducing stockpiles. By default, the trickle down effect should encourage manufacturers to increase production in the coming months. Digging deeper, the orders sub-component, climbed to its highest level in more than 2- years. Even the employment headline registered growth for the first time in 13-months (pre-recession). The production index and order backlogs also improved. In fact it was a rosy report for the second last day of the year.

The USD$ is currently lower against the EUR +0.53%, GBP +0.42%, CHF +0.62% and JPY +0.20%. The commodity currencies are stronger this morning, CAD +0.72% and AUD +0.73%. The loonie bear’s took a firm grip on the market yesterday, exiting short dollar positions on stronger growth signs south of the border. The CAD declined the most vs. the greenback on the second last trading day of the year. Prior to yesterday, the currency was the best performer amongst the 16 most traded currencies this month. Elevated commodity prices and robust equity indices had kept the loonie in ‘demand’ territory. However, yesterday’s action was a reversal of fortune. Today’s action will be a function of portfolio year-end requirements. Speculators continue to want to short the loonie after the fortnights tentatively over exaggerated gains. There is better buying on pullbacks.

The AUD rallied in the O/N session and is on course to record the largest annual gain vs. the greenback in 6-years. Stronger commodity prices and positive equity indices have convinced investors that the recent currency ‘softening’ was somewhat overdone. Similar to most currency pairings, the markets lack direction because of liquidity constraints and low volume. The RBA believes its monetary policy is ‘now back in the normal range’ after lenders raised business and home-loan rates by more than the RBA themselves have increased (+3.75%) the overnight cash rate target. Traders have aggressively pared bets that the RBA was in a position to hike rates for a fourth consecutive time in Feb. (0.8924).

Crude is higher in the O/N session ($79.89 up +49c). Oil prices initially came under pressure after yesterday’s weekly EIA report showed a smaller than forecasted decline in inventories. This month, prices have been rising even as the dollar climbs, they are rising even as interest rates are backing up. There is no correlation and it can only suggest that the market is beginning to believe that global demand is rising. Forget the dollar. The demand ‘variable’ seems to be back on the table again. Expect crude to remain better bid on pull backs as consumption is expected to pickup because of the North American cold snap. Oil inventories dropped -1.54m barrels to +326m last week vs. an expected decrease of -1.85m barrels. They were +5.2% above the 5-year average, down from +5.3%last week. Despite this week’s report, the trend of demand and consumption continues to climb. Year-to-date, oil has climbed +76%, the largest increase in a decade.

Gold retreated for a second consecutive day yesterday on the back of a strengthening greenback persuading investors to shy away from investing in the commodity as a hedging alternative to a weakening USD. In this morning’s European session all was reversed as the dollar has wilted on the final trading day of the year. The buck has managed to appreciate +3.8% this month, of course the million dollar question remains, is this month’s dollar strength sustainable and will it be repeated at the beginning of the New Year? As per usual, investors will be guided by the inverse relationship of the ‘yellow metal’ to the reserve currencies price movements. Month-to-date, the commodity had depreciated just under 12% after printing a record high of $1,227.50 early in Dec. Year-to-date, it has appreciated +23%, the ninth consecutive yearly gain. Not unlike other asset classes, this month’s holiday swings have been somewhat overly exaggerated on liquidity constraints ($1,105).

The Nikkei closed at 10,546 down -91 (holiday). The DAX index in Europe was at 5,957 down -54; the FTSE (UK) currently is 5,410 up +12. The early call for the open of key US indices is higher. The US 10-year bond backed up 1bp yesterday (3.81%) and are little changed in the O/N session. The $32b US 7-year auction came in at 3.345% vs. the pre-auction levels of 3.346%. The bid-to-cover ratio was stronger than expected at 2.72 vs. Nov.’s print of 2.76 and Oct.’s 2.65%. The average for the past 10 auctions was 2.56. Indirect bids (Primary dealers, Cbanks etc.) accounted for 45% vs. the 62.5% print in Nov and the 59.3% demand in Oct. With indirect registering 45% and the tail being small (0.5bp) there seems to be decent foreign demand for longer dated securities.

December 29, 2009

Currencies ‘Carbon Copy’ moves

Filed under: OANDA News — Tags: , , , , , , , , , , , , — admin @ 3:38 am

Currencies are trading in a narrow range, holding out for the ‘yearly turn’. To be fair to Bernanke, he has always impressed on us that the Fed’s would use alternative innovative exit tools. Yesterday, they touted one idea, the term deposit facility. Its objective is to withdrawn money from the monetary system, allowing financial institutions to earn interest on loans of ‘longer’ maturities at the Fed (unlike the interest on banks’ overnight reserves). One should expect exit strategies to dominate Capital Markets next year. However, for the remainder of the week we are just witnesses to various unexplained currency moves.

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

Forex heatmap

Interest rates dictated yesterday’s movements in Capital Markets. Bank of Israel hiked rates for a third consecutive time since Aug. (+1.25%) as growth accelerated (GDP-3rd Q +2.2%) and inflation exceeded Governor’s Fischer target range (+3.8% in Nov.-target range 1-3%). In the US, 2-year auction took center stage. Will higher borrowing costs choke the pace of global economic recovery? Some dealers do not see short term US product close to being fair value just yet. With 2-years trading at +1.02%, fair value is seen at approximately +1.15%. Yesterday’s auction arrived with a tail, albeit small, not good news for today’s 5’s and tomorrow’s 7’s as the street remains half-staffed and has little risk tolerance. Indirect bidders (proxy for foreign demand) accounted for +35% of yesterday’s demand, unlike Oct. and Nov.’s demand averaging at +44.5%. The bid-to-cover ration was 2.91 vs. 3.16 in Nov. and 3.63 in Oct. Does the tentative global economic growth justify rates getting ahead of themselves?

The USD$ is currently lower against the EUR +0.39%, GBP +0.30%, CHF +0.47% and JPY +0.05%. The commodity currencies are stronger this morning, CAD +0.19% and AUD +0.74%. Despite the Canadian markets being closed yesterday, the loonie appreciation can be described like catching a ‘falling knife’. Once again, the currency managed to strengthen, recording its highest print vs. its southern neighbor in over a month this morning. The CAD strengthened against all 16 of its largest trading partners as commodities remain well sought after as we head for the yearly ‘turn’. Elevated commodity prices and robust equity indices have kept the loonie in ‘demand’ territory. It has rallied higher on speculation that stronger domestic fundamentals warrant the BOC to hike rates sooner than anticipated. It’s not surprising that Governor Carneys policy of timing may be going step ‘n step with the Fed’s. Year-to-date the currency is up 16% and the Canadian futures market is starting to price in rate hikes sooner than next May. If one prefers being long the greenback, crossing it with ‘this’ commodity sensitive currency is not the ideal answer as analysts continue to favor buying the loonie longer term. Historically, the CAD performs well during the month of Dec. In the short term, be weary of speculators wanting to short the loonie after the fortnights tentatively over exaggerated gains.

The AUD has grinded higher in the O/N session on the back of stronger commodity and equity prices. However, the currency is heading for its first losing month since last Jan. Some investors are speculating that stronger US economic data will warrant the Fed to hike rates ‘sooner that later’ and interest differentials will pressurize the AUD. The RBA believes its monetary policy is ‘now back in the normal range’ after lenders raised business and home-loan rates by more than the RBA themselves have increased (+3.75%) the overnight cash rate target. Traders have aggressively pared bets that the RBA was in a position to hike rates for a fourth consecutive time in Feb. Investors continue to look for better levels to sell despite elevated equity and commodity prices (0.8950).

Crude is higher in the O/N session ($78.96 up +19c). Crude remains better bid after Weather Derivates predicted that US demand will increase +6.7% this week due to the North American cold snap. The black stuff managed to rise for a fourth consecutive day yesterday, supported by last week’s surprisingly weak inventory report. Now that most Capital Markets are tentatively open, albeit with liquidity remaining an issue, the commodity will probably find stronger support on any pull backs until year end. Various surveys again expect inventories to be lower tomorrow. Crude inventories fell -4.84m barrels to +327.5m last week. This month alone we have witnessed inventories plummet -3.6%. Digging deeper, last weeks report was even more bullish for prices. Distillate fuel (heating oil and diesel) slipped -3.03m barrels to +161.3m, the biggest decline in 8-months. Gas stockpiles fell -883m barrels to +216.3m. It’s worth noting that this was the first drop in a month and a half. Imports of the black stuff fell -0.8% to +7.71m barrels a day and the lowest level in 15-months. The trend of demand and consumption continues to climb. Gas demand averaged +9.05m barrels a day, w/w, that’s +2% higher than a year ago, while consumption of distillate fuel averaged +3.99m barrels a day, +5.2% higher w/w. Year-to-date, oil has climbed +76%, the largest increase in a decade.

Gold speculators continue to be better buyers of the ‘yellow metal’ on pull backs, believing that the greenback is about to give up more of the positive ground it has managed to acquire this month. By the end of last week, the dollar showed signs of wilting which has boosted the demand for commodities as an alternative investment. Month-to-date, the commodity had depreciated just under 11% after printing a record high of $1,227.50 early in Dec. Year-to-date, it has appreciated +25%, the ninth consecutive yearly gain. Not unlike other asset classes, this month’s holiday swings have been somewhat overly exaggerated ($1,105).

The Nikkei closed at 10,658 up +19. The DAX index in Europe was at 6,007 up +4; the FTSE (UK) currently is 5,425 up +22. The early call for the open of key US indices is higher. The US 10-year bond backed up 1bp yesterday (3.85%) and are little changed in the O/N session. The 2-year auction came and went yesterday ($44b), resulting in the market pushing yields to their highest level in 2-months. The concession that we have witnessed in the FI market over the last seven business days will allow the market to digest the remaining issues this week with less trepidation. The fear that an accelerating US economic recovery will fuel inflation has dampened the demand for government debt and pushed the 2’s/10’s spread out close to a new record of 286bp. With more supply coming down the pipeline this week, 5’s (today-$48b) and 7’s (tomorrow-$32b), should provide further concessions. However, short term technically we are approaching some attractive yields.

December 23, 2009

The dollar maintains its holiday edge

Filed under: OANDA News — Tags: , , , , , , , , , , , , , — admin @ 3:52 am

Despite all the fundamental data to be reported over the next 2-days, most traders’ have closed their books. Price action is expected to be choppy and erratic with poor liquidity for the remainder of the year. This month has rejuvenated the dollar ‘bull’ as capital markets price out its ‘funding’ currency theme. Next week’s US treasury refunding requirement ($118b 2’s, 5’s and 7’s) will probably be the highlight of the week. It will be interesting to see what foreign demand is like and how messy a holiday auction can become. Will we have a failed US auction by Mar?

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, yet illiquid’ trading range.

Forex heatmap

Yesterday’s US data was a mixed bag of results. GDP was revised lower yet again. The final pass (GDP is reported in advance, preliminary and final reports) for 3rd Q real-GDP growth unexpectedly fell from +3.5% (advance) all the way down to +2.2%. The downward revisions did little damage to consumption, however all other sub-categories took it on the chin. These deep downward revisions leave the market susceptible to ‘upside’ surprises for the 4th Q. Digging deeper, in the final report, consumer spending only missed its expectation target by a tick (+2.8% vs. +2.9%). Investments were revised much weaker, tumbling from an original estimate of +11.5% to +5%, this covered the whole spectrum of investments, even residential investment were revised lower again. The initial growth of +23.4% in the advance report was lowered to +19.5% in the second take, and now sits at +18.9%, q/q, growth. Net exports were slightly worse than previously estimated (deficit of -$357b vs. -$348b), as export growth was revised a bit lower and imports higher. On the optimistic side of the equation, US sales of existing homes last month jumped to its highest level in 3-years as first-time buyers continued to take advantage of a government tax credit and lower prices. Purchases increased +7.4% to a +6.54m annual rate vs. an expectation of +6.29m. It’s all about the health of the US housing market. It’s probably the strongest variable that will convince the masses that the worst is truly over.

The USD$ is currently lower against the EUR +0.03%, CHF +0.00%, JPY +0.03% and higher against GBP -0.15%. The commodity currencies are mixed this morning, CAD +0.22% and AUD -0.10%. The loonie again yesterday, for a second consecutive day, was the strongest of the G7 currencies. It rallied higher on speculation that stronger domestic fundamentals warrant the BOC will have to hike rates sooner than anticipated. It’s not surprising that Governor Carneys policy of timing may be going step ‘n step with the Fed’s. Year-to-date the currency is up 16% and the Canadian futures market is starting to price in rate hikes sooner. Up until this week the loonie had lagged most growth currencies, but now it seems to be given its head. Currently, the market is still looking at dollar rallies as a sell opportunity. If one prefers being long the greenback, crossing it with ‘this’ commodity sensitive currency is not the ideal answer as analysts continue to favor buying the loonie longer term. EUR/CAD books are starting to see more sell orders building above.

The AUD is little changed this morning despite traders want to pare their position in high yielding assets just before year end. Some investors are speculating that stronger US economic data will warrant the Fed to hike rates ‘sooner that later’. The RBA believes its monetary policy is ‘now back in the normal range’ after lenders raised business and home-loan rates by more than the RBA themselves have increased (+3.75%) the overnight cash rate target. Traders have aggressively pared bets that the Cbank was in a position to hike rates for a fourth consecutive time in Feb. The currency remains under pressure despite stronger fundamentals with investors continuing to look for better levels to sell it (0.8747).

Crude is higher in the O/N session ($74.69 up +45c). Yesterday, oil managed to crawl its way higher as the greenback pared some of its earlier trading session gains vs. G7 currencies and on signs that global economic strength is gathering momentum. Initially the black stuff fell on the ‘expected’ announcement from OPEC that they agreed to hold quotas at 24.845m barrels a day. However, all we have truly seen is technical buying on the dollar movements. Volume remains light because of the holidays, which makes it easier to move the market. This morning we get this week’s inventory report. Last week’s EIA release showed that inventories declined -3.69m barrels to +332.4m vs. expectations of a decline of only -2m barrels. Refineries are operating at +80% of capacity, down -1.1%. On the flip side, US gas consumption rose +1.5% last month, y/y, as the economy recovers from the recession. Demand destruction is healthy and the commodity prices remains range bound. For the moment the ‘reserve’ currency will dictate the direction of commodity prices.

Gold managed to print a 2-month low yesterday on speculation that this months dollar rally may reduce the demand for the ‘yellow metal’ as an alternative investment. Month-to-date, the commodity has depreciated just over 11% after printing a record high of $1,227.50 earlier in Dec. Strong US fundamentals has propelled the dollar 4% higher this month. Is this a seasonal or year-end move? Is the dollar ‘bullness’ sustainable? Temporarily the weak trend remains intact as speculators, friends and everyone’s mother are long the ‘yellow metal’ ($1,084).

The Nikkei closed at 10,378 up +194 (holiday). The DAX index in Europe was at 5,979 up +33; the FTSE (UK) currently is 5,367 up +39. The early call for the open of key US indices is higher. The US 10-year bond backed up 3bp yesterday (3.74%) and are little changed in the O/N session. The US curve remains under pressure with 10-yrs printing a 4-month high yield on the back of US Home sales beating expectations. The fear that an accelerating US economic recovery will fuel inflation has dampened the demand for government debt. With more supply coming down the pipeline, today Treasury announces 2’s, 5’s and 7’s (expected $118b) allotted issues for next week, should pressurizes prices even further. The 2’/10’s spread has widened out to 288bp, the largest gap in 7-months. Many analysts are now throwing their weight behind the idea that 10-years will yield 4% by end of next year. However, short term technically we are approaching some attractive yields.

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