Forex Blog

September 1, 2011

EURO has Lost its Teflon?

Filed under: OANDA News — Tags: , , , , , , , , , , — admin @ 4:36 am

It’s a thin market, liquidity at a premium, a holiday weekend and now we get a disastrous set of Euro-zone manufacturing data, a day ahead of the highly anticipated NFP report. The market has been slicing through the EUR like knife through butter already this morning, mostly on concern that Euro sovereign-debt crisis may worsen, curbing the demand for the currency and triggering some sizable stop losses that have helped to quicken the downward pace.

The IMF is helping to speed up the EUR downfall by its negative comments on European banks balance sheets. It does not help the currency that the Euro-finance ministers continue to struggle to agree on the details of possible securities for bailout loans for Greece. With these ministers continuing to put their national interests first, nothing will ever be decided.

Manufacturing activity in the Euro-zone fell back into contraction last month (PMI-49), ending a two-year run of growth as activity shrank in France and Italy, two of its biggest economies. The forward looking indicators are also looking suspect. Its expected that US ISM Manufacturing PMI will mark its first sub-50 reading in two-years later this morning. Look on the bright side, that print is still above the 42 levels that would signal recession!

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 ‘whippy’ trading session.

Forex heatmap

Yesterday’s data was met with little fanfare. The market is keeping that for tomorrow’s employment report. Private businesses added a modest number of jobs last month. ADP reported a gain of +91k. Dealers were expecting a gain of +100k. On a disappointing note, the June headline print was revised down to +109k from +114k. Analysts are expecting an NFP print around +80k, anticipating that the headline print was held down by workers on strike at Verizon. No one seems to be expecting any movement in the unemployment rate (+9.1%). Data this week continues to point towards a sluggish labor market as the US economy cannot seem to ‘rev up quick enough’ to generate new jobs.

Business activity in the US continued to expand last month, but at a slower pace (+56.5 vs. 58.8). Despite beating market expectations (53.5) it still was the lowest reading in two years. That’s a long way from the February print of 71.2, which was the highest reading in two-decades. Digging deeper, the production index plummeted from 64.3 to 57.8, the worst print in two-years. New orders declined from 59.4 to 56.9, the lowest in three-month. Inventories eased from 53.2 to 52.9, while the prices paid component continued their slow downward trend from 71.7 to 68.6. Interestingly, employment rallied slightly to 52.1 and remains in line with other regional releases, signaling that manufacturing will be contributing modestly to August’s payrolls.

The dollar is higher against the EUR -0.66%, GBP -0.30% and JPY -0.35% and lower against CHF +0.87%. The commodity currencies are weaker this morning, CAD -0.18% and AUD -0.08%.

The loonie has pared its biggest monthly decline since May as data yesterday showed that the economy grew by +0.2% in June. Unfortunately the bigger picture was not so pretty. The quarter GDP declined -0.1%, for an annualized drop of +0.4%, marks the first decline since the second quarter of 2009. Exports fell -2.1%, the sharpest drop in two-years and imports grew +2.4%, which points to net exports of having a significant affect on growth. Japan has been the only other G7 country to have had a negative decline in the quarter.

Month-to-date, the loonie is heading for its biggest drop in a year on speculation that the BoC would refrain from tightening rates anytime soon. This week’s month-end pressure on global equities has also discouraged investors from wanting to own higher-yielding assets. Now it’s a new month, but a day before payrolls and a long weekend.

The market will have to wait and see what tomorrow’s US employment number bring to the table before investors place their ‘new bets’. This week’s Fed minutes revealed a dovish meeting and one that shows that policy makers are still prepared to act if things get worse from here. This has allowed investors to become better buyers of dollars on dips (0.9790).

Aussie retail sales for July rose +0.5%, m/m, last night, more than the consensus forecast for a +0.3% print. Even the private capital expenditures (capex) came in healthy with the final estimate for growth for this year of +12%. Despite being below the government’s earlier estimate of +16%, y/y, expected spending for next year was essentially unchanged at +41%. The data certainly supports the RBA forecasts that mining investment will keep the Australian economic growth strong despite soft consumer and housing growth.

Australia is the only developed economy to avoid a recession during the global contraction of 2009, and is undergoing a ‘structural adjustment’ as the biggest mining boom in more than a century drives the nation’s currency to a record. The rising local dollar is hurting exporters, and the unemployment rate last month rose for the first time in 11-months.

It seems that the currency cannot lose at the moment. If US data continues to improve then local market pricing for interest rate cuts by the RBA will evaporate. On the flip side, if US data takes a turn for the worst, then the AUD will benefit from a weaker dollar. Now that this growth and interest rate sensitive currency would likely be supported on both poor and strong US data, certainly favors a test of the old highs north of 1.10. Currently, investors are better buyers of Aussie dollars on pullbacks as long as this risk loving environment remains (1.0696).

Crude is lower in the O/N session ($88.47 down-0.34c). Crude prices fluctuated yesterday as it headed for its biggest monthly drop since May after the weekly inventories increased unexpectedly and equities and gas prices surged. As East Coast refineries continue to work to restart refineries after Irene is providing price support for the black-stuff.

Last week’s EIA inventory report revealed that crude stockpiles unexpectedly moved up. Inventories increased by +5.3m barrels to +357.1m, and are above the upper limit of the average range for this time of year. On the flip side, gas inventories fell by -2.8m barrels and this after gaining by +1.4m in the prior week. They remain at the upper limit of the average range. Analysts were expecting crude oil inventories to dip by-500k barrels and gas stocks to fall by nearly +1m. Oil refinery inputs averaged +15.4m barrels per day, which were-219k barrels per day below the previous week’s average as refineries operated at +89.2% of their operable capacity. It’s also worth noting that over the last four-weeks, imports have averaged +9.2m barrels per day, which were-441k barrels less than the same period last year.

For the moment, Crude prices continue to hold just above strong support levels, supported by unrest in Libya where the availability of light oil with low-density and sulfur content output has fallen. The Fed’s monetary policy should be bearish for the dollar and bullish for crude in the longer term.

Gold completed its biggest monthly gain in two years yesterday, on speculation that the Fed will take more action to spur growth. The metal has rallied aggressively after the US consumer confidence number sank to a 28-month low earlier this week. Investors again are speculating that the Fed will be required to ease monetary policy in answer to stimulate the economy. This is boosting the appeal of the yellow metal as an alternative asset class. To date, the Fed has kept borrowing costs at a record low for nearly three-years to stimulate the economy.

Already this week the possibility of a stimulus package from the Fed in the weeks ahead had seen the return of risk appetite to the market with ‘safer haven assets’ being liquidated. The commodity is close to paring all of this week losses where both fundamental and technical pressures bore down on the commodity once it approached new record levels.

Year-to-date, the lemming commodity trade is up +29%, as the global debt crises and volatile stock markets boost the appeal of the metal as an alternative asset. The Fed’s efforts to drive interest rates lower to support lending should curtail the dollar’s appeal and by default, support commodities. The commodity is heading for its eleventh consecutive annual gain ($1,826-$5.60c).

The Nikkei closed at 9,060 up+106. The DAX index in Europe was at 5,691 down-94; the FTSE (UK) currently is 5,379 down-15. The early call for the open of key US indices is lower. The US 10-year eased 1bp yesterday (2.19%) and is little changed in the O/N session.

Treasuries completed its biggest monthly gain in nearly three-years as investors ignored the US’s first-ever credit rating downgrade and sought a refuge in the safest securities amid signs of slowing global growth. This week US Treasuries prices have rallied, especially longer dated securities, as consumer confidence plunged this month to the lowest in more than two years.

Yields on shorter term treasuries remain rooted to their record lows after the Fed signaled earlier this month that they are willing to take further measures to prevent the US from falling back into a recession. The spread between 2/10’s has again flattened (+201bp).

The market will try to stay out of trouble and peacefully wait for tomorrows NFP release.

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August 31, 2011

Market is anemic ahead of Job data

Filed under: OANDA News — Tags: , , , , , , , — admin @ 4:27 am

It’s the last week of unofficial holidays and this thinly traded market should probably savor these last few days before the rest of the market participants head back to the grindstone.

What have we to look forward to this morning? ADP and Chicago PMI. Analysts consensus expect a+100k print for ADP, just below last months reading. The danger is obviously to the downside, softer data would hold true to form the stream of poor data releases over the past few weeks. The market is certainly insulating itself from a poorer showing from the Chicago PMI, its expected to drop from 57.6 in July to 52.7 this month. It is the last regional manufacturing indicator in August ahead of tomorrows ISM data. To date, all the other regionals have disappointed. A below expectations print could be another non event with so much pessimism already priced in.

This morning German jobless rate held steady (+7%) with the number of jobless Germans continuing to fall (-8k vs.-10k), although the overall pace of improvement is showing signs of slowing. If it was only that easy for NFP to print something of sustainable substance!

The US$ is stronger in the O/N trading session. Currently, it is higher against 12 of the 16 most actively traded currencies in a ‘subdued’ trading session.

Forex heatmap

Discouraging indicators yesterday had traders in a sell first mentality with the dollar and the EUR both suffering declines on ‘crumbling confidence in their economies’. The mood in the US plummeted this month (44.5 vs. 59.2), the lowest reading in two-years, mostly on the back of the debt ceiling debate. Digging deeper, consumer expectation for economic activity over the next six-months plunged to 51.9 from a revised 74.9 (75.4). The present situation index fared no better, slipping to 33.3 from 35.7. The conference board noted that the headline decline was well under way before the S&P downgrade and Hurricane Irene (metric cutoff was August 18). Consumers inflation expectation held steady at July’s +5.8% 12-months from now. For an employment data filled week consumers views on the job situation turned negative. There were +49.1% of respondents who think that ‘jobs remain hard to get this month’, up from +44.8% in July. Only +4.7% think jobs are plentiful, down from last months +5.1%. Even more disappointing was the percentage of consumers expecting more jobs in the months ahead declined to +11.4% from +16.9%. Perhaps Friday’s data will be another blind side effort?

The S&P Case-Schiller home price index brought us little comfort despite rallying in June (+1.1%) for a third consecutive month. However, adjusted for seasonal factors the 20-city index declined -0.1%, while year-to-date, unadjusted June prices were down -4.5%. The US housing market has been struggling to recover due to high-unemployment (+9.1%), an abundance of foreclosures, a historic shadow inventory and tighter mortgage requirements.

The dollar is higher against the EUR -0.06%, GBP -0.16% and lower against CHF +0.88% and JPY +0.15%. The commodity currencies are weaker this morning, CAD -0.04% and AUD -0.01%.

Like all good commodity growth sensitive currencies, the loonie for the first half of this week was supported by the rise in risk interest. Yesterday, the currency managed to fall for the first time in three-days as a report State side revealed a dramatic drop in consumer confidence to a 28-month low from Canada’s largest trading partner. Yesterday’s rally in commodities managed to mitigate some of the CAD ‘potential’ loss. Month-to-date, the loonie is heading for its biggest drop in a year on speculation that the BoC would refrain from tightening rates anytime soon. The month-end pressure on global equities is also discouraging investors from wanting to own higher-yielding assets.

Canadian data yesterday revealed that the current account deficit widened in April through June to the second largest on record (-$15.3b). Many analysts have now cut by half their expectations for a BoC policy rate increases through the end of next year.

Last week Governor Carney stated that the Canadian economy has stalled and may have even contracted in the second-quarter. This morning we get the Canadian GDP number m/m and fundamentally, the market will have to wait and see what Friday’s US employment number brings to the table before investors place longer term bets. Outlook for the Canadian economy has come under serious scrutiny over the past few weeks. Yesterday’s Fed minutes revealed a dovish meeting and one that shows that policy makers are still prepared to act if things get worse from here, allowing investors to become better buyers of dollars on dips (0.9790).

The Aussie is headed for a monthly decline outright and against the JPY on signs the global economy is slowing. The currency has lost -3.5% against the dollar since its record high print last month. Declines in the AUD o/n have been limited on prospects that slowing jobs in the US will increase pressure on the Fed to add stimulus, and in turn boost demand for higher-yielding assets.

So, it seems that the currency cannot lose at the moment. If US data continues to improve then local market pricing for interest rate cuts by the RBA will evaporate. On the flip side, if US data takes a turn for the worst, then the AUD will benefit from a weaker dollar. Now that this growth and interest rate sensitive currency would likely be supported on both poor and strong US data, certainly favors a test of the old highs north of 1.10.

However, domestic data is found wanting. Aussie consumer sentiment is holding at two-year lows, private sector borrowing has slumped, retail spending is well below normal, home prices are falling, construction and services sector are weak and manufacturing is contracting at a faster pace. These are all strong enough reasons for the RBA to remain on the side line until it has a stronger handle on the economy. Currently, investors are better buyers of Aussie dollars on pullbacks as long as this risk loving environment remains (1.0670).

Crude is lower in the O/N session ($88.77 down-0.13c). For a third consecutive day crude prices have climbed to their strongest print in a month, advancing with gas and heating oil as East Coast refineries worked to restart refineries after Irene and on signs that the US housing market is perhaps stabilizing. With Sunoco shutting a Philadelphia fuel-making unit and other terminals operating at reduced rates is also providing price support for the black-stuff.

Last week’s EIA inventory report revealed that oil stockpiles fell -2.21m barrels to +351.7m. The market had been anticipating a build of inventories of +800k barrels. Crude imports fell-477k barrels per day to +8.77m. Also of note, data released by the IEA showed that the US SPR supply fell -4.8m barrels last week. On the flip-side, gas inventories rallied +1.36m barrels to +211.4m. Analysts had been expecting a-1m barrel decline. Average gas demand in the last four-weeks fell -2.4% from a year ago. Finally, distillates (heating oil and diesel), rose +1.73m barrels to +155.7m, more than the forecasted rise of +700k barrels. Refinery utilization rose +1.2% to +90.3% of capacity.

The report has been bullish for crude and bearish for the products. For the moment, Crude prices continue to hold just above strong support levels, supported by unrest in Libya where the availability of light oil with low-density and sulfur content output has fallen. The Fed’s monetary policy should be bearish for the dollar and bullish for crude in the longer term.

Classic flight-to-safety instruments got a shot in the arm yesterday. Gold has rallied aggressively after the US consumer confidence number sank to a 28-month low and in doing so has pushed US equities lower. The inverse correlation between equities and gold continues to hold steadfast. Investors again are speculating that the Fed will be required to ease monetary policy in answer to stimulate the economy. This is boosting the appeal of the yellow metal as an alternative asset class. To date, the Fed has kept borrowing costs at a record low for nearly three-years to stimulate the economy.

Already this week the possibility of a stimulus package from the Fed in the weeks ahead had seen the return of risk appetite to the market with ‘safer haven assets’ being liquidated. The commodity is close to paring all of this week losses where both fundamental and technical pressures bore down on the commodity once it approached new record levels.

Year-to-date, the lemming commodity trade is up +29%, as the global debt crises and volatile stock markets boost the appeal of the metal as an alternative asset. The Fed’s efforts to drive interest rates lower to support lending should curtail the dollar’s appeal and by default, support commodities. The commodity is heading for its eleventh consecutive annual gain ($1,833+$3.70c).

The Nikkei closed at 8,955 up+1. The DAX index in Europe was at 5,730 up+87; the FTSE (UK) currently is 5,325 up+57. The early call for the open of key US indices is higher. The US 10-year eased 5bp yesterday (2.18%) and is little changed in the O/N session.

US Treasuries prices have rallied, especially longer dated securities, as consumer confidence plunged this month to the lowest in more than two years, highlighting concern that global growth has slowed and boosting demand for the safest assets.

Yields on shorter term treasuries remain rooted to their record lows after the Fed signaled earlier this month that they are willing to take further measures to prevent the US from falling back into a recession. The spread between 2/10’s has again flattened (+199bp).

The Euro-zone and US consumer confidence data yesterday was ‘grossly weaker than expectations and consistent with what has been going on with weakening data of late’ according to Bill Gross. This is causing the market again to retrace towards the double-dip recessionary price level. Longer dated securities have pared their monthly yield gains that they earned after Bernanke’s Jackson Hole address where he said the Fed has tools to aid the recovery if needed, stopping short of indicating any implementation of QE3. 10-year yields remain range bound +2.35-2.03%.

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August 30, 2011

Reasons to Short EUR begin to Pile

Filed under: OANDA News — Tags: , , , , , , , , — admin @ 4:34 am

Futures fund dealers certainly got the jump in the o/n session and have been happily sitting on their pre-sold positions. The EUR this morning remains choppy, susceptible to month-end flows from real demand players. The currency has been playing with a whole lot of hurt this week.

There is Merkel’s shaky support. Trichet has indicated that the bank is reviewing its assessment of inflation risks as economic growth slows, perhaps ending a tighter ECB policy. European bank’s accounting body apparently have not yet taken big enough losses on Greek debt. What are you waiting for? A default? In the woodwork, there is a German lawmaker stating that their ‘parliament must have a say in future bailouts’. Beautiful, another stalling tactic that will slow the whole Euro legal process down.

An IMF report has cut its 2011-12 growth forecasts for the US (+1.6% from +2.5%-2011 and 2% from +2.7%-2012) and EU (+1.9% from 2%-2011 and +1.4% from 1.7%-2012) and says that Cbanker’s in both should be prepared to ease monetary policy.

Finally, this morning, the Italians did happen to get their debt issue away, but it was a soft bid-to-cover ratio. In this environment and it being the end of the month, it’s difficult to justify long EUR positions.

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 ‘whippy’ trading session.

Forex heatmap

Investors will likely wait for this Friday’s Augusts US’s job report to make fresh dollar bets on whether more Fed stimulus is coming. Yesterday’s US data was a healthy surprise. Consumers increased their spending in July (+0.8%), much more than expected. It was the biggest gain in five-months and a confident sign of strength for the US economy going into the second half of the year. Income grew +0.3% as both wages and salaries grew. Even the savings ratio slowed, falling to +5% as consumers become more confident in the economy. The spending portion is very important to overall growth and its good to see it up-tick, especially in the wake of the US government lowing their estimates for the second quarter down to +1% through June. Unfortunately, with unemployment remaining high and energy prices elevated continues to pressurize consumers spending and reduce buying power.

Last week, the Fed said that they stand ready to provide further support to an economy that is saddled with +9.1% jobless rates. Ben did indicate that he expects the economy to pick up speed in the second half and the above report goes someway to back his prediction. Digging deeper, the inflation gauges within the report picked up a tad in July. The price index for personal consumption expenditure increased +2.8%, y/y. On a monthly basis, the PCE price gauge was +0.4% in July from June and what is more important, the core-PCE which is watched closely by the Fed, rose +0.2% in July.

The NAR reported yesterday the number of contracts to purchase previously owned US homes fell -1.3% in July, the first decline in three-months, in a sign that lower prices and borrowing costs continue ‘not’ to attract buyers. The drop followed a +2.4% gain the previous month.

The dollar is higher against the EUR -0.48%, GBP -0.44% and CHF -0.08% and lower against JPY +0.11%. The commodity currencies are weaker this morning, CAD +0.43% and AUD +0.47%.

Like all good commodity growth sensitive currencies, the loonie was supported for most of yesterday by the rise in risk interest. In a thin trading market, the CAD was allowed to print three-week highs before paring some of its gains on profit taking. With Bernanke giving the market a little bit of calm and confidence over the weekend has certainly increased the short term risk appetite of investors. The currency extended it gains after US data showed that consumer spending from Canada’s largest trading partner climbed more than forecasted last month.

Now that the Fed is taking a timeout regarding implementing any of their monetary tools to stimulate growth, the market will have to wait and see what Friday’s, US employment numbers bring to the table before investors place longer term bets. Outlook for the Canadian economy has come under serious scrutiny over the past few weeks, allowing investors to become better buyers of dollars on dips (0.9794).

The Aussie dollar remains robust this morning, having reached its highest levels in nearly a month as investors continue to respond to stronger economic data State side and gains in equities this week. Asian bourses have rallied after the Fed eased concerns that the US economy would stall. The expectations of rate cuts down under have been wound down.

It seems that the currency cannot lose at the moment. If US data continues to improve then local market pricing for interest rate cuts by the RBA will evaporate. On the flip side, if US data takes a turn for the worst, then the AUD will benefit from a weaker dollar. Now that this growth and interest rate sensitive currency would likely be supported on both poor and strong US data, certainly favors a test of the old highs north of 1.10.

Last week, RBA governor Stevens said inflation ‘bears careful watching’, easing speculation that policy makers would cut rates any time soon in a speech to the House of Representatives Standing Committee. Futures dealers reduced their expectation for RBA rate cuts over the next year by-7bp to +126bp. Domestic credit markets need to reverse expectations of interest rate cuts before the AUD can fully surge again. Stevens acknowledged the ‘heightened’ degree of uncertainty offshore, but again, highlighted the impact from the improvement in the terms of trade on income keeping inflationary pressures elevated.

However, domestic data is found wanting. Building approvals in July rose +1% from June o/n, compared with an expected rise of +2%. Aussie consumer sentiment is holding at two-year lows, private sector borrowing has slumped, retail spending is well below normal, home prices are falling, construction and services sector are weak and manufacturing is contracting at a faster pace. These are all strong enough reasons for the RBA to remain on the side line until it has a stronger handle on the economy. Currently, investors are better buyers of Aussie dollars on pullbacks as long as this risk loving environment remains (1.0632).

Crude is lower in the O/N session ($86.91 down-0.36c). Crude prices climbed with stocks yesterday on optimism that the US economy will expand and a report indicated that US consumer spending rallied last month, supporting Bernanke’s comments last week that growth will resume and that the central bank has tools to stimulate the economy even further.

Last week’s EIA report showed that oil stockpiles fell -2.21m barrels to +351.7m. The market had been anticipating a build of inventories of +800k barrels. Crude imports fell-477k barrels per day to +8.77m. Also of note, data released by the IEA showed that the US SPR supply fell -4.8m barrels last week. On the flip-side, gas inventories rallied +1.36m barrels to +211.4m. Analysts had been expecting a-1m barrel decline. Average gas demand in the last four-weeks fell -2.4% from a year ago. Finally, distillates (heating oil and diesel), rose +1.73m barrels to +155.7m, more than the forecasted rise of +700k barrels. Refinery utilization rose +1.2% to +90.3% of capacity.

The report has been bullish for crude and bearish for the products. For the moment, Crude prices continue to hold just above strong support levels, supported by Libya, exclude them from the equation and the commodity remains vulnerable. The Libyan revolt has reduced the availability of light oil with low-density and sulfur content. The war torn country’s output has fallen to +100k a day last month, down from +1.6m barrels per day in January. The Fed’s monetary policy will be bearish for the dollar and so should be bullish for crude in the longer term.

Gold prices dropped sharply yesterday, in holiday-thinned trading, after North American bourses opened higher, deflecting interest for the safe-haven metal. With a possibility of a stimulus package from the Fed in the weeks ahead, risk appetite seems to have returned to the markets with ‘safer haven assets’ being liquidated. Technical pressure has also bored down on the commodity who failed again near record prints.

The weak long investors have been tapping the market and taking some profit off the table on speculation that financial markets may be stabilizing, eroding the appeal of the precious metal. It remains a crowded trade that investors wish to pare on expectations Bernanke will do something to boost equity prices even further next month.

Before last week, the commodity trade was up +31%, y/d, as the global debt crises and volatile stock markets boosted the appeal of the metal as an alternative asset. A hike in margin requirements for gold forwards in Shanghai is also helping to curb the precious metal’s meteoric rise. This is a similar move to the COMEX margin hike of +22% earlier in the month. The Fed’s efforts to drive interest rates lower to support lending should curtail the dollar’s appeal and by default, support commodities. The commodity is heading for its eleventh consecutive annual gain ($1,794+$2.20).

The Nikkei closed at 8,953 up+102. The DAX index in Europe was at 5,659 down-11; the FTSE (UK) currently is 5,254 up+124. The early call for the open of key US indices is lower. The US 10-year backed up +3bp yesterday (2.23%) and is little changed in the O/N session.

Despite yields on shorter term treasuries remaining rooted to their record lows after the Fed signaled earlier this month that they are willing to take further measures to prevent the US from falling back into a recession, the US curve has steepened. Longer term Treasury prices have declined for the first time in three days as the US economy showed signs of resilience and European debt turmoil eased, reducing demand for safe haven debt and boosting global equities. Investors have taken some assurance from Bernanke that growth would eventually resume. Yesterday’s data in the US showed that personal spending rose last month more than expected (spending accounts for +70% of the economy). 10-year yields remain range bound +2.35-2.03%.

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June 28, 2011

EUR held to ransom

Filed under: OANDA News — Tags: , , , , , , , , , , , , , , — admin @ 4:01 am

Capital markets remain focused on the parliamentary vote in Greece and on the long-term funding program negotiations. In the near term, the key deadline remains the vote in the Greek parliament on austerity measures, scheduled for tomorrow. The successful outcome to last week’s confidence vote supports market expectations that the austerity measures will pass.

However, according to Prim Minister Papandreou, this vote is too close to call! So much so, that EU members are putting the finishing touches to contingency plans to deal with the possible consequence of a sovereign default in the Euro-zone. Financial markets are pricing in an +80% chance of this occurring.

A positive austerity voting outcome should bring only limited relief to this already nervous market. Without a comprehensive funding program with clarity on the degree of participation for private bondholders, the EUR will remain vulnerable to headline risk.

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

Forex heatmap

Yesterday’s US consumption spending data was noticeably weaker than expected due to the downward revisions to prior months. The -0.1% decline in real-PCE for May was in line with market forecast, and largely reflects the supply driven decline in auto-sales. The surprise was in April, where real consumption spending was revised down from +0.1% to -0.1%. That pulled the annualized growth rate of real consumption spending for the first two-months of this quarter relative to first quarter to +0.6%. Capital markets expect second quarter growth to slip into the +1 to +2% because of weak consumption throughout May.

There were fewer surprises in the price data. The PCE price index matched the CPI with gains of +0.2% in the headline index and +0.3% in the core. Analysts expect the indexes to soften next month due to declining energy prices in the headline index, fewer energy spillover effects in the core and an easing of supply pressures in the auto industry.

The dollar is higher against the EUR -0.08%, GBP -0.30% and lower against CHF +0.14% and JPY +0.09%. The commodity currencies are mixed this morning, CAD -0.22% and AUD +0.13%.

The Canadian dollar, despite trading within its recent tight range, continues to inch closer to parity, touching a three-month low yesterday, as investors remained wary ahead of the vote in Greece tomorrow, to approve an unpopular austerity plan and as commodity prices fall.

Last week, the loonie posted its biggest weekly drop in two-months as risk-averse investors sought refuge in the most liquid of assets, the greenback. Higher yielding growth assets have come under pressure as investors risk-appetite goes ‘walkabout’ on the back of commodities softening on speculation that global economic growth may falter. US consumer spending, which accounts for +70% of US economic activity, came in flat for the first time in nearly a year, and slipped -0.1% when adjusted for inflation yesterday. Personal income also rose less than expected. The disappointing data added to the general cloud over the global economy.

The loonie is headed for the first two-month loss in a year, as rising concern that debt-strapped Greece and other Euro-peripheries will default and an economic slowdown in the US makes interest-rate increases by the BoC less likely.

With the Fed cutting its growth objective for the remainder of the year has higher yielding growth sensitive currencies trading under pressure. Expect the Canadian dollar to be subjected to the pull of either risk or risk aversion trading strategies. CAD is vulnerable now with US data likely to continue to print weak into mid-July (0.9878).

The AUD dropped through key technical support levels to an eleven-week low after the dollar rallied in the O/N session. The currency remains under pressure on concerns that a Greek austerity plan will not resolve Europe’s sovereign-debt crisis and will continue to dampen appetite for higher yields. Supporting the selling pressure was the RBA’s board minute’s for June reaffirming a noncommittal Central Bank. Concern that global growth is slowing is prompting traders to bet that the RBA will cut interest rates. Governor Stevens may reduce his benchmark rate by 19bp over the next 12-months, compared with bets on a +25bp hike on June 1st.

Governor Stevens and company cited growing concerns in Europe, downside surprises in US data and deterioration in non-mining related industries as giving the board enough reason to remain on hold until further notice. The minutes were also less explicit than RBA Governor Stevens’ speech last week on emphasizing upcoming data like the CPI report. The market is pricing a no hike in August unless inflation and employment surprised on the upside and the situation in Greece clears up sufficiently for a powerful rebound in risk appetite. Global data needs to improve before we can embrace any rate hike policy thinking. Investors remain better sellers on rallies (1.0452).

Crude is higher in the O/N session ($91.05 +0.44c). Oil prices fell yesterday as Greece’s debt crisis and the decision to tap global oil reserves continued to weigh on prices. The IEA said its members would release crude from their SPR’s. They intend to inject +60m barrels of government-held stocks onto the global market, immediately increasing world supply by +2.5%. Weaker global data is also put the commodity under pressure this week. US consumer spending stagnating last month and a preliminary Chinese PMI showing that factory output may rise at the slowest pace in 11-months in June is questioning global demand.

Previously, ‘tightness in the oil market has threatened to undermine the fragile global economic recovery’. Year-to-date, unrest in the crude-producing Middle-East and North Africa has sparked hefty price gains. According to analysts, this supply move is significant, as it ‘represents a reach by member countries for the remedy of last resort to high oil prices’. The spike in energy prices is being cited ‘as the reason for the economic slowdown and this is a reaction to that’. Analyst’s note, that from its peak this year, crude is off-20%.The technicals see strong support first appearing at around $87.

Gold prices yesterday were little changed as indecisive moves in FX-land and ongoing negotiations about a potential bailout for debt-laden Greece have left the market in ‘walkabout’ mode. Last week, the commodity fell $50 after a pledge by EU officials to stabilize the region’s economy slashed demand for the commodity as a haven. Margin calls in other asset classes also required investors to raise fresh capital by selling the yellow metal.

Gold is viewed by some investors as a hedge against inflation, and the surprise release of crude oil stockpiles from developed nations’ reserves damped sentiment amongst investors for rising prices. The commodity could still see a strong pullback if the Greek austerity measures win parliamentary approval tomorrow, as it would likely reduce short-term investor concern and demand for safe-harbor assets.

The commodities dependency on the buck and the outlook for US rates is likely to remain intact for now. This ‘one directional trade’ is far from over, with speculators continuing to look to buy the metal on these deep pullbacks ($1,502 +$5.70c). Technical analyst’s see $1,485 as the first level of real support.

The Nikkei closed at 9,648 up+71. The DAX index in Europe was at 7,129 up+22; the FTSE (UK) currently is 5,753 up+32. The early call for the open of key US indices is lower. The US 10-year backed up 5bp yesterday (2.91%) and are little changed in the O/N session.

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

The US 10-year benchmark was able to back up for the first time in four days as Chancellor Merkel’s coalition government welcomed proposals from French banks and insurers on voluntary participation in a roll-over of Greek debt. The market to date has seen a steady grind to lower yields without a significant pullback. Investors seem to be waiting for the ‘storm to pass until there is some clarity from Greece’.

The US Treasury auctioned $35b 2-year notes yesterday. The issue tailed +1.2bp at a record low yield of 0.395%. It was the first tail in three months and was to be expected because of record low yields. The auction had a 3.08 bid-to-cover ratio compared to an average cover of 3.32 in the six-prior auctions. Indirect bidders took +22% of the issue (the smallest take down in three-years) versus an average of +30.5%. Direct bidders took +13.5% of the issue versus a +14.5% average. Today, we get to take down +$35b 5-years and tomorrow $29b 7-years.

June 22, 2011

EURO Buyer Beware

Filed under: OANDA News — Tags: , , , , , , , , , , , — admin @ 4:17 am

First hurdle completed. Now the market waits for the next Greek obstacle-the Greek government parliamentary vote on crucial austerity measures next week. The Socialists need to ‘ram’ through some Eur28b worth of stringent measures before receiving a Eur12b lifeline from the EU.

The peoples reaction, Greek citizens are emptying saving accounts and buying gold as they brace themselves for a sovereign default and a run on the banks. The populous continue to discount the Socialist party pledge of ‘save the country’. As longs as the Capital markets believe that Greece will pull through, the EUR will not plummet. If the situation gets so bad that the survival is at stake thats a different story.

Mind you, the IMF is diverting investors attention towards Spain this morning, insisting that they must step up efforts to overhaul their Economy, ‘the repair of the economy is incomplete and risks are considerable’.

The market now waits for Ben’s communique this afternoon. Will he hint towards a QE3 type stimulus or whatever it will be called one day? The market doubts it and expects his rhetoric to put some pressure on the dollar.

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

Forex heatmap

Not a disaster and not unexpected, US sales of previously occupied homes fell in May to its lowest level in six-months. Sales decreased -3.8% to a seasonally adjusted annual rate of +4.81m, the weakest showing since November yesterday. The median sales price was +$166.5k, down -4.6%, y/y. Some good news was the inventory of existing owned houses listed for sale. It fell slightly to +3.72m last month, representing a +9.3 month supply (down from +9.5 months). It seems that higher incomes and job growth is the only solution capable of eating through such large inventory levels. Proof of the housing market continuing to struggle will only detract further from US economic growth. The market has also to absorb the +1.8m distressed properties that continue to weigh down home values.

The dollar is higher against the EUR -0.12%, GBP -0.58%, CHF -0.08% and lower against JPY +0.03%. The commodity currencies are weaker this morning, CAD -0.14% and AUD -0.01%.

With the market expecting a ‘yes’ confidence vote in Greece has allowed investors to strap on risk with the loonie one of the biggest gainers yesterday. Amid global equities and commodities rallying has also aided the currency, pushing it close to its weekly highs versus its largest trading partner. Even the disappointing retail sales data was unable to prevent the loonies’ flight. Retail sales rose +0.3% in April to a seasonally adjusted C$37.4b after a revised decline of -0.1% in March.

Previously, the loonie had slipped against its US counterpart, shredding all technical levels, weakening to its lowest level against the buck in three-months as renewed fears that Greece’s debt problems were out of control spurred a flight to safety. The CAD’s health is heavily linked to its southern economy because of the close trading relationship between the two countries. Yesterday’s intraday volatility moved on fumes, with most market participants happy to wait for the Greek vote.

On the crosses the currency has performed relatively well, boosted by this month’s employment numbers. Expect the Canadian dollar to be subjected to the pull of either risk or risk aversion trading strategies (0.9732).

The Aussie remains on the soft side against most of its trading partners on prospects that Greece will struggle to pass austerity measures next week to avoid a default, damping demand for growth-sensitive currencies. Previously, it was the RBA’s board minutes for June reaffirming a noncommittal Central Bank that first applied the pressure. The market pricing for rate hikes over the next year has fallen 7bp to-6bp.

Governor Stevens and company cited growing concerns in Europe, downside surprises in US data and deterioration in non-mining related industries as giving the board enough reason to remain on hold until further notice. The minutes were also less explicit than RBA Governor Stevens’ speech last week on emphasizing upcoming data like the CPI report. The market is pricing a no hike in August unless inflation and employment surprised on the upside and the situation in Greece clears up sufficiently for a powerful rebound in risk appetite. Global data needs to improve before we can embrace any rate hike policy thinking.

The market is waiting for Bernanke’s communique before traders commit themselves to new strategies (1.0595).

Crude is lower in the O/N session ($93.82 -35c). Oil prices yesterday slumped to a four-month low on the back of weaker economic outlook and a European debt crisis will eventually curb fuel consumption. Analyst’s note, that from its peak this year, crude is off +20%. The technicals see strong support only appearing at around $87.

Prices are not been influenced by bearish weekly inventory data, but, rather by the negative economic news. With NY and Philly manufacturing contracting and European debt crisis deepening is expected to reduce economic growth and eventually fuel demand.

Last week’s EIA report showed that oil inventories fell -3.41m barrels to +365.6m. Stockpiles at Cushing were down -1.14m barrels at +37.76m (NYMEX delivery point). On the flip-side, gas stocks rose +573m barrels to +215.07m, below market expectations of a +1m barrel gain. A market surprise was distillates (heating oil and diesel) posting a dip of-105k barrels to +140.82m (-5.2%). The refinery utilization rate fell -1.1% to +86.1% of capacity, compared with analysts’ forecasts for a slight increase of +0.3%.

Big picture, the market believes that the US has ample crude stocks, allowing WTI prices to remain in check, while the Brent market continues to price in lost production of preferred sweet crude from Libya. Economic headlines are more important to the market right now than inventory levels.

Gold has again rallied as a weaker dollar and concern about Europe’s debt crisis spur demand for an alternative investment. The commodity ended last week better supported as currency volatility boosted demand for the precious metal as an alternative investment. Last week, the metal dropped -0.3% and this after falling -0.9% the previous week. Year-to-date, the commodity has climbed +7.3%.

Big picture, the yellow metal remains in demand on speculation that borrowing costs in the US will remain low after economic data signaled that the recovery may be faltering and on the back of Bernanke’s comments that further stimulus is required. The Euro-carnage will continue to support gold buying.

Support is also coming from the physical gold markets, especially Asia. Their demand for the commodity currently tops the last two-year similar period appetite. Last month alone, India’s demand grew +22%, m/m.

Strong buying recommendations from Goldman and Morgan Stanley have also been good enough reason to drag the commodity higher. The yellow metal is being used as a store-of-value and trades like a currency.

The metals bull-run is far from over with speculators continuing to look to buy commodities on these pullbacks ($1,547 +$1.30c). With the potentially dollar creeping higher, there may be better levels to own the commodity.

The Nikkei closed at 9,629 up+169. The DAX index in Europe was at 7,293 up+9; the FTSE (UK) currently is 5,771 down-4. The early call for the open of key US indices is lower. The US 10-year backed up 2bp yesterday (2.97%) and is little changed in the O/N session.

With a positive Greek confidence vote who would want to apply risk adverse trading strategies? Very few it seems as treasuries remain under pressure ahead of the FOMC meeting today. Market participants do not believe that the US economy is weak enough to justify yields that touched yearly lows last week and are happily steepening the US curve.

Policy makers are expected to leave the accommodative language unchanged and is not expected to do a new round of debt purchases under its so-called quantitative easing program. Bernanke’s post meeting communiqué this afternoon will enlighten the market of policy makers intentions.

The reality, record monetary stimulus is still needed to support US economic recovery. With the Fed expected to remain on hold for a considerable time is creating a new paradigm of longer term lower interest rates.

June 17, 2011

EURO waits and waits

Filed under: OANDA News — Tags: , , , , , , , , , , , , , — admin @ 3:50 am

No one is sure if the Merkel-Sarkozy meeting can bear fruit. Will they produce a compromise on the controversial issue of private sector participation in new financing for Greece? Within the hour we will know. If not, the market will be giving back some of this morning’s premium and will have to rely on the European finance ministers to resume their talks on the second bailout package on Sunday.

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

Forex heatmap

Yesterday’s US data was all over the place. The Philly Fed factory index came in at a miserable -7.7 this month, mirroring the ugly Empire print and calls into question the durability of the US recovery. It was the weakest headline reading in two-years. With the factory sector normally the leading indicator for economic momentum, the market will now be worrying about how long this lack of growth scenario will last. All components of the index came in short, from factory orders to employment. An ISM-like weighting of the breakout produces a reading of 47.2, down from 52.6 and again in contractionary territory.

Weekly claims were a tad better, declining -16k to +414k, again above that psychological +400k barrier. The headline print was aided by an easy seasonal factor. Analysts note that going forward the market should be weary of seasonal factors aiding. The historical increased layoffs at car-plants may be ‘baffled by complications from supply chains abroad’, which may lead to unreliable seasonal reporting. On a more reliable note, the four-week moving average held steady at +424k. Digging deeper, continuing claims fell for a second consecutive week (+3.68m), while the number of eligible population receiving UI held steady at +2.9%.

US May house starts rose + 3.5% to +560k, better than market expectation of +540k. Giving a better performance was US May permits, rising +8.7% to +612k. Although positive, with housing having fallen to such low levels a significant increase is warranted to have any effect on GDP.

Finally, the US current account deficit rose in the first quarter (-$119b vs. -$112b), dragged higher by rising imports. Most of the increase in imports came from gains in industrial supplies such as petroleum, which was higher in price at the beginning of the year. With the US trade and budget deficits being so high it’s important that the US can attract foreign capital. This week’s TIC data showed that China was a big buyer of US debt, the first time in five-months.

The dollar is higher against the EUR -0.05%, GBP -0.15% and lower against CHF +0.05% and JPY +0.24%. The commodity currencies are weaker this morning, CAD -0.40% and AUD -0.33%.

The loonie has slipped against its US counterpart, shredding all technical levels, at one point yesterday weakened to its lowest level against the buck in three-months as renewed fears that Greece’s debt problems were out of control spurred a flight to safety. Better-than-expected US weekly claims and housing figures offered some relief, allowing the loonie to trim some of its earlier losses. This week is quiet for Canadian data, so expect the currency to take its cue from risk appetite. When risk is on, the ‘loonie’ is coveted, when off, watch out.

So far this month the loonie has been at the mercy of its largest trading partner, on speculation that a slow recovery down south is curtailing demand. On the crosses the currency has performed relatively well, boosted by last week’s employment numbers.
Expect the Canadian dollar to be subjected to the pull of either risk or risk aversion trading strategies. If oil prices continue to soften Canadian bulls can expect to see better buying opportunities (0.9826).

The AUD has weakened in the O/N session as a deadlock on aid for Greece has dampened risk and demand for higher yielding assets. Some of this weeks losses have been pared by RBA comments. Governor Stevens said that policy makers will need to raise interest rates at some stage. He reiterated a bias to raise the policy rate in the medium term in a speech earlier in the week and acknowledged that the slightly restrictive monetary and fiscal policy are currently constraining the economy. He believes that inflation is more likely to rise than fall despite the gains in the currency that further hikes are required to curb price increases. The markets believes that another inflation print above the 2-3% target will have policy makers hiking rates as early as August.

The risk-off mood remains dominant in the markets because of concerns over Greece and a slowdown in global growth, sending equities and commodities lower. AUD yields are still the highest in the G10 and always look attractive. The expected mix of trade surpluses and rising capital inflows should provide support for the currency on these much deeper pullbacks for the time being (1.0565).

Crude is lower in the O/N session ($92.62 -2.38c). Oil prices continue to fluctuate close to their monthly lows despite better than expected US claims data yesterday. Prices are not been influenced by this weeks bearish inventory data, but, rather by the negative economic news. With NY and Philly manufacturing contracting and European debt crisis deepening is expected to reduce economic growth and eventually fuel demand.

Last week’s EIA report showed that oil inventories fell -3.41m barrels to +365.6m. The market had been expecting a -1.8m barrel decline. Stockpiles at Cushing were down -1.14m barrels at +37.76m (NYMEX delivery point). On the flip-side, gas stocks rose +573m barrels to +215.07m, below market expectations of a +1m barrel gain. A market surprise was distillates (heating oil and diesel) posting a dip of-105k barrels to +140.82m (-5.2%). Analysts noted that the drop at Cushing can be explained away. It is the terminus of the Keystone pipeline (carries Canadian oil) which happened to be closed for a week. The refinery utilization rate fell -1.1% to +86.1% of capacity, compared with analysts’ forecasts for a slight increase of +0.3%.

Big picture, the market believes that the US has ample crude stocks, allowing WTI prices to remain in check, while the Brent market continues to price in lost production of preferred sweet crude from Libya. Economic headlines are more important to the market right now than inventory levels.

Gold rose for a third consecutive day yesterday as currency volatility has boosted demand for the precious metal as an alternative. Earlier in the week investors were required to sell the yellow metal to cover losses in other assert classes as margin calls increased. Last week, the metal dropped -0.9%, the first decline in five-weeks. Year-to-date, the commodity has climbed +7.6%.

Big picture, the yellow metal remains in demand on speculation that borrowing costs in the US will remain low after economic data signaled that the recovery may be faltering and on the back of Bernanke’s comments that further stimulus is required. The Euro-carnage will continue to support gold buying.

Strong buying recommendations from Goldman and Morgan Stanley have also been good enough reason to drag the commodity higher. The yellow metal is being used as a store-of-value and trades like a currency.

The metals bull-run is far from over with speculators continuing to look to buy commodities on these pullbacks ($1,524 -$5.50c).

The Nikkei closed at 9,351 down-60. The DAX index in Europe was at 7,064 down-46; the FTSE (UK) currently is 5,649 down-49. The early call for the open of key US indices is higher. The US 10-year eased 6bp yesterday (2.96%) and is little changed in the O/N session.

With Treasury volatility the highest in two-months it has been easy for investors to get side-wiped. Up one day down the next, that is the US yield curve. Yields yesterday have backed up from their intra-day low (2.88%) on speculation that there is an EU and IMF agreement preventing a Greek default. It is anticipated that an announcement will be made this weekend. Let’s hope so.

A drop in US applications for UI, and a bigger gain in housing starts were a touch stronger than expected, but alone, provided little excitement to the market as it continues to focus on Greek headlines.

Bernanke’s comments earlier this month continues to provide fodder for the bulls to want to own longer dated product. The reality, record monetary stimulus is still needed to support US economic recovery. With the Fed expected to remain on hold for a considerable time is creating a new paradigm of longer term lower interest rates. Investors continue to reduce their bets on an increase in the Fed’s overnight lending rate. Dealers remain better buyers on pullbacks.

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June 13, 2011

China does not help the EURO

Filed under: OANDA News — Tags: , , , , , , , , , , , , , , — admin @ 4:11 am

Investors are looking for signs that global growth is bottoming. Disappointing Chinese loan data (552b vs. 740b) released last night will do little to support risk appetite. The weaker than expected release for May points to slower Chinese growth over the next several months.

The market will now have to shift its attention back towards US data and hope that it will show some form of stabilization, if not, it will generate significant further loss of risk appreciation.

Investors cannot rely on Europe, it remains exposed to headline risk as markets continue to look for clarity on Greek support plans, particularly any ‘indication on the planned structure for private sector participation’.

In reality, EU policymakers seem incapable of crafting a solution that meets German demands for private involvement ‘which is sufficiently voluntary to avoid triggering formal declarations of default’. A plan needs to be in place by June 24 to prevent the IMF from withholding the next installment of the Greek bailout. A solution will be created, expect it to be another political white wash remedy.

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

Forex heatmap

The dollar is higher against the EUR -0.04% and JPY -0.06% and lower against GBP +0.17% and CHF +0.18%. The commodity currencies are stronger this morning, CAD +0.26% and AUD +0.13%.

The loonie is at the mercy of its largest trading partner. The CAD remains under pressure, matching its longest losing streak in nearly four-years versus its southern partner, on speculation a slowing recovery for the country’s biggest trade partner is curtailing demand. On the crosses the currency has performed relatively well, boosted by Friday’s employment numbers. The economy was able to add another +22.3k new jobs and push the unemployment rate down to its lowest level in two-years (7.4%).

The currency has also been under pressure from weaker commodity prices and investors paring back some of their riskier growth trading strategies. For most of last week, growth and risk sensitive currencies have been trading under pressure as global growth becomes more of a concern.

The CAD is trading close to its yearly lows due to its strong trade association and proximity to the US. Earlier this month, the BoC kept their key interest rate unchanged (+1%) and said they will raise it ‘eventually’ as the economy recovers. The Canadian bulls who read the BoC’s communiqué as being hawkish should be happy that they have been getting better levels to own the currency.

The loonie is being subjected to the pull of either risk or risk aversion trading strategies. Most strategists are waiting for this morning’s employment report before committing to longer term trading positions. Investors continue to look for better levels to own the loonie for now (0.9770).

In the O/N session the AUD gave up some of it’s O/N gains as falling Asian stocks dampened demands for higher yield. Last week, the markets reacted negatively to the much lower-than-expected Australian employment report (+7.8k) by pushing the Aussie dollar to a ten-day low. Rate dealers have cut their pricing for RBA rate hikes over the next year by 10bp. The report has severely reduced the chance of a July RBA rate hike and allows the currency to trade in a modest range until investors can get more clarity about Governor Stevens’s interest rate outlook.

Aussie yields are still the highest in the G10 and always look attractive. The expected mix of trade surpluses and rising capital inflows should provide support for the currency on these much deeper pullbacks for the time being (1.0559).

Crude is lower in the O/N session ($98.67 -0.62c). Oil prices fell on Friday for a number of reasons, first, on news that the Saudis were offering more oil to Asian and second there was additional pressure from a stronger dollar and weak global bourses. Before the Saudi announcement, oil had been well supported after OPEC failed to make a deal to raise supplies in Vienna last week. With no extra supply, it provides for a tight market. Saudi Arabia seems to be going alone.

Last week’s EIA report showed that oil inventories decreased by -4.8m barrels. At +369m barrels, crude oil inventories are above the upper limit of the average range for this time of year. On the flip side and negating the bullish headline, gas inventories increased by +2.2m barrels and are in the upper limit of the average range. Distillate fuel inventories increased by +0.8m barrels last week and are in the upper limit of the average range for this time of year. Refineries operated at +87.2% of their operable capacity.

The US is obviously concerned about the effect of oil prices on the economy and is expected to use all avenues at its disposal to deal with it. Do not expect the bid tone to be maintained in the medium term because of the pressures on global growth.

The market expects gold to rally this week on the back of the dollar losing some of its bid momentum. Dollar weakness tends to lift gold prices, as it makes dollar-priced assets cheaper for other currency holders and boosts the precious metal’s appeal as an alternative investment. The commodity came under pressure as the dollar rallied on Friday and on rumors that the IMF was also raising cash.

Year-to-date, the commodity is up +7.2% in 2011 after climbing the past 10-years. Big picture, the yellow metal remains in demand on speculation that borrowing costs in the US will remain low after economic data signaled that the recovery may be faltering and on the back of Bernanke’s comments that further stimulus is required.

Strong buying recommendations from Goldman and Morgan Stanley have also been good enough reason to drag the commodity higher this month. The yellow metal is being used as a store-of-value and trades like a currency.

The metals bull-run is far from over with speculators continuing to look to buy gold on deeper pullbacks ($1,529 -0.10c).

The Nikkei closed at 9,448 down-66. The DAX index in Europe was at 7,076 up+8; the FTSE (UK) currently is 5,783 up+18. The early call for the open of key US indices is higher. The US 10-year eased 2bp on Friday (2.97%) and is little changed in the O/N session.

Last week completed the longest winning stretch in the FI market in three-years as bond values appreciated for a ninth consecutive week. Bernanke’s comments earlier this month continues to provide fodder for the bulls to push longer dated yields to new yearly lows. The reality, record monetary stimulus is still needed to support US economic recovery. It seems that market consensus has us believing that there’s going to be another dip in economic growth and that will require a QE3 package.

US debt has advanced as economic pessimism discourages demand for higher-yielding assets. With investors nervous about economic growth going forward, their appetite for risk aversion trading strategies has increased. With the Fed expected to remain on hold for a considerable time, is creating this new paradigm of further lower interest rates.

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June 10, 2011

Dismal Dollar Wins By Default

Filed under: OANDA News, Uncategorized — Tags: , , , , , , , , , , , , — admin @ 4:13 am

The dollar is being supported by global growth concerns. Weaker industrial production in Europe and Asian should keep the currency better bid until next week.

Every Central Banker has mentioned that lower fuel prices is the key for the market’s outlook for a recovery over the next several months, yet oil prices have risen to essentially a one-month high this week. OPEC’s most contentious meeting in two-decades has done little to alleviate any pressures. With no new supply agreed upon, it will provide for a tight market.

There has been some positives, but not enough to persuade investors to cease selling risk currencies and the EUR overnight. The Greek cabinet has approved its new fiscal austerity package, certainly will not end up being a crowd pleaser, and Chinese import growth in May was surprisingly strong.

The market is tired, jaded and bruised. Momentum will round off the week a trade winner.

The US$ is stronger in the O/N trading session. Currently, it is higher against 12 of the 16 most actively traded currencies in a ‘subdued’ session.

Forex heatmap

Obviously the market’s focus yesterday was on Trichet. Despite his high profile communiqué event, the US had trade and weekly claims to digest.

The surprise, US trade deficit unexpectedly contracted in April, to its lowest level of the year (-43.7b vs. -48.6b), as exports hit a new high and the buying of crude fell off sharply amid a surge in prices.

The disappointment, weekly US claims did very little week over week. The number of individuals applying for weekly benefits remained virtually the same (+427k). Unadjusted claims softened and inline with market expectations of-17k. This drop had little affect on the seasonally adjusted figure. On the plus side, the four week moving average is still improving and eased again for the third consecutive week (+424k from +426.5k). With most market indicators indicating stagnation for the remainder of the year has claims following suit, consistently posting above that +400k benchmark. Continuing claims on the other hand did fall-71k to +3.7m.

The ECB seems to be losing its grip on its own independence. It’s becoming more of a political pawn in Europe, talking its own book. Yesterday’s rate announcement was a zero-sum game, the bulls and bears got what they wanted, a hint of a rate hike and Trichet mentioning a stronger dollar policy more than once.

The anticipated ‘strong vigilance’ was again put forth, which equates to a probable rate hike next time, but no pre-commitment.

In Trichet’s communiqué he highlighted that uncertainty remains and that risks to price stability was ‘to the upside’ and that the bank’s ‘ample provisions of liquidity might accommodate inflationary pressures’.

ECB made slight upward revisions to its forecasts both for growth and inflation this year and left next year unchanged. Trichet concluded yesterday by stating that the onus is on Governments to rescue the peripheries.

The dollar is higher against the EUR -0.20%, GBP -0.52%, CHF -0.06% and lower against JPY +0.37%. The commodity currencies are mixed this morning, CAD -0.10% and AUD +0.00%.

Even with Canada having an unexpected trade deficit in April (-$0.9b), on a drop in foreign sales of transportation equipment (-1.9%), did little to dent the loonies rise yesterday. The currency got a lift from higher oil prices and a contracting US trade deficit south of the border. Anything positive in the US tends to be supportive of its largest trading partner.

For most of this week, growth and risk sensitive currencies have been trading under pressure as global growth becomes more of a concern. The CAD is trading close to its yearly lows due to its strong trade association and proximity to the US. Last week, the BoC kept their key interest rate unchanged (+1%) and said they will raise it ‘eventually’ as the economy recovers. The Canadian bulls who read the BoC’s communiqué as being hawkish should be happy that they have been getting better levels to own the currency.

The loonie is being subjected to the pull of either risk or risk aversion trading strategies. Most strategists are waiting for this morning’s employment report before committing to longer term trading positions. Investors continue to look for better levels to own the loonie for now (0.9741).

In the O/N session the AUD gave up most of yesterday’s gains as falling Asian stocks dampened demands for higher yield. Earlier this week, the markets reacted negatively to the much lower-than-expected Australian employment report (+7.8k) by pushing the Aussie dollar to a ten-day low. Rate dealers have cut their pricing for RBA rate hikes over the next year by 10bp. Digging deeper, the modest gains in the headline print was due to the +29.8k rise in part-time while full-time employment fell for a second consecutive month by-22k. The unemployment rate was broadly stable at +4.9% because the participation rate was little changed at +65.6%.

On the flip side and providing some currency support was that both full-time and part-time hours worked rose last month. This, combined with the acceleration in wage growth, is supportive of consumption growth and reduction in household debt. However, the report has severely reduced the chance of a July RBA rate hike and allows the currency to trade in a modest range until investors can get more clarity about Governor Stevens’s interest rate outlook.

Aussie yields are still the highest in the G10 and always look attractive. The expected mix of trade surpluses and rising capital inflows should provide support for the currency on these much deeper pullbacks for the time being (1.0625).

Crude is lower in the O/N session ($101.50 -0.43c). Oil prices have been well supported after OPEC failed to make a deal to raise supplies in Vienna earlier this week. With no extra supply, it will provide for a tight market. The weekly EIA report, despite a plunging headline print, cancelled out its own bullish contribution with the uptick in gas supplies. Prices have even got a lift as the dollar index found support. This scenario normally provides for an inverse relationship.

This week’s EIA report showed that oil inventories decreased by -4.8m barrels. At +369m barrels, crude oil inventories are above the upper limit of the average range for this time of year. On the flip side and negating the bullish headline, gas inventories increased by +2.2m barrels and are in the upper limit of the average range. Distillate fuel inventories increased by +0.8m barrels last week and are in the upper limit of the average range for this time of year. Refineries operated at +87.2% of their operable capacity.

The US is obviously concerned about the effect of oil prices on the economy and is expected to use all avenues at its disposal to deal with it. Do not expect the bid tone to be maintained in the medium term because of the pressures on global growth.

Dollar weakness tends to lift gold prices, as it makes dollar-priced assets cheaper for other currency holders and boosts the precious metal’s appeal as an alternative investment. Yesterday, gold was bid despite a stronger dollar.

Year-to-date, the commodity is up +8% in 2011 after climbing the past 10-years. Big picture, the yellow metal remains in demand on speculation that borrowing costs in the US will remain low after economic data signaled that the recovery may be faltering and on the back of Bernanke’s comments that further stimulus is required.

Strong buying recommendations from Goldman and Morgan Stanley have also been good enough reason to drag the commodity higher this month. The yellow metal is being used as a store-of-value and trades like a currency.

The metals bull-run is far from over with speculators continuing to look to buy gold on deeper pullbacks ($1,545 +$2.40c).

The Nikkei closed at 9,514 up+47. The DAX index in Europe was at 7,152 down-8; the FTSE (UK) currently is 5,846 down-10. The early call for the open of key US indices is higher. The US 10-year backed up 3bp yesterday (2.99%) and is eased 3bp in the O/N session (2.96%).

It took very little to push rates higher, they have been sitting on or close to yearly highs for some time and a contracting US trade deficit number was the catalyst for investors to take some profit off the table. A static weekly claim’s report had no influence. With yields backing up made it easier for dealers to push for a pricing concession on the final weekly sales of Treasury product.

Bernanke’s comments earlier this week continues to provide fodder for the bulls to push longer dated yields to new yearly lows. The reality, record monetary stimulus is still needed to support US economic recovery. It seems that market consensus has us believing that there’s going to be another dip in economic growth and that will require a QE3 package.

Yesterday’s $13b 30-year auction was not a hit. It had a 3.4bps tail, the largest in two-years. Indirect and direct bidders took less than 50% of the issue, and the issue had a weaker than usual 2.63 bid-to-cover ratio compared to the six auction average of 2.70.

Even piggybacking record lows and because of Bernanke’s stance investors continue have an appetite for product. However, these low yields remain difficult to absorb longer term.

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May 19, 2011

Euro Roundabout

Filed under: OANDA News — Tags: , , , , , , , , , , , , , , — admin @ 4:30 am

Despite Japan entering a recession, Strauss-Kahn resigning, Trichet stating that the ECB would not be using Greek bonds as collateral should there be a decision to lengthen debt restructuring, we continue to see a consolidation phase after the heavy liquidation of short dollar positions this month. The market is begging to break out of the recent ranges.

Big picture, the market remains tentative and will be looking towards US claims numbers this morning for some sort of guidance. A headline print in line or better than consensus (+421k) should be supportive for risk trades, and the CAD and MXN in particular. A positive print should be capable of pushing US front-end yields higher, and support those long dollars versus yen positions despite the hiatus in T-bill issuance this week. Otherwise, we are back to that reality show, policy makers versus politicians.

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

Forex heatmap

In the FOMC minutes there was little different to what Bernanke commented in his post press appearance. Perhaps this release will become non-influential. The FOMC meeting showed that monetary policy tightening is still far down the line. Concerns about inflation were present, but with the dominating view still being rising energy costs are ‘transitory’. While the minutes showed participants discussing the Fed’s exit policy and would point towards policy tightening as the next policy move, there has been no time line discussed and the next policy move could still be some time away.
 
The USD is higher against the EUR -0.19%, GBP -0.04%, CHF -0.23% and JPY -0.22%. The commodity currencies are stronger this morning, CAD +0.04% and AUD +0.12%.

Canadian wholesale trade yesterday was weighed down by lower import prices (+0.1% vs. +1.2%) which provided for a disappointing report. Digging deeper, the details were mixed as lower import prices weighed on several categories. Analysts however tried to put a small positive spin on the data, noting that wholesale volumes increased during the month, which should provided a boost to first quarter economic growth. The market now waits for retail sales to be reported before we get a peek at an anticipated stronger growth scenario. Three of the seven subcategories saw declines, equipment and supplies (-0.6%), personal and household goods (-0.5%) and food and beverage (-0.4%).  The gainers were motor vehicle (+0.6%), farm products (+0.2%) and the miscellaneous category (+2.3%).Also of note, inventories climbed +0.4% in March (the third consecutive monthly gain).  

With the rate market continuing to push out BoC hikes is making the top side for the loonie outright more vulnerable. The currency this week has traded heavily against most of its major counterparts and at times been within striking distance of its two-month low outright. Until now, the pressure on commodities had been undermining the loonies’ progress, now investors have shifted their focus back to ‘rate’ watching. The Bank next meet on the 31-May to determine their interest rate policy.

With 0.9800 barriers supposedly maturing at month end, the market will see defense maximized as expiries draw closer, providing resistance for the time being, despite the underlying momentum wanting to drag the dollar to test higher. Not helping the currency is the market waiting for Canadian inflation data tomorrow before committing to larger CAD positions. To date, risk sentiment has been stung over Euro-zone debt restructuring and on doubts about the pace of global growth. Investors are better buyers on these pull backs (0.9673).

The perception that the worse of the commodity sell off may now be behind us, has the Aussie dollar doing better in the O/N session, supported by the uptick in the Asian equity class.

Earlier this week, the currency was pressurized by Australian consumer confidence declining this month to the lowest level in almost a year. The Westpac sentiment index fell -1.3% to 103.9 from a month earlier. Not helping either was Moody’s downgrading the long-term, senior unsecured debt ratings of some of its leading domestic banks.

Aussie yields are still the highest in the G10 and do look attractive. The expected mix of trade surpluses and rising capital inflows should provide support for the currency on these pullbacks for the time being (1.0646).

Crude is lower in the O/N session ($99.69 -0.41c). Oil prices climbed yesterday after the weekly EIA report showed an unexpected drop in US inventories, as refineries boosted operating rates and imports declined. For most of this week crude prices have been vulnerable to the downside on worries that global economic growth is stalling.

Weekly crude supplies fell-15k barrels to +370.3m last week versus an expected build of +1.7m barrels. Cushing supplies dropped -1.59m barrels to +40.0m, while imports were off-394k barrels per day to +8.54m barrels per day. Distillate stockpiles (heating oil and diesel) also posted a surprise draw, dropping -1.16m barrels versus expectations of a +700k build. On the flip-side and a surprise, was gas inventories growing as expected but modestly, rising +119k versus a forecast for a +800k barrel build. The refinery utilization rate rose +1.5% to +81.7% of capacity, much bigger than the +0.2% expected.

Technically, the report could be seen as overall bearish because of the weaker gas demand. Despite the market being awash with product, the long-term fundamental supply and demand of commodities is still pointing to higher prices. The IEA is considering cutting their global demand numbers again, as this year’s price rally begins to weigh on consumption. Thus far, they have reduced its estimates for world consumption by-190k barrels a day.

After falling to a one week low in the earlier session, gold rallied the most this month yesterday, as commodities rebounded, boosting the appeal of the precious metal as a hedge against inflation. The modest decline of the dollar has also aided in boosting commodity prices.

With the risk factor coming back to commodities tentatively, investors want to diversify away from the dollar and own precious metals. The metals bull-run is far from over with speculators continuing to look to buy gold on these deeper pullbacks. Interestingly, the sale of gold coins this month remains on track for the best month in a year amid the worst commodities rout in three-years, which would suggest that bullion’s longest ‘bull market’ still has room to run ($1,489 -$6.10c).

The Nikkei closed at 9,620 down-41. The DAX index in Europe was at 7,346 up+44; the FTSE (UK) currently is 5,955 up+32. The early call for the open of key US indices is lower. The US 10-year backed up 5bp yesterday (3.17%) and is little changed in the O/N session.

Treasuries have fallen, pushing the 10-year yield up for the first time this week as equities and crude rallied and investors found less value in owning US product after the yield dropped to its lowest level this year. With the lack of economic data out yesterday it was difficult to commit to owning product at these rich levels.

Mixed US data this week has investors remaining better bid on these pull backs, providing bullish momentum for the FI asset class who it seems want to register even lower record yields over the medium term.

May 16, 2011

EUR value under discussion this week

Filed under: OANDA News — Tags: , , , , , , , , , — admin @ 4:30 am

It’s time to discuss. The reality, the market does not expect the Euro-finance ministers to make a final decision today on any Greek additional assistance. They will wait on the EU/IMF’s fourth mission to the region to complete its conclusions later this week. Even the disturbing developments in New York over the weekend should not have a material affect on their decisions. Most importantly, the market is seeking assurance that the latest pressures on Greece will not be ‘systemically damaging’.

How is Greece going to find the €27b it needs to fill its 2012 ‘funding gap’? The most likely option is a continuation of EU/IMF support, through an extension of the initial aid package or through Greece’s access to EFSF funding. Maybe, if the Greek government were to speed up its privatization plan and attempt to reduce its deficit faster, they could in theory, achieve their funding needs. Sometimes politically, it’s easier to put your hand out and ask for more than tighten ones own belt!

The US$ is mixed in the O/N trading session. Currently, it is higher against 11 of the 16 most actively traded currencies in a ‘volatile’ morning session.

Forex heatmap

The USD is lower against the EUR +0.04%, CHF +0.46% and JPY +0.02% and higher against GBP -0.09%. The commodity currencies are weaker this morning, CAD -0.44% and AUD -0.25%.

The pressure on commodities continue to undermine the loonies’ progress. Last week, the currency dropped for a second-straight week for the first time in four-months, as crude prices continued their slide, one week after plummeting the most since December 2008. The order boards remain very thin with corporate buyers backing up their bids for the currency. Now with investor’s perception that commodities may have got ahead of themselves, technically has the potential to push the commodity sensitive currency’s much lower in the short term.

Already this month, the CAD has retreated from a three-year high as commodities plunged on concerns for Greece’s continued Euro membership, pushing investors to seek temporary sanctuary in the world’s go to safe heaven currency, the dollar. This week’s Euro-finance meetings will certainly set the appetite for risk (0.9744).

The Aussie dollar continues its slump, and trades near its three week low on commodity declines curbing the demand for the nation’s assets. Also, not aiding the currency was a government report showing home-loan approvals unexpectedly dropped to a 10-year low in March(-1.5%) as higher interest rates deterred homebuyers. Dealers have cut the pricing for RBA rate hikes over the next 12-months by-11bp to+30bp. Declines in the currency have been tempered before the RBA publishes minutes of its May 3 meeting this evening and before the government releases first-quarter wage data on May 18. The market expect the release to be a little hawkish.

Aussie yields are still the highest in the G10 and do look attractive. The expected mix of trade surpluses and rising capital inflows should provide support for the currency on these pullbacks for the time being (1.0527).

Crude is lower in the O/N session ($97.86 -$3.20c). Oil prices remain vulnerable, and fell last week after a surprisingly strong weekly inventory report, mixed with a cooling Chinese economy coming into focus. The PBoC raised banks’ reserve requirements for a fifth time this year to restrain inflation, underlining the risk that tightening measures will cause a slowdown in the world’s second-biggest economy.

Weekly US crude stocks rose +3.78m, much higher than the +1.4m barrels build up expected. Not to be left behind, gas inventories rose +1.28m barrels versus a forecast for a-200k barrel drop. This much larger build has grown because of gas demand being down year-over-year as higher prices at the pump cut into demand ahead of the US peak driving season. Fundamentally, investors should expect further slippage of prices to generate stronger demand and reduce inventories from current levels.

Higher oil prices have been denting demand growth and it’s this drop-off, combined with the overall retreat in commodities, and a rising dollar that has forced this drastic easing of oil prices this month. The IEA indicated that they have cut global demand again, as this years price rally begins to weigh on consumption. They have reduced its estimates for world consumption by-190k barrels a day.

The dollars rebound is eroding the allure of gold for alternative investment purposes. With global equities under pressure from China’s inflationary stance, is bearish for commodities as investors are pressurized to taking profit with gold to compensate for losses with other assets. Last week, gold happened to give up +4.2% of its value.

Investors continue to unwind that long-commodity, short-dollar trade. Until now, the uncertain macro-economic and political environment has been encouraging investors to want to own their piece of the gold. Unofficially, the yellow metal has become the currency of choice because of the heightened currency volatility and on the back of a questionable dollar value.

The metals bull-run is far from over with speculators continuing to look to buy gold on these deeper pullbacks, however, with inflation expectations dipping this month has the weaker ‘long’s’ remaining on the back foot and second guessing their outright positions ($1,496 +$3.20c).

The Nikkei closed at 9,558 down-44. The DAX index in Europe was at 7,317 down-80; the FTSE (UK) currently is 5,881 down-44. The early call for the open of key US indices is lower. The US 10-year rose 2bp on Friday (3.16%) and is little changed in the O/N session.

Treasuries fell for the first time in five weeks last week as mixed domestic economic data and a rebound in commodities cooled demand for the safety of US debt. Recent data is creating a very choppy trading environment.

Fundamentally, US yields remain historically low as the economy is finding it difficult to generate enough forward momentum to suggest rising prices will ‘be passed through the underlying rate of inflation’.

Dealers last week cheapened up the curve nicely ahead of the $72b of new product that came to the market. Because of the US mixed data and the Euro-political situation investors continue to find value on these pull backs.

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