Forex Blog

January 13, 2012

US Data Not Good for Funding Currency

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

Should we be questioning if US data is beginning to top out? This week, US releases were less than enthusiastic, with jobless claims rising smartly and retail sales disappointing. The steady improvement in initial jobless claims rose a rather disturbingly large +24k last week, rising from a modestly upward revised +375k to +399k. Are we to see a large downward revision to the next NFP report? Employment statistics is to play a major role in this year’s Presidential race and to Obama’s reelection campaign. Up to this point, a notable improvement in US data has been particularly helpful for currencies geared to US and global growth. With the Fed still committed to stable policy through mid-2013, the dollar is expected to remain a good funding currency for risk trades.

Below are some other highlights of the week:


AMERICAS

  • CAD: Monthly building permits fell less than expected in November, -3.6% vs. -3.8%, (fourth decline in five-month) as lower planned construction of institutional, industrial and commercial building affect the first gain in residential building plans.
  • USD: US whole sale inventories rose less than forecasted in November (+0.1%) as distributors struggled to keep up with demand, a sign gains in manufacturing will keep the economy growing. Inventories followed a +1.2% revised gain in October.
  • CAD: CMHC housing starts was +200k units in December, up from +185.6k units in November 2011.
  • CAD: Canadian monthly new house prices rose slightly more than expected in November for the largest gain in six-months. Prices were up +0.3%, m/m and +2.5% y/y.
  • USD: Softer US data disappoints all markets. December retail sales rose +0.1%, ex-autos it declined -0.2%, completing the first fall in 18-months.
  • USD: Weekly US jobless claims benefits climb past expectations, surging +24k to a seasonally adjusted +399k.
  • USD: US trade deficit widened for the first time in five months, +10.7% to -47.7b vs. -45.5b. Rising oil prices lifted imports while exports to the Euro region slumped. The trade gap with China narrowed -4.3% to 26.87b
  • CAN: Posted a surprise trade surplus in November, +$1.07b from a -$0.5b deficit in October. Exports increased +3.2% (+1.7% was a price increase and +1.6% a volume increase).
  • US: Consumer confidence came in stronger than expected. US preliminary January Michigan CSI increased by 4.1 point to 74, a fifth straight improvement from an August market low of 55.7

December 16, 2011

Dollar to make the Turn ahead

Filed under: OANDA News — Tags: , , , , , , , , , , , — admin @ 10:30 am

The EUR certainly hogged most of the headline this week. It seems investors appear most bullish on the USD and JPY and overwhelmingly bearish on the EUR and AUD. US data continues to pleasantly surprise even with the Euro-zone believed to be entering or has entered its own recession. The FOMC meeting delivered no surprises. As expected, they kept policy unchanged with no mention of new communications strategies, discount rate cuts or of QE3. It was noted that key sections of the FOMC policy statement were identical to the statement issued on 2 November. With Europe under so much pressure it’s now a guessing game “when” QE3 is required!

Below are some other highlights of the week:


AMERICAS

  • USD: US retail sales disappointed. Sales rose +0.2% in November, compared with the +0.6% expected. Ex-autos, sales rallied +0.2% versus +0.5%. Despite the previous months being revised a tad higher the overall print was a disappointment.
  • USD: The FOMC meeting delivered no surprises. As expected, they kept policy unchanged with no mention of new communications strategies, discount rate cuts or of QE3. It was noted that key sections of the FOMC policy statement were identical to the statement issued on 2 November. With Europe under so much pressure it’s now a guessing game “when” QE3 is required!
  • US: On Thursday, PPI, Empire State manufacturing and initial weekly job claims offered real encouragement on the health of the US economy.
  • US: Jobless claims continue to trend lower (initial +366k, continuing claims +3.603m) and reinforce the recent generally positive tone to US data. The market remains weary that firings maybe ebbing, or is it because hiring is about to accelerate? Initial claims were at this level three and a half years-ago.
  • US: Empire Manufacturing surprised higher and the details were firmer. New orders resumed growth this month; however, it’s too early to call this a “new” trend. The unfilled order backlog continues to get worked off and the reason why shipments are gaining.
  • US: Wholesale prices rose slightly in November amid higher food costs, but the underlying rate of increase in PPI remained tame, indicating little inflationary pressure. PPI rose a seasonally adjusted +0.3%.
  • US: Philly Manufacturing (10.3 vs. 3.6) continued to expand this month. In the details, employment stayed positive, but slowed a tad m/m. However, there were big gains in prices received, similar to the Empire report. “Optimism about the future is on the rise”.
  • CAD: Canadian Capacity accelerated (81.3 vs. 79.9) to its highest level in four-years. Capacity use was closed off faster than expected in Q3 and the prior quarter was revised higher. Canada is still operating at a lower rate than its peak in 2000 (87%). Despite this, the BoC has been clear that a move toward “neutralizing rates will lag behind closing off spare capacity in part given global risks affecting the 2012 outlook”.
  • USD: Consumer prices held flat in November (+0.0% vs. -0.1%) as a drop in energy costs offsets a slight rise in food prices and other items, underscoring weak demand.
  • CAD: Overseas interest in Canadian assets dropped to +c$2.03b vs. +c$7.35b last.
  • CAD: New Job insurance claims rose +4.2% in October, although long term jobless benefit claimants fell -1% in October and -20.3% on the year.

July 19, 2011

Bank of America Posts $8.8B Quarterly Loss

Filed under: OANDA News — Tags: , , , , , , , , , , , , — admin @ 7:15 am

Bank of America – the largest bank in the U.S. – has recorded a record quarterly loss of $8.8 billion. The loss comes after the bank agreed to pay $8.5 bn to investors and insurers in the wake of the sub-prime mortgage scandal. Investors demanded the bank buy back “toxic” loans held in mortgage-backed securities that had been represented as investment grade instruments.

Source: BBC News

July 14, 2011

US Retail Sales Disappoint

Filed under: OANDA News — Tags: , , , , , , , , , , , , , , — admin @ 7:04 am

US retail sales for June increased by just 0.1 percent as consumers continue to battle with elevated unemployment and a slowing economy. Total sales however, were boosted by an unexpected increase in demand at auto dealers that will not influence figures on consumer spending for the second quarter that the government will publish later this month.

“Consumers are cautious,” said Michelle Meyer, a senior economist at Bank of America Merrill Lynch in New York. “There is still pretty slow momentum. It still shows we’re in a fragile recovery.”

Source: Bloomberg

June 28, 2011

BIS Says Global Interest Rates Must Rise

Filed under: OANDA News — Tags: , , , , , , , , , , , , , , — admin @ 8:18 am

The Bank for International Settlements (BIS) warned yesterday that ultra-low interest rate policies represent a threat to the global financial system. According to the BIS, low borrowing costs have promoted asset bubbles that are now verging on the unsustainable and are eerily reminiscent of the property price collapse that ushered in the recession in 2007.

During the recession many central banks resorted to an “easy money” policy to promote financial activity. As growth has slowly returned to the afflicted economies, central banks are easing interest rates higher but they remain for the most part well below the pre-recession norm.

There are hold-outs to the trend however with the U.S. Federal Reserve refusing to budge from its record low rate capped at just 0.25 percent. Even as recently as the June 23rd FOMC statement the Fed remained committed to the current rate stating that the present conditions “are likely to warrant exceptionally low levels of the federal funds rate for an extended period.”

China’s Property Bubble

It is not just the U.S. that – in the words of the BIS – risks the creation of “financial distortions” through its monetary policies. Hedge fund manager Jim Chanos was among the first to warn that rapidly rising property values and inflation were creating the perfect conditions for a property bubble within the emerging Asian economies. Chanos continues to caution investors of China’s dependency on development to drive the economy and the possibility that a plunge in property values could trigger a recession.

China has made attempts in recent years to slow the pace of inflation and surging property values. The People’s Bank of China has tightened lending rules, raised interest rates, and even imposed eligibility requirements to limit property speculation and ease demand for new properties. The results have been mixed; in May, despite the Bank’s efforts, new home prices still increased in 67 of 70 cities.

For the global economy there are fears that higher energy and commodity prices in China will be “exported” to other countries through increased costs to the consumer. This means that consumers in America may find themselves sharing the inflation burden through higher prices for products manufactured in China.

This is a case of very poor timing on the part of China’s exporters. American consumer confidence has taken a turn for the worse and higher prices on goods shipped to the U.S. could suffer a decline in demand. Spiking energy and food prices are taking a greater share of each consumer dollar leaving less for non-essential goods and services and consumers are keeping a close watch on their expenditures.

May 27, 2011

Slowing US Economy a Warning to Canada

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

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

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

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

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

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

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

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

May 17, 2011

Looming Crisis Over U.S. Debt Ceiling

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

It may be too much for most people to fully comprehend the size of the government’s $14.3 trillion debt, so let’s put this in terms each of us can understand – yesterday the United States maxed out all its credit cards.

By law, the government is restricted to a debt ceiling of $14.294 trillion. This limit came into play on Monday and means the government is effectively prevented from selling bonds and taking on any further debt. The Treasury Department released a somber statement noting that by raiding the nation’s pension funds it could manage to meet the nation’s debt obligations until mid-summer, but unless new funds are available by then, the Treasury would have no choice but to default on some of the country’s debt obligations.

Mandatory Spending vrs. Discretionary

The U.S. debt has become a ferocious beast with an insatiable appetite. In 2010, mandatory spending grew nearly 15 percent over the previous year and totaled $2.17 trillion. At the top of the list was Social Security at a shade under $700 billion with Medicare / Medicaid following at $453 billion and $290 billion respectively. It is also noteworthy that interest on the national debt – also a mandatory expenditure – cost American taxpayers $164 billion for the year.

Discretionary spending for 2010 was also up significantly gaining almost 14 percent over the previous year to $1.38 trillion. Defense spending as you might imagine, was the number one expenditure on the discretionary side accounting for $663.7 billion. By comparison, the remaining discretionary totals are minuscule with the number two category – the Department of Energy – accounting for “only” $26.3 billion.

Here is the problem facing lawmakers. Mandatory spending is just that – mandatory. In other words, the government has few options to find savings in these areas. With respect to discretionary spending, other than the big-ticket defense spending, the remaining expenditures are – relatively speaking – insignificant. Locating a spare trillion or so in this category will require significant cutbacks across many different departments and would take months to complete; the government has at best, a few weeks.

So why not simply raise the lending limit? Well, this would be the obvious solution but the typical back-room shenanigans are in full-bloom in Washington right now and it is unclear when this approval may come. Both sides are using the debate to positions themselves as the better steward of the nation’s finances and should this partisan back-and-forth continue past the Treasury’s warning date, some form of default is unavoidable. Treasury officials are already quietly considering the worst case scenario and are identifying areas where a default would create the least damage.

If it comes to that extreme, it seems unlikely that the government would risk sacrificing its credit rating by defaulting on its interest payments. The resulting collapse in investor confidence would force yields much higher on subsequent bond offerings and this would have grave consequences on America’s ability to raise funds in the future. After all, the U.S. will be forced to rely on deficit financing for the foreseeable future so this option is a non-starter.

It is also hard to imagine that the government will take the route of slashing healthcare or dismantling other social programs. This would be a tough sell with the 2012 election campaign about to kick-off in earnest but the political posturing does serve to set up the debate between the two camps – the Democrats who favor minimal spending cuts with increased taxes, and the Republicans who demand dramatic spending cuts as the cost for garnering their support for raising the credit limit.

So far, it appears that both sides are more concerned with scoring political points at each other’s expense rather than tackling what could quickly become a crisis issue. Despite the looming election, both sides would be well-advised to ease up on the politics until the financing question is settled for the short term at least.

A good start would be to remove the specter of a default by approving an increase in the borrowing limits ASAP. Once markets are reassured that a default is not going to happen, then lawmakers can address the larger question of spending and taxes.

Oh, and here is something else to keep in mind – just because the limit has been increased on your credit card, it doesn’t mean to have to spend it.

May 2, 2011

US Home Prices Decline

Filed under: OANDA News — Tags: , , , , , , , , , , — admin @ 1:14 pm

For the eighth straight month, the price for single-family homes fell in February. The S&P/Case Shiller composite index – which measure home prices for twenty cities across America – declined by 0.2 percent.

“There is very little, if any, good news about housing. Prices continue to weaken, trends in sales and construction are disappointing,” David Blitzer, chairman of the Index Committee at S&P Indices, said in a statement.

“Recent data on existing-home sales, housing starts, foreclosure activity and employment confirm that we are still in a slow recovery.”

Source: Bloomberg

February 28, 2011

NABE Lists US Deficit as Top Concern

Filed under: OANDA News — Tags: , , , , , , , , , , , , , , — admin @ 2:00 pm

A poll of the members of the National Association for Business Economics has listed the US deficit as the number one threat facing the America economy. The survey released Monday noted that the 2011 federal deficit has increased to an estimated $1.4 trillion from last year’s total of $1.1 trillion.

“Panelists continue to characterize excessive federal indebtedness as their single greatest concern,” with state and local government debt the second-biggest worry, the survey said. It was conducted between January 25 and February 9.

Source: Reuters

Hawkish drum beat points to a strong EUR

Filed under: OANDA News — Tags: , , , , , , , , , , , , — admin @ 11:20 am

This is a busy week data wise. We have global PMI reports, the US employment report, monetary policy meetings from the ECB, RBA, BoC and Bernanke’s testimonies to both houses to overcome. On the face of it, the market anticipates the data to show that the recovery momentum remains strong. At the same time, a dovish message from Bernanke is likely to contrast with a hawkish ECB shift. Big picture, despite the Euro-region entering a new refinancing stage, especially for the peripheries, and the overwhelming Fine Gael victory on the weekend giving it a clear mandate to try to renegotiate its EU/IMF bailout package, the dollar is expected to remain on the back foot. Of course, trumping all this will be the Middle-East and North African contagion fears.

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’ O/N session.

Forex heatmap

The market is preparing itself for a more hawkish tone at this week’s ECB meeting, with bullish implications for the EUR. In the past few weeks, ECB officials have surprised the markets and gone out of their way to beat the hawkish drum. A shift in Euro-policy makers assessment of inflation risk to the upside will have the futures dealers quickly pricing in the ECB’s first rate hike in June. This morning’s Euro-zones consumer prices rose less quickly last month than initially thought, as prices for less volatile ‘core’ fell sharply from December (2.3%). Not surprisingly, the headline inflation rate is being kept elevated by energy prices.

The USD$ is lower against the EUR +0.50%, GBP +0.51%, CHF +0.12% and higher against JPY -0.11%. The commodity currencies are mixed this morning, CAD +0.13% and AUD -0.22%. The loonie surged to a three-year high outright last night, on the back of commodities continuing to trade higher with the growing tensions in the Middle-East. Higher commodity prices have investors dissociating themselves away from riskier, growth linked assets and sending investors towards safer commodity linked currencies. In fact, the loonie technically straddles both trading philosophy camps. Risk aversion and not commodities had been dominating the currency’s value of late. Currencies linked to raw materials usually weaken after ‘major crude supply shocks’. This is a busy data week for the Canadian economy. This morning we get the GDP print. The only positives that are lining up for this month are coming through net trade and wholesale trade. All other influences upon December GDP growth over the prior month are negative and that include real manufacturing shipments, housing starts, and hours worked. Are we setting ourselves up for a negative print for December GDP over November? The trend is for a stronger CAD. The market is looking towards Governor Carney tomorrow and a hint when policy begin tightening again. Expect the Governor’s rhetoric to focus on the value of the loonie and its future effect on the economy. Investors will continue to look for more favorable levels to own the currency (0.9765).

The AUD weakened in the O/N session after a government report showed company profits unexpectedly fell in the 4th Q (-2.8%). Business spending last week was in line with RBA Governor Stevens’ comments and supportive of higher yields and structurally higher AUD currency. Recent strong data has encouraged traders to add to bets that the RBA will boost interest rates over the next 12-months. On pullbacks, the currency is aided by commodity prices and is having very little follow-through on risk-aversion trading strategies. Despite geopolitical uncertainties, the demand for higher yielding growth currencies remains steadfast. The RBA is expected to remain on hold this evening. Dealers are anticipating the tone of the statement to remain largely unchanged from the last meeting, with some possibility of a slightly more positive assessment acknowledging strong wage growth in 4th Q and robust investment expectations in the CAPEX survey (1.0150).

Crude is higher in the O/N session ($98.2 +74c). Crude prices remain elevated on Middle-East geopolitical concerns. Oil climbed to a 30-month high last week as violent uprising reduced supplies from Africa’s third-biggest producer. It’s been estimated that as much as +1m barrels of Libya’s daily oil production may have been shut. The IEA believes that may be a ‘bloated figure’ which has caused oil prices to back away from their recent highs. ‘While there’s a risk of contagion, of this spreading to Iran or Saudi Arabia, the market is going to see prices elevated from these levels’. The IEA’s chief economist said that ‘higher oil prices pose a danger for a global economic recovery’. Last week’s EIA report again has provided some support for the US crude market on pull backs. The report showed a smaller-than-expected increase in supplies. Crude inventories rose by +800k barrels vs. an expected increase of +1.4m. Even worse was the gas inventory headline declining -2.8m, analysts had been expecting an increase of +950k barrels. Stocks of distillates (heating oil and diesel) fell -1.3m barrels, which was very much inline with expectations. Concerns about the Middle-East and production problems in the North Sea are boosting Brent relative to WTI and pushing the spread to a record premium. With supply the number one concern, the commodity will remain bid because of the contagion concerns.

Like most commodities, gold is heading for its longest rally in six-months, as mounting tensions in North Africa and the Middle East boost demand for a ‘safe haven’. Last week the commodity was up +1%. The yellow metal continues to be supported by geopolitical factors and inflation threats. Prices have risen nearly +7% this month, as protests in favor of democratic reform in North Africa turned bloody. Investors have grown increasingly uneasy that the crisis could spread. Even hawkish global rhetoric has managed to give the yellow metal a leg up in February. Consumer prices are also boosting the demand for the precious metal as a hedge against global inflation. Last week, the market witnessed Chinese’s inflation accelerating the most in six years, and UK consumer prices the most in two years. Even US data is showing that their inflation numbers are edging higher. The commodity that is being used as a store of value. The asset class is expected to remain better bid on speculation that currency volatility will boost demand for a safe heaven investment once the Euro contagion fears raise its ugly head again over the coming weeks during the Euro-periphery refunding season ($1,412 +$3.10c).

The Nikkei closed at 10,624 up+97. The DAX index in Europe was at 7,180 down-4; the FTSE (UK) currently is 5,976 down-25. The early call for the open of key US indices is lower. The US 10-year eased 6bp on Friday (3.39%) and is little changed in the O/N session. Geopolitical pressures continue to support treasuries despite the uptick in global inflation numbers. Last week, the US benchmark 10’s gained the most in nine-months as the revolution in Libya drove investors to the safety of US product and raised concern that surging commodity prices may curtail whatever economic recovery we are currently witnessing and this despite the issue of $99b’s worth of new product. Also aiding prices is the belief that the Fed will buy between $18.5b and $26.5b in US debt this week. Month end requirements has also had portfolio managers requiring some duration. Event risk remains the order of the day.

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