Forex Blog

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.

January 25, 2011

US Home Prices Drop 1.6% in November

Filed under: OANDA News — Tags: , , , , , , , , , , , , — admin @ 2:26 pm

Home prices in the US decline 1.6 percent in November compared to the same month one year ago according to the S&P/Case-Shiller index of new home values. An increase in home foreclosures adding to the inventory of properties is partly to blame for the decline but weak demand is still the primary reason that the housing sector continues to lag the greater economy.

“We’re having what I’d call a mini double-dip in home prices,” Michelle Meyer, senior U.S. economist with Bank of America Merrill Lynch Global Research in New York, said before the report. “Prices will remain pretty weak through the first half of the year. With excess supply on the market, it is still very much a buyers’ market.”

Source: Bloomberg

October 25, 2010

August 24, 2010

Fed split on on Boosting Economy

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

The Aug. 10 meeting of top Federal Reserve officials was among the most contentious in Ben Bernanke’s four-and-a-half year tenure as central bank chairman.

With the economic outlook unexpectedly darkening, the issue was a seemingly technical one: whether to alter the way the Fed manages its huge portfolio of securities.

But it had big implications: Doing so would plunge the Fed back into the markets and might be a prelude to a future easing of monetary policy, moves that divided the men and women atop the central bank.

At least seven of the 17 Fed officials gathered around the massive oval boardroom table, made of Honduran mahogany and granite, spoke against the proposal or expressed reservations. At the end of an extended debate, Mr. Bernanke settled the issue by pushing successfully to proceed with the move.

The debate over the decision to keep the Fed’s $2.05 trillion stock of mortgage debt and U.S. Treasury holdings from shrinking, described in interviews with several participants, set the stage for a more consequential discussion inside the Fed that remains very much alive: what to do next, if anything, about America’s stubbornly weak recovery and troublingly low inflation.

Mr. Bernanke gets an opportunity to elaborate on this crucial and unresolved question when he and other Fed officials gather Friday and Saturday, along with foreign counterparts and a gaggle of academic experts, at the Fed’s annual meeting in Jackson Hole, Wyo.

Wall Street Journal

YEN Yada Yada

Filed under: OANDA News — Tags: , , , , , , , , , , , , , , — admin @ 10:13 am

We wake up and hope, but, it’s ugly again today. Two consecutive days of ‘no’ North American data has the market grasping for any excuse to sell the EUR. Speculators have been throwing everything out there to justify pushing the EUR to test its medium term support levels. Excuses ranging from the ‘no’ consensus on behalf of the BOJ and MOF, when it comes to currency intervention, to risk on and off again, or China’s appetite slowdown for commodities are being used. Sellers across the board line up to take a pot shot. Japanese operating profits will not start to decline until we hit 80 USD/JPY, they will not be erased until we hit 67. So, the market has room to maneuver and to squeeze the yen even more!

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

Forex heatmap

Today we are back to some sort of normality, in the sense that we will get some data to gorge on later. This mornings US home sales report could be the tipping point to push capital markets into a trading a ‘defined recession’ again. The Euro-zone Industrial new orders advanced more than the market had been expecting in June (+2.5% vs. +1.5%, m/m). Annualized, that is an impressive +22.6% gain. However, it has provided little comfort for the EUR in the session, as the JPY continues to remain the main driver of volatility this morning.

The USD$ is higher against the EUR -0.32%, GBP -0.81%, CHF -0.12% and lower against JPY +0.76%. The commodity currencies are weaker this morning, CAD -0.61% and AUD -0.82%. Weaker global equity and commodity prices have pushed the loonie to a new six-week low this morning. Inflation data last week has the market questioning if Governor Carney will back away from a normalization of rates policy and take a break from hiking next month. Futures traders are beginning to price a less than 38% chance of rates backing up and probably higher after last nights overseas moves. A couple of weeks ago it was a foregone conclusion that policy makers would hike +25bp. Expectations in the bond market for a boost have reversed after reports from Canada and the US showed the economic recovery may be faltering and inflation is slowing, July’s inflation data rose less than expected (core +1.6% vs. +1.9%). The loonie is not immune to the weaker data out of the US. North America was sold as a unit across the board on the back of the region as a whole could be losing steam. With risk being pared, it was only natural that growth and interest rate sensitive currencies would be dumped even more aggressively. Canada happens to be the US’s largest trading partner, with 70% of all exports heading south. Traders are happy to play the risk-aversion card with longer term CAD bulls looking to pick up cheaper loonies.

Investors hate uncertainty and the outcome of the Aussi election to date is well documented. The result of a hung government initially pressurized the AUD, now it’s all about the JPY. The demand for the safe heaven currency has pushed the AUD to test its one month lows. Concerns that global growth is slowing has damped investor appetite for higher-yielding assets. The currency has underperformed against all of its major trading partners and is expected to do so until there is a new Government formed. The commodity rich currency is not isolated, as other growth sensitive currencies are suffering the same fate. Over the past 2-trading sessions the AUD has come under pressure vs. the JPY on speculation that the BOJ are not ready to intervene on behalf of their currency, dampening the demand for riskier assets. Government data has also happened to put a lid on the recent rally. Net result traders are adding to their bets that the RBA will leave interest rates unchanged for the next 12-months. Interest rate differentials play a big part of the currency’s attractiveness. Risk aversion will likely force the bull’s hand, capping rallies with better sellers on upticks (0.8856).

Crude is lower in the O/N session ($72.41 down -69c). Crude prices this morning have printed new 7-week lows, as a rising US jobless claims and a contraction in manufacturing added to concern growth in the worlds biggest oil-consuming nation is slowing. The dollar strengthening vs. the EUR discourages investors to hedge against inflation using dollar-priced assets. Last weeks EIA report continues to provide fodder for the ‘bears’. Oil stockpiles declined -0.8m bpd vs. a market expectation of a -1m barrel print. Inventories fell to +354.2m barrels w/w. Not to be left out, gas stocks dropped -39k barrels to +223.3m. On the flip side, distillate supplies (heating and diesel) climbed +1.07m barrels to +174.2m. With this bearish report successfully penetrating the $75 support opens up the way to test the $72 surroundings. Prices have also gravitated towards these lows on the back of data showing that economic growth in both China and the US is slowing. The demand for oil products also fell, as gas demand hit a 2-month low, while demand for distillates is close to its lowest level in 10-months. The report re-confirms the IEA conclusion earlier this month that ‘oil demand could take a substantial hit should economic growth continue to falter’. It’s no wonder that the market continues to pressurize commodity prices. Speculators remain better sellers on up-ticks in the short term.

Gold could not hold on to its early morning gains, fluctuating from positive to negative territory, as investors eyed equities. With global bourses under pressure, investors are trying to retain cash on mounting evidence of an economic slowdown. In the O/N session investor again supported the various safer heaven assets on pullbacks, avoiding risky assets due to uncertainties in the markets. With a genuine fear for global growth, by default, should boost the demand for the metal as a protector of wealth in the grand scheme of things. Year-to-date the metal has risen +10.9%. With treasury yields expected to remain low for sometime and with the Fed announcement earlier this month of their intentions to buy bonds, could promote a quickening inflation rate, which would promote pushing commodity prices higher. For most of this year, we have witnessed a gold rally on the back of a weaker EUR ($1,221 -$6.70c). Even with the dollar strengthening, the historical negative correlation is only tentatively holding true at the moment. It’s about preserving wealth that is driving metal and keeping commodities in demand on bigger pullbacks.

The Nikkei closed at 8,995 down -122 The DAX index in Europe was at 5,954 down -56; the FTSE (UK) currently is 5,174 down -60. The early call for the open of key US indices is lower. The US 10-year eased 1bp yesterday (2.61%) and another 5bp in the O/N session (2.56%). US Treasuries remain close to last weeks lows as disappointing US data continues to be digested. Investors remain concerned for the strength of the global recovery. If the Fed does expand its balance sheet then the curve should flatten to analysts medium term projection of +200bp 2’s/10’s (+2209bp). The market seems content in owning longer dated product on these deeper pull backs. This week, the US plans to sell $102b of 2’s (+$37b), 5’s (+$36b) and 7-year notes (+$29b), starting with today’s shorter end. Of note, this will be the smallest monthly offering of ‘the’ combination thus far. Longer term buyers continue to control the market.

August 23, 2010

EUR on verge of tipping

Filed under: OANDA News — Tags: , , , , , , , , — admin @ 10:40 am

Global uncertainty continues to dominate this lackluster forex market this morning. At least the soap operas in the Asian-Pacific region have been keeping us awake. Gillard and Abbot have been scrambling, seeking the ‘winning support’, to lead their country and take the currency higher. Japanese officials have show little appetite to halt their currency’s advance, allowing the dollar to suffer. All last week, speculators have been squeezed out of their weak short JPY positions. Picking the Yen’s top has been an expensive exercise. Sellers beware as the dollar vs. the yen’s technical’s head further south. Not many want to accumulate EUR’s at these levels, it feels uncomfortable. The technicals are giving the dollar a leg up, short term at least. The EUR’s highs are getting lower!

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

Forex heatmap

No data again had most traders grasping for straws on Friday. North America will have to follow the unenthusiastic lead of Europe this morning, as we again lack any data of ‘conviction’.
This morning’s Aug. fall in the euro-zone PMI is a sign that the recovery might be starting to slow, although the index points to growth for now. The decline in the headline composite manufacturing and service sector index, from 56.7 to 56.1, was a tad more than expected and nearly reversed all of last month’s gain. The data continues to point to a quarterly GDP growth of about +0.7% vs. the +1.0% gain in the 2nd Q. However, the decline ‘mirrors earlier falls in sentiment in other major economies and suggests that the euro-zone’s economic cycle might simply be lagging behind those elsewhere’. The fall was driven mainly by a decline in the manufacturing index, particularly in Germany.
This will provide traders with some proof to sell the EUR on rallies in the short term.

The USD$ is higher against the EUR -0.07% and lower against GBP +0.38%, CHF +0.11% and JPY +0.21%. The commodity currencies are stronger this morning, CAD +0.06% and AUD +0.47%. The loonie ended a 2nd consecutive week on the losing side, printing its weakest print in over a month on Friday, as fundamental data trumped the potential of any large M&A activity. July inflation data rose less than expected (core +1.6% vs. +1.9%), prompting traders to trim their bets that the BOC will entertain another rate hike next month. BHP Billiton hostile takeover bid for Potash had supported the loonie for most of the week. In fact, technically, the currency should have had a much more disappointing week only for the $40b speculation bet. The loonie is not immune to the weaker data out of the US. North America was sold as a unit across the board on the back of the region as a whole could be losing steam. With risk being pared, it was only natural that growth and interest rate sensitive currencies would be dumped. Canada happens to be the US’s largest trading partner, with 70% of all exports heading south. Sloppy trading and lack of interest because of the summer doldrums has meant that many believed that they had missed the buying boat opportunity that they had hoped to witness on the last ‘risk aversion’ go-around. Traders are happy to play the risk-aversion card. It has to be averaging up their already long CAD positions from M&A activity!

Investors hate uncertainty and the outcome of the Aussi election is well documented. The result of a hung government initially pressurized the AUD in the O/N session. The currency has underperformed against all of its major trading partners and is expected to do so until there is a new Government formed. Last week, there has been quite a bit of AUD/CAD cross selling, front running M&A speculation that has pinned down the currency on rallies. The fear that the global recovery is losing momentum has also somewhat diluted the demand for Australia’s higher-yielding assets. The commodity rich currency is not isolated, as other growth sensitive currencies are suffering the same fate. Over the past 2-trading sessions the AUD has come under pressure vs. the JPY on speculation that the BOJ are not ready to intervene on behalf of their currency, dampening the demand for riskier assets. Government data has also happened to put a lid on the recent rally. Reports, earlier last week, showed that skilled vacancies declined this month and wage growth slowed in the 2nd Q. Net result traders are adding to their bets that the RBA will leave interest rates unchanged for the next 12-months. Interest rate differentials play a big part of the currency’s attractiveness. Risk aversion will likely force the bull’s hand, capping rallies with better sellers on upticks (0.8926).

Crude is higher in the O/N session ($74.01 up +19cc). Crude prices hovers close to its 6-week lows as a rising US jobless claims and a contraction in manufacturing added to concern growth in the worlds biggest oil-consuming nation is slowing. Last weeks EIA report continues to provide fodder for the ‘bears’. Oil stockpiles declined -0.8m bpd vs. a market expectation of a -1m barrel print. Inventories fell to +354.2m barrels w/w. Not to be left out, gas stocks dropped -39k barrels to +223.3m. On the flip side, distillate supplies (heating and diesel) climbed +1.07m barrels to +174.2m. With this bearish report successfully penetrating the $75 support opens up the way to test the $72 surroundings. Prices have also gravitated towards these lows on the back of data showing that economic growth in both China and the US is slowing. The demand for oil products also fell, as gas demand hit a 2-month low, while demand for distillates is close to its lowest level in 10-months. The report re-confirms the IEA conclusion earlier this month that ‘oil demand could take a substantial hit should economic growth continue to falter’. It’s no wonder that the market continues to pressurize commodity prices. Speculators remain better sellers on up-ticks in the short term.

Gold pared some of their recent gains on Friday as investors cashed in to raise capital. With equities under pressure, investors retained cash on mounting evidence of an economic slowdown. In the O/N session investor again supported the various safer heaven assets, avoiding risky assets due to uncertainties in the markets. With a genuine fear for global growth, by default, should boost the demand for the metal as a protector of wealth in the grand scheme of things. Year-to-date the metal has risen +11.3%. With treasury yields expected to remain low for sometime and with the Fed announcement earlier this month of their intentions to buy bonds, could promote a quickening inflation rate, which would promote pushing commodity prices higher. For most of this year, we have witnessed a gold rally on the back of a weaker EUR ($1,230 +$1). Even with the dollar strengthening, the historical negative correlation is not holding true at the moment. It’s about preserving wealth that is driving metal commodity prices big picture.

The Nikkei closed at 9,116 down -63. The DAX index in Europe was at 6,026 up +22; the FTSE (UK) currently is 5,223 up +28. The early call for the open of key US indices is higher. The US 10-year eased 1bp on Friday (2.60%) and is little changed in the O/N session. US Treasuries prices have rallied hard after disappointing US data last week. Investors remain concerned for the strength of the global recovery. If the Fed does expand its balance sheet then the curve should flatten to analysts medium term projection of +200bp 2’s/10’s (+209bp). The market seems content in owning longer dated product on these deeper pull backs. This week, the US plans to sell $102b of 2’s (+$37b), 5’s (+$36b) and 7-year notes (+$29b). This will be the smallest monthly offering of the combination thus far. Longer term buyers control the market.

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