Forex Blog

August 31, 2011

Negative 2nd Quarter Triggers Canadian Recession Fears

Filed under: OANDA News — Tags: , , , , , , , , — admin @ 3:02 pm

Wednesday’s release by Statistics Canada revealed that for the three months ending in June, the Canadian economy contracted by 0.1 percent. With a recession typically defined as two or more consecutive quarters of negative growth, Canada is already half way back to a recession.

Like most of the industrialized world, Canada suffered through a recession triggered by economic events in late 2007 and 2008. For Canadians, the recession lasted from the final quarter of 2008 to the end of the second quarter of 2009. While growth as measured by Gross Domestic Product (GDP) during the recession declined by more than 3 percent, this was still better then most other G7 countries where losses were much more pronounced. Canada also was one of the first to emerge from recession returning to positive growth by the third quarter of 2009.

These realities helped the country garner a reputation as somewhat of a fiscal prodigy. Hoping to continue to build on this legacy, Finance Minister Jim Flaherty downplayed the GDP result noting that Canada’s economic and fiscal fundamentals remain “sound and sustainable”.

“The weakness in Q2 was largely due to external factors — the tsunami and earthquakes in Japan in the second quarter had a very strong effect on the auto sector, particularly auto imports,” he said. “And of course there was some slowness in U.S. growth, so that affected our exports. The domestic situation is much stronger.”

As much as Canadians may wish to believe it, the ability of Canadian monetary policy to manage the economy is often overpowered by a much stronger force – the huge market lurking below the 49th parallel. For most of its existence, Canada has been an exporting nation and remains so to this day. An abundance of resources combined with an educated and skilled workforce situated within sight of the world’s largest consumer market has for the most part, served Canadians positively for well over a century.

However, there is a downside to this arrangement; today, about 75 percent of Canada’s exports find their way to the American market. When times are good and American consumers feel confident regarding their economic future, Canada enjoys a trade surplus that prior to the last recession, averaged more than $70 billion a year. In 2009 and 2010 the surplus declined sharply to $20 billion a year.

Should the U.S. economy tip back into recession and force consumers to cut back even further on their spending, this will certainly impact Canadian export sales. It may even push Canada’s economy to recession. Already the Bank of Canada has noted that Canadian growth is likely to ease in the final two quarters of the year and all talk of an interest rate hike appears to now be a thing of the past.

Negative 2nd Quarter Triggers Canadian Recession Fears

Filed under: OANDA News — Tags: , , , , , , , , — admin @ 3:02 pm

Wednesday’s release by Statistics Canada revealed that for the three months ending in June, the Canadian economy contracted by 0.1 percent. With a recession typically defined as two or more consecutive quarters of negative growth, Canada is already half way back to a recession.

Like most of the industrialized world, Canada suffered through a recession triggered by economic events in late 2007 and 2008. For Canadians, the recession lasted from the final quarter of 2008 to the end of the second quarter of 2009. While growth as measured by Gross Domestic Product (GDP) during the recession declined by more than 3 percent, this was still better then most other G7 countries where losses were much more pronounced. Canada also was one of the first to emerge from recession returning to positive growth by the third quarter of 2009.

These realities helped the country garner a reputation as somewhat of a fiscal prodigy. Hoping to continue to build on this legacy, Finance Minister Jim Flaherty downplayed the GDP result noting that Canada’s economic and fiscal fundamentals remain “sound and sustainable”.

“The weakness in Q2 was largely due to external factors — the tsunami and earthquakes in Japan in the second quarter had a very strong effect on the auto sector, particularly auto imports,” he said. “And of course there was some slowness in U.S. growth, so that affected our exports. The domestic situation is much stronger.”

As much as Canadians may wish to believe it, the ability of Canadian monetary policy to manage the economy is often overpowered by a much stronger force – the huge market lurking below the 49th parallel. For most of its existence, Canada has been an exporting nation and remains so to this day. An abundance of resources combined with an educated and skilled workforce situated within sight of the world’s largest consumer market has for the most part, served Canadians positively for well over a century.

However, there is a downside to this arrangement; today, about 75 percent of Canada’s exports find their way to the American market. When times are good and American consumers feel confident regarding their economic future, Canada enjoys a trade surplus that prior to the last recession, averaged more than $70 billion a year. In 2009 and 2010 the surplus declined sharply to $20 billion a year.

Should the U.S. economy tip back into recession and force consumers to cut back even further on their spending, this will certainly impact Canadian export sales. It may even push Canada’s economy to recession. Already the Bank of Canada has noted that Canadian growth is likely to ease in the final two quarters of the year and all talk of an interest rate hike appears to now be a thing of the past.

June 17, 2011

Forex Week in Review June 12-17

Filed under: OANDA News — Tags: , , , , , , , , , , , , — admin @ 10:59 am

Markets are ending the week on firmer footing. The meeting between Merkel and Sarkozy and the news of a new Greek cabinet is supporting the EUR. The German Chancellor has agreed to compromise and work with the ECB on a debt plan for Greece. Supposedly, they will use a ‘Vienna-style’ voluntary debt rollover as the framework. The Greek PM Papandreou has formed a new cabinet, setting the stage for a confidence vote in parliament next week. Market uncertainty remains. No one knows the depth and scope for ‘the’ rollover agreement. The European finance ministers resume their talks on the second bailout package for Greece this Sunday.

“When you are insolvent you do not solve things with new and larger loans”
-Yanis Varoufakis

Below are some of the highlights of the week:


EUROPE

  • Italian IP was strong in April with a +1.0%, m/m rise, well above the +0.2% expected and pushed the annual growth rate of industrial production to +3.7%, y/y from +3.4%.
  • UK headline inflation was stable at +4.5%, y/y in May. Core inflation subsided to +3.3%, reversing the exceptional spike to +3.7% last month. Transport services, the main cause, fell -5%.
  • S&P’s added to Greece’s woes, cutting its long term sovereign rating three notches to CCC, citing, a ‘significantly higher likelihood of one or more defaults’.
  • UK RICS house prices fell to -28 in May from -21. Analysts note that weak data and softer inflation continue to argue against a hawkish turn in the BoE policy stance.
  • Swedish inflation stayed stable at +3.3%, y/y in May, while core inflation moderated a touch to +1.7%, y/y from +1.8%. Market believes its in line with Riksbank’s expectations and that they will continue to raise interest rates.
  • Tuesday, EU finance ministers ended their first meeting with little evidence of progress in agreeing on a framework for private sector involvement in the Greek rescue. Meet again this Sunday.
  • Euro-zone IP grew +0.2%, m/m vs. expectations for a -0.2% decline. March was revised upward to flat from the -0.2% m/m fall. Strength was driven by Italy, Finland and Luxembourg, offsetting the -0.6% m/m fall in Germany and the -0.3% fall in France.
  • UK labor report disappointed with a spike in jobless claims to almost +20k, above the +6k consensus. Weekly earnings were weak at +1.8%, y/y, down from +2.3%. No reason for the BoE to turn less dovish.
  • SNB kept rates on hold, maintaining a relatively dovish tone in the policy statement. Growth forecast unchanged at +2%, y/y. Inflation forecast for 2013 was revised lower to +1.7%, y/y, from +2.0%. The franc strength is the reason behind lower inflation forecasts from 2012.
  • UK retail sales ex-autos fell -1.6%, m/m, in May with the year-on-year growth rate now reduced to 0%. The weak wages and money growth reported earlier are likely to pull down inflation.
  • Euro-zone final CPI for May was unrevised from the flash estimate of +2.7%,y/y. Core inflation also moderated slightly to +1.5%, y/y, from +1.6%. Lower energy inflation was the main reason behind the softer headline.

Americas

  • US Retail sales (-0.2%) fell last month for the first time in eleven-months as receipts at auto dealerships dropped sharply, but the decline was less than expected (-0.6%), and provided investors some optimism of a pickup in economic activity in the second half of the year.
  • US CPI surprised to the upside with a +0.2% rise in the headline and a more worrying +0.3% rise in the core (ex-food and energy). This is the strongest monthly rise in nearly three-years, making it more difficult for helicopter Ben to implement QE3. Analysts’ have noted that the y/y core-CPI has accelerated to +1.5% from +1.3%.
  • An ugly Empire State manufacturing print (-7.79) can be added to the long list of softer US data. This is the first negative headline in eight-months and a complete surprise to the market who had expected the index to edge higher to 13.5.
  • US TIC data showed that net foreign purchases of long term securities rose from +$24b to +$30.6b last month. China has added $7.6b to its net-treasury holdings.
  • CAD manufacturers saw sales slip -1.3% in April, reversing much of the previous month’s gains as the Japan earthquake cut off supplies to the auto industry.
  • 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.
  • US 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.
  • US May house starts rose + 3.5% to +560k. Giving a better performance was US May permits, rising +8.7% to +612k.
  • US current account deficit rose in the 1st Q (-$119b vs. -$112b), dragged higher by rising imports. Most of the increase in imports came from gains in industrial supplies such as petroleum,
  • CAD Wholesale sales edged down -0.1% to $46.8b in April, following a +0.3% gain in March.
  • Confidence among US consumers dropped more than forecasted in June (71.8 vs. 74.2) as households contended with higher prices that are eating into incomes amid slowing job growth.

ASIA

  • NZD suffered more earthquakes in Christchurch, causing some damage to roads and structures in residential areas of the city.
  • China reported that new loans totaled CNY551b in May, much lower than the consensus forecast for CNY650b and down from the CNY739.6b in April. Loans are 12% lower ytd than last year and 39% lower than in 2009. This would suggest that Chinese policy tightening is beginning to take hold.
  • Growth in Chinese industrial output (+13.3%) and fixed asset investment (+25.8%) remains robust and above market expectations, while retail sales (+16.9%) was modestly below expectations.
  • Chinese CPI inflation was at a three-year high of +5.5%, y/y in May. The rise in services inflation continues to offset the slowing of momentum in food inflation
  • PBoC hiked the commercial banks’ reserve requirement ratio (RRR) +50bp, that is a cumulative +550bp since the cycle began. Rate is now at +21.5%.
  • BoJ announced the creation of a small new lending facility, adding 500b yen to its existing 3-trillion yen facility that provides loans to banks at +0.1% for on-lending.
  • RBA Governor Stevens reiterated a bias to raise the policy rate in the medium term and acknowledged that the slightly restrictive monetary policy and fiscal policy are currently constraining the economy. He reiterated that inflation is still more likely to rise than fall despite the gains in the AUD and that further rates rises are need to curb price increases.

Forex Week in Review June 12-17

Filed under: OANDA News — Tags: , , , , , , , , , , , , — admin @ 10:59 am

Markets are ending the week on firmer footing. The meeting between Merkel and Sarkozy and the news of a new Greek cabinet is supporting the EUR. The German Chancellor has agreed to compromise and work with the ECB on a debt plan for Greece. Supposedly, they will use a ‘Vienna-style’ voluntary debt rollover as the framework. The Greek PM Papandreou has formed a new cabinet, setting the stage for a confidence vote in parliament next week. Market uncertainty remains. No one knows the depth and scope for ‘the’ rollover agreement. The European finance ministers resume their talks on the second bailout package for Greece this Sunday.

“When you are insolvent you do not solve things with new and larger loans”
-Yanis Varoufakis

Below are some of the highlights of the week:


EUROPE

  • Italian IP was strong in April with a +1.0%, m/m rise, well above the +0.2% expected and pushed the annual growth rate of industrial production to +3.7%, y/y from +3.4%.
  • UK headline inflation was stable at +4.5%, y/y in May. Core inflation subsided to +3.3%, reversing the exceptional spike to +3.7% last month. Transport services, the main cause, fell -5%.
  • S&P’s added to Greece’s woes, cutting its long term sovereign rating three notches to CCC, citing, a ‘significantly higher likelihood of one or more defaults’.
  • UK RICS house prices fell to -28 in May from -21. Analysts note that weak data and softer inflation continue to argue against a hawkish turn in the BoE policy stance.
  • Swedish inflation stayed stable at +3.3%, y/y in May, while core inflation moderated a touch to +1.7%, y/y from +1.8%. Market believes its in line with Riksbank’s expectations and that they will continue to raise interest rates.
  • Tuesday, EU finance ministers ended their first meeting with little evidence of progress in agreeing on a framework for private sector involvement in the Greek rescue. Meet again this Sunday.
  • Euro-zone IP grew +0.2%, m/m vs. expectations for a -0.2% decline. March was revised upward to flat from the -0.2% m/m fall. Strength was driven by Italy, Finland and Luxembourg, offsetting the -0.6% m/m fall in Germany and the -0.3% fall in France.
  • UK labor report disappointed with a spike in jobless claims to almost +20k, above the +6k consensus. Weekly earnings were weak at +1.8%, y/y, down from +2.3%. No reason for the BoE to turn less dovish.
  • SNB kept rates on hold, maintaining a relatively dovish tone in the policy statement. Growth forecast unchanged at +2%, y/y. Inflation forecast for 2013 was revised lower to +1.7%, y/y, from +2.0%. The franc strength is the reason behind lower inflation forecasts from 2012.
  • UK retail sales ex-autos fell -1.6%, m/m, in May with the year-on-year growth rate now reduced to 0%. The weak wages and money growth reported earlier are likely to pull down inflation.
  • Euro-zone final CPI for May was unrevised from the flash estimate of +2.7%,y/y. Core inflation also moderated slightly to +1.5%, y/y, from +1.6%. Lower energy inflation was the main reason behind the softer headline.

Americas

  • US Retail sales (-0.2%) fell last month for the first time in eleven-months as receipts at auto dealerships dropped sharply, but the decline was less than expected (-0.6%), and provided investors some optimism of a pickup in economic activity in the second half of the year.
  • US CPI surprised to the upside with a +0.2% rise in the headline and a more worrying +0.3% rise in the core (ex-food and energy). This is the strongest monthly rise in nearly three-years, making it more difficult for helicopter Ben to implement QE3. Analysts’ have noted that the y/y core-CPI has accelerated to +1.5% from +1.3%.
  • An ugly Empire State manufacturing print (-7.79) can be added to the long list of softer US data. This is the first negative headline in eight-months and a complete surprise to the market who had expected the index to edge higher to 13.5.
  • US TIC data showed that net foreign purchases of long term securities rose from +$24b to +$30.6b last month. China has added $7.6b to its net-treasury holdings.
  • CAD manufacturers saw sales slip -1.3% in April, reversing much of the previous month’s gains as the Japan earthquake cut off supplies to the auto industry.
  • 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.
  • US 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.
  • US May house starts rose + 3.5% to +560k. Giving a better performance was US May permits, rising +8.7% to +612k.
  • US current account deficit rose in the 1st Q (-$119b vs. -$112b), dragged higher by rising imports. Most of the increase in imports came from gains in industrial supplies such as petroleum,
  • CAD Wholesale sales edged down -0.1% to $46.8b in April, following a +0.3% gain in March.
  • Confidence among US consumers dropped more than forecasted in June (71.8 vs. 74.2) as households contended with higher prices that are eating into incomes amid slowing job growth.

ASIA

  • NZD suffered more earthquakes in Christchurch, causing some damage to roads and structures in residential areas of the city.
  • China reported that new loans totaled CNY551b in May, much lower than the consensus forecast for CNY650b and down from the CNY739.6b in April. Loans are 12% lower ytd than last year and 39% lower than in 2009. This would suggest that Chinese policy tightening is beginning to take hold.
  • Growth in Chinese industrial output (+13.3%) and fixed asset investment (+25.8%) remains robust and above market expectations, while retail sales (+16.9%) was modestly below expectations.
  • Chinese CPI inflation was at a three-year high of +5.5%, y/y in May. The rise in services inflation continues to offset the slowing of momentum in food inflation
  • PBoC hiked the commercial banks’ reserve requirement ratio (RRR) +50bp, that is a cumulative +550bp since the cycle began. Rate is now at +21.5%.
  • BoJ announced the creation of a small new lending facility, adding 500b yen to its existing 3-trillion yen facility that provides loans to banks at +0.1% for on-lending.
  • RBA Governor Stevens reiterated a bias to raise the policy rate in the medium term and acknowledged that the slightly restrictive monetary policy and fiscal policy are currently constraining the economy. He reiterated that inflation is still more likely to rise than fall despite the gains in the AUD and that further rates rises are need to curb price increases.

June 16, 2011

EURO stampede persists

Filed under: OANDA News — Tags: , , , , , , , , , , , , , , — admin @ 4:21 am

This is carnage and the mass liquidation of the Euro-unit is breaking all types of technical levels. The market is increasingly focused on the contagion risk Greece poses to European financials.

Major rating agencies are all out with new reports and downgrades tied to Greece’s woes and the lack of action taken by European leaders to hammer out a new financial plan. When will policy makes realize these peripheries are penniless? Any bailout received is just being recycled back to the ECB/EU/IMF.Restructuring of Greece’s debt looks increasingly probable as Athens lacks the political will to carry out wide spread privatization of state assets and budget tightening.

Two things to be weary of today, first, market is pricing in a better than expected Philly Fed survey. If we follow the ugly Empire of yesterday more investors will run for the exits. Second, watch for March 18 G7 coordinated intervention levels in EUR/JPY. Japan happened to make some noise this week that they will act to limit large moves in the yen.

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’ session.

Forex heatmap

In the middle of watching Greek protesters running amuck the market had to digest some very opposing and ugly US data. May CPI surprised to the upside with a +0.2% rise in the headline and a more worrying +0.3% rise in the core (ex-food and energy). This is the strongest monthly rise in nearly three-years, making it more difficult for helicopter Ben to implement QE3. Analysts’ have noted that the y/y core-CPI has accelerated to +1.5% from +1.3%. At this level it’s still within striking distance of the Fed’s mandate, however, the three-month annualized pace is accelerating, currently at +2.5% and up from +0.7% six-months ago and probably running too firm for the Fed.

The main sectors that lifted the core are the usual suspects, subjected to seasonal factors, apparel (+1.2%), lodging (+2.9%) and vehicles (+1%). On the downside, fall in other goods and services (-0.2%) and surprisingly energy prices (-2%), again seasonally adjusted. There is no room for complacency or we will be yelling stagflation again.

An ugly Empire State manufacturing print (-7.79) can be added to the long list of softer US data that makes it difficult to want to own risk. This is the first negative headline in eight-months and a complete surprise to the market who had expected the index to edge higher to 13.5. Digging deeper, four indices slipped into negative territory (new-orders, average employee workweek, delivery time and shipments), four other decelerated (inventories, prices paid, received and no. of employees), while unfilled orders fell to zero. More significantly, if we superimposed this as an ISM-like weighting then we have entered contractionary territory.

US TIC data showed that net foreign purchases of long term securities rose from $24b to $30.6b last month. The market seems to take very little notice of this release nowadays. It worth noting, China has added $7.6b to its net-treasury holdings.

The dollar is higher against the EUR -0.44%, GBP -0.45% and lower against CHF +0.15% and JPY +0.39%. The commodity currencies are weaker this morning, CAD -0.33% and AUD -0.49%.

The loonie has slipped against its US counterpart, shredding all technical levels, following weaker Canadian manufacturing data, a higher-than-expected rise in US core-inflation and a Euro-debt crisis driving investors to owning the dollar for surety reasons. Canadian manufacturers saw sales slip -1.3% in April, as expected, reversing much of the previous month’s gains as the Japan earthquake cut off supplies to the auto industry.

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. Investors remain better buyers of Canadian dollars on US rallies (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 (1.0514).

Crude is higher in the O/N session ($95.39 +0.58c). Oil prices have found it difficult to trade above that psychological $100 a barrel. Prices are not been influenced by inventory data, but, rather by the negative economic news. With New York 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 the 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 the fall in inventories.

Gold is trying hard to rebound after posting its biggest one-day loss in a month earlier this week on growing worries about another global economic downturn. Previously, investors sold 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%.

The market had expected gold to rally this week on the back of the dollar losing some of its bid momentum. That’s not happening. 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. Fact, investors are boosting their demand for precious metals as a protection of wealth.

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 deeper pullbacks ($1,526 +0.10c).

The Nikkei closed at 9,411 down-163. The DAX index in Europe was at 7,079 down-36; the FTSE (UK) currently is 5,700 down-42. The early call for the open of key US indices is higher. The US 10-year eased 13bp yesterday (3.01%) and is little changed in the O/N session.

Up one day down the next, that is the US yield curve. Yield’s fell from their monthly highs after some ugly US data yesterday, where Empire manufacturing unexpectedly contracted. European disagreement is threatening to delay the next rescue payment for Greece. Bonds did try to pare some of their advance after a higher US core-CPI print. However, risk aversion trading strategies was the order of the day.

Also supporting the bond market was China’s holding of treasuries advanced for the first time in six-months. 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. 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. However, yesterday’s inflation data does provide a problem for policy makers in that regard.

With the Fed expected to remain on hold for a considerable time is creating a new paradigm of longer term lower interest rates. Dealers are better buyers on these pull backs.

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May 20, 2011

Forex Week in Review May 15-20

Filed under: OANDA News — Tags: , , , , , , , , , , , , , , — admin @ 11:48 am

Developments with respect to Greece remain a source of stress for the markets. How will Greece find the €27bn it needs to fill its 2012 ‘funding gap’? Restructure, reprofiling? The market is trying to shape word definitions rather that reshape a quicker market solution for Greece. Before you know it we will have created a Lehman style contagion affair. Today’s Euro pullback appears to have been prompted by pre-weekend nervousness on peripheral finance issues and reports of heavy liquidation in Greek bonds that have coincided with the Spanish/Bund spread blowing out. It’s your typical ‘buy the rumor sell the fact’. It’s easy to create a lot of noise when liquidity is non existent on a Friday. Below are some of the highlights of the week:


EUROPE

  • IMF names John Lipsky as interim Managing Director
  • EUR headline inflation was unrevised at +2.8%, y/y, last month, but core-inflation surprised to the upside to +1.6%, y/y. Together with strong GDP numbers last week this clearly argues for further ECB tightening.
  • Rightmove data showed UK property asking prices rising +1.3% this month, to the highest level since June 2008.
  • Eurogroup chair Juncker conceded that Greek debt is currently at unsustainable levels and said that Europe would consider ‘reprofiling’ of Greek maturities, though only in the context of more spending cuts and asset sales from the Greek government.
  • UK inflation, both headline and core, surprised to the upside last month. Headline inflation accelerated to +4.5%, y/y and core CPI jumped to +3.7% from +3.2%, y/y, in March, a new record high. Much of the spike was caused by airfare prices, up +36%, y/y.
  • The letter from BoE Governor King to the UK Chancellor of the Exchequer again downplayed the above-target inflation. King continued to expect, in line with the inflation report, CPI to return back to target with the Bank rate moving in line with market interest rates.
  • German ZEW economic sentiment was on the weak side, printing at 3.1 in May, down from 7.6 in April and continues the downward trend since February. The ZEW current situation assessment increased to 91.5 from 87.1.
  • The BoE May minutes showed no change in the voting pattern despite some expectations of one less member supporting a hike. As at the last meeting, Weale and Dale voted for a +25bps hike and Sentance voted for a +50bps hike.
  • UK jobless claims printed higher than expected at +12.4k vs. the flat consensus forecasted. The claimant count unemployment increased slightly to +4.6%, but the ILO unemployment was down to +7.7% from +7.8%.
  • Strauss-Kahn resigns from IMF, France’s Lagarde possible successor.
  • FT Deutschland reported that the ECB might cease to accept Greek sovereign debt if maturities were extended. Board-member Stark was quoted making similar comments at a public forum in Athens.
  • UK retail sales surprised with a strong +1.2%, m/m read ex-gas, above the +0.8% forecast. It was the strongest increase in over a year,
  • Spain-Germany 10-year spread exceeds April wides.

Americas

  • Russia’s central bank (CBR) reported in its annual report that its previously disclosed increase in allocation to the CAD in 2010 came at the expense of the GBP, rather than lowering allocation to EUR or USD.
  • Empire State manufacturing index extended its gains for a sixth-consecutive month (11.9 vs. 20.7), but at its slowest pace this year.
  • Despite a weaker than expected TIC’s data (+24b vs. +57.7b), overseas demand remains relatively strong. China was seen as a net seller of US treasuries in March.
  • Governor Carney stated that recent Canadian economic data continues to support the BoC’s near term outlook, noting that employment and inflation numbers were modestly stronger, while auto-sales and retail spending were a touch weaker. The Bank next meets on May 31st to determine their interest rate policy.
  • US home construction fell unexpectedly in April, an indication that the troubled housing sector will remain a drag on ‘the’ recovery. Construction of homes plummeted -10.6% from March to a seasonally adjusted annual rate of +523k.
  • US building permits came in weaker, falling to +551k from a downward revision of +574k in March.
  • US manufacturing production fell for the first time in ten-months (+0.0%) last month, as Japans natural disaster disrupted the auto-industry. Industries used +76.9% of their capacity vs. a +77% reading in March. Manufacturing capacity utilization dropped -0.4% to +74.4%, ex-autos, then factory production gained +0.2% in April.
  • In the FOMC minutes there was little different to what Bernanke commented in his post press appearance. 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’.
  • Canadian wholesale trade was weighed down by lower import prices (+0.1% vs. +1.2%) which provided for a disappointing report.
  • US jobless claims fell for a second consecutive week (-29k to +409k), a tentative sign that the downward trend may have recommenced. The decline is being attributed to the ‘shake out of weather related problems, and supply shortages in Japan
  • US home resale’s unexpectedly declined last month on widespread weakness (+5.05m vs. +5.20m), despite a downward revision to the previous month and the second contraction in three-months. What is also disturbing is that the month’s supply moved back above 9 (highest print in six months).
  • For a second consecutive month the Philly Fed manufacturing index plummeted, falling from +18.5 to +3.9 in May.
  • Canadian retail sales disappointed -0.1% and Canadian inflation numbers came in softer with CPI +0.3% vs. +1.1%

ASIA

  • Japan core-machinery orders rose +2.9% in March, well above consensus expectations for an earthquake-induced 10% decline. This marks the third consecutive month of increased three-month momentum, but seems unlikely to fully reflect the impact from the mid-March earthquake.
  • Australia reported that the number of home loans contracted -1.5%, m/m, in March, vs. expectation of a +2.0% rebound, to below +45k (weakest number in ten years). However, investment lending rose +2.1%, almost offsetting the -2.3%, m/m, contraction in February.
  • RBA May minutes said that an appreciating AUD was helping to contain inflation pressures. However, the minutes also noted that higher interest rates may be required at some point if inflation was to remain consistent with medium-term goals.
  • Australia reported weaker than expected wage cost growth in Q1 of +0.8%, q/q, vs. +1.1% expected.
  • New Zealand input and output PPI rose to +2.2% and +1.7%, q/q, respectively. Consumer confidence rose to 103.2 from 101.4 in March, arresting the slide in confidence year-to-date.
  • Japan Q1 GDP fell by -0.9%, q/q, weaker than the -0.5% consensus. The decline was even larger when taking into account that Q4 GDP growth was revised down to -0.8% from -0.3%, q/q, previously. This would suggest an increasing divergence in BoJ and other G10 monetary policy.
  • New Zealand reported a larger budget surplus projection than the previous forecast easing concerns of sovereign rating downgrades.
  • BoJ left their monetary policy and its asset purchase plan unchanged. Stable BoJ policy leaves the yen vulnerable as US front-end rates rise.

WEEK AHEAD

  • Heads up for inflation and expectation reports from New Zealand and the UK
  • We get revised and preliminary GDP releases from the UK and US
  • Witness borrowing and expenditure data from the UK and Australia
  • Economic and business indicators from the German ifo and KOF in Switzerland
  • The US will deliver the volatile New Home Sales at the beginning of the week and we shut out the week with US Pending Home Sales

February 1, 2011

What’s EUR’s relative value?

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

Global PMI surveys remain firmly in expansionary territory, with evidence of out performance. The market all week had been looking for an excuse to own Cable, and finally this morning we get it. UK’s manufacturing PMI aggressively jumped four ticks to 62. The EUR bears have been given the run around over the last 24-hours with month-end requirements, fixes, geopolitical risk premium been priced out and a market record short. Euro-zone inflation data has heightened speculation that ECB rates would soon be increased, all this is counterbalancing Egypt’s political instability. Forget the noise and keep your eye on ‘relative value’. At 1.3800 the EUR looks toppy, at 1.3500 it has value. In between the market is second guessing themselves.

The US$ is mixed the O/N trading session. Currently, it is higher against 8 of the 16 most actively traded currencies in a ‘whippy’ O/N session.

Forex heatmap

Stronger US data surprisingly yesterday has added to the dollars woes. December consumer spending was double that of the previous month (+0.7%) and aggressively trumped all forecasts (+0.4%). Digging deeper, most of the spending gains was focused on goods, led by nondurables (+1.5%) and the discretionary spending category, durables (+0.7%) reversing the previous months decline (+0.4%). Even the service spending happened to advance (+0.4%) for a second consecutive month. Most of the rise in spending was due to higher volumes and analysts note that ‘a little more than half of the headline rise will flow through to GDP growth’.  It’s worth noting that real spending grew +0.4%, month over month. Income did not provide much of a surprise, growing at its forecasted pace of +0.4%. Digging deeper, private wages and salaries were up +0.3%, led by the services sector. Government transfers moderated, expanding +0.2%, with the unemployment insurance benefits down in three of the last four months. In real terms, disposable income grew a modest +0.1%. Finally, the Fed’s preferred inflation gauge, core-PCE deflator (spending ex-food and energy) was flat last month. It seems that little of the commodity shock is being passed through to consumer prices. The Fed’s long-term goal is for inflation of +1.6. The lack of price pressures is allowing the helicopter Ben to maintain his current QE2 timetable.

Yesterday’s US PMI index accelerated at its fastest pace in 22-years (68.8 vs. 65.5), proof that the US economy seems to be building on its recent momentum. Orders (75.7), production (73.7) and employment (64.1) increased from a pickup in consumer purchases and stronger export markets from the emerging economies. The release supports other recent surveys, Empire and the Philly Fed. The strength of the data may be inflated by seasonal adjustments and a rebound in the auto sector, but the message remains upbeat.

The USD$ is lower against the EUR +0.51%, GBP +0.65%, CHF +0.01% and JPY +0.47%. The commodity currencies are mixed this morning, CAD -0.01% and AUD +0.02%. Canada’s November GDP print yesterday showed that the economy expanded (+0.4%), doubling the previous months gain. The strong details point to solid consumer spending and an appetite for commodities, partly offset by a decline in manufacturing. While the monthly gain was better than expected, it still leaves a weak quarter intact.  This months BOC’s forecast in its MPR expected +2.3% annualized growth for the fourth quarter. Consensus believes that it may be too optimistic even with a decent December monthly print. To achieve that target a relatively strong monthly GDP growth of about +0.5% would be required. While a stronger US economy will help Canadian industry in the near-term, the over valued Canadian dollar, waning government capital spending, a cooling housing market, and moderating retail sales will eventually combine to limit overall GDP growth this year. They are all stellar reasons for Carneys vocal concerns to be reiterated last weekend. He indicated that ‘persistent strength in the currency is a threat to economic expansion’. His views happened to push the currency to print three-month lows. Month end dollar requirements and weaker long CAD positions are pressurizing the loonie bulls. Investors are wary of the loonie weakening further and remain better buyers on pullbacks (0.9989).

AUD through parity is a surprise with a backdrop of a flood disaster, Chinese rate hikes and a toppy equity market. On top of this, last nights RBA rhetoric was dovish or hawkish, something with a twist, depending on what way you want to look at it. Governor Stevens left the overnight cash rate target at 4.75% and said that policy makers will ‘look through’ the near-term affect growth and prices of flooding across the nation’s east coast will have. Stevens stated that ‘flood reconstruction doesn’t pose much inflation risk and called the global economic outlook strong for this year. He went on to say that ‘net additional demand from rebuilding is unlikely to have a major affect on the medium-term outlook for inflation’. The RBA ‘expects that inflation over the year ahead will continue to be consistent with its 2% to 3% target range’. It’s difficult to sell AUD on the back of the statement as it removes any chance whatsoever of a rate cut. The market looks for better levels to own the currency as investors look towards the ‘carry trade’ (1.055).

Crude is lower in the O/N session ($91.84 -35c). Crude until this morning had been maintaining its upward trajectory as consumers and investors worried that Egyptian unrest could spill over into neighboring oil-producing countries in the region. Traders continue to buy dips on fears that things could escalate further in the Middle East and this despite an OPEC representative stating that they do not expect the Suez Canal to be affected. Again, temporarily at least, fear trumps the fundamentals. Last week’s EIA report showed that US inventories ballooned. Stocks climbed +4.84m barrels to +340.6m vs. expectations of a +1.2m barrels rise. Not to be out done, gas supplies increased +2.4m barrels, against expectations of a +2.1m. The only negative coming from distillate supplies (heating oil and diesel) decreasing-100k, less than the expected-300k. Refinery’s in puts averaged +14.1m barrels per day, which was-212k barrels below the previous week’s average as refineries operated at +81.8% capacities. Weekly imports averaged +9.4m barrels per day, up by +386k barrels. Over the last four-weeks, imports have averaged +8.9m barrels, +517k barrels per day above the same four-week period last year. Despite OPEC believing that supply and demand is ‘in balance’, the concern with Egypt will keep upward pressure on the commodity? The country is a significant oil producer and a rapidly growing natural-gas producer. It is also an important transit corridor for world oil markets with its proximity to the Suez Canal. According to analysts, approximately +6% of global daily oil production runs through the region. If longer term disruption continued, expect rerouting of supplies around the horn of Africa. Fundamentally, there is far more oil in storage, more fuel capacity and more idle oil wells to limit a stronger market rally in the medium term. However, the fear of a reduction of supply will always exaggerate the commodity’s price.

With the lack of further escalation of unrest in Egypt, the market is pricing out some of the risk premium, which is eroding the yellow metals safe-heaven appeal. For most of this month gold has suffered, down -6.1%, on lackluster physical buying as the commodities appeal deteriorated and on hedge fund liquidation triggering vulnerable support levels. Before tensions in the Middle East, investors had been shying away from the commodity and sough ‘price appreciation’ in equities. Fundamentally, the bulls are trapped in this month’s price action with the trend turning rather badly against them. Expect the weak longs to sell on these up ticks. Natural physical buying has been less than modest with the commodity off to its worst start in 14-years. Has the gold peaked or is simply a short-term correction? Gold prices have depreciated just over $100 from its December highs. With the Euro-zone being able to sell their bonds, there’s less of a flight to quality, which could cause this asset class to be staring at a sub $1,300 a once soon. The market remains a seller on rallies despite what’s happening in the Middle-East ($1,337 +$2.80).

The Nikkei closed at 10,274 up+37. The DAX index in Europe was at 7,125 up+48; the FTSE (UK) currently is 5,880 up+25. The early call for the open of key US indices is higher. The US 10-year backed up 5bp yesterday (3.40%) and is little changed in the O/N session. Stronger US consumer spending and income data provides proof that the US economy is supporting its strong momentum and pressurizing treasury prices despite the ongoing Fed’s buyback program. The market is also unwinding the flight-to-quality trade, as investors downgrade, temporarily at least, the risk coming from Egypt. US longer yields closed out yesterday, rising for a fifth consecutive month, solidifying its longest losing streak in 12-years. The Fed has pledged to keep rates at a record low and continue its asset buyback program, supporting speculation that any additional rise in yields will be gradual.

September 1, 2010

Lack of Confidence in the FED would never happen almost never

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

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

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

Forex heatmap

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

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

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

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

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

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

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

August 20, 2010

EUR bulls have their tails between their legs

Filed under: OANDA News — Tags: , , , , , , , , , , — admin @ 10:27 am

People are still inclined to shun riskier assets as the faithful dollar rules the roost this morning. Speculation that next week’s data will add to the evidence that the world’s economic recovery is losing momentum has the JPY buyers testing the BOJ’s resolve. The market is calculating a 51% chance that the BOJ will intervene soon, the first time in 6-years. If the BOJ happens to eases monetary policy further, selling of the yen, not only against the dollar, but also against broader cross currencies will happen. How much of an impact will they have? The SNB is under water on their ‘intervention’ policy position, to the tune of $500 dollars per capita (7.6m), a whopping -$3.8b forex loss and climbing everyday. The dollars momentum, mixed with a little illiquidity and spiced with the summer doldrums should continue to lean on riskier positions today.

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 ‘sloppy’ trading range.

Forex heatmap

US data yesterday delivered the one two-combo and hit us with more bad news. Weekly claims continue on the downward trend, striking the psychological +500k, w/w mark. This is the third consecutive weekly rise and is now pointing to an Aug. NFP disappointment. Analysts are wary of some distortions occurring, like various benefit extensions maybe bringing people back to the front of the line after exhausting their earlier benefits or the unusual timing of the auto sector historical shutdowns. However, that been said deteriorating readings for ‘consumption growth, trade and new manufacturing order book’ are weaker fundamentals that are indeed trumping any distortions. Digging deeper, the weekly report shows that claims are up +12k, w/w. That has pushed the 4-week moving average higher to +482.5k, the largest print in 9-months. Continuing claims softened to +4.48m and below market consensus. Its moving average remains somewhat static at +4.53m, the lowest in 18-months. Brace yourself for Sept 3rd.

If that was not a downer, then the Philly Fed was able to do that for you. The report has taken a turn for the worst and signals slower growth ahead (-7.7 vs. +7). Technically, manufacturing activity in the district has re-entered ‘contraction territory’. It is the first time in over a year and is expected to be a drag on the GDP 3rd Q growth. Digging deeper, some of the sub-categories appeared as an eyesore. The new-orders continued to contract, for a 2nd consecutive month and the first time in over a year. It’s difficult to superimpose this specific district scenario nationally. Not helping was the pipeline strengths evaporating, shipments retreating and delivery times falling (signaling a quickening pace of getting product out the door as new orders and the order backlog wane). More firms reported a decline in employment and even more eye-popping was the ‘massive’ drop in the average employee workweek index to -17.1 from +1.7. Supporting a deflation environment was the reported decline in manufactured goods prices and input goods they use in production. The six-month forward expectations signaled slowing activity (lowest reading in 17-months). Despite the new orders advancing (+8 points), it still is only half of what we were witnessing at the beginning of the year. Shipments remained unchanged, and unfilled orders re-entered positive growth territory. The future employment index fell -14 points and has now entered negative territory.

The USD$ is higher against the EUR -0.51%, GBP -0.28% and JPY -0.02% and lower against the CHF +0.07%. The commodity currencies are weaker this morning, CAD -0.16% and AUD -0.26%. Yesterday, Canadian wholesale trade disappointed (-0.3% vs. +0.4%), while the leading indicator posted another gain in support of continued forecast growth in their economy, but came in less than expected (+0.4% vs. +0.7%). Despite the trade number expected to be a drag on GDP growth, market expects a healthy gain for the growth report on the back of the earlier manufacturing report posting a more important gain than yesterday’s mild drop. The loonie was 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. Dollar rallies are been sold and dealers are content to keep the currency in the limelight until they get the green light to ‘execute’ any such M&A deal. However, the Canadian economy cannot be immune to a US slowdown. It happens to be its 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 have missed the buying boat opportunity that they had hoped to witness on the last ‘risk aversion’ go-around. BHP Billiton hostile bid takeover of Potash in Canada should keep the loonie firm, no debt involved. Traders are happy to play the risk-aversion card. It has to be averaging up their already long CAD positions from above!

There has been quite a bit of AUD/CAD cross selling, front running M&A speculation that has pinned down the AUD for periods of this week. However, the currency is heading for a second weekly loss on speculation that the global recovery is losing momentum. This has 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. Demand for the currency is also limited on concern for this weekend’s election will result in a hung parliament. 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 this 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 differential continue to play a big part of the currency’s attractiveness. No currency is immune to this ‘questionable growth’ environment. Risk aversion will likely force the bull’s hand for the remainder of today, capping rallies, as equities find it difficult to maintain traction at the moment (0.8885). Better sellers on upticks heading into next weeks data.

Crude is lower in the O/N session ($74.28 down -15c). Crude prices managed to print new monthly lows this morning after a rising US claims report and a contracting Philly Fed index boosted market concerns that the economic rebound is slowing. Even this weeks EIA report is providing fodder for the ‘bears’, aided by some ‘dubious’ hefty predictions for increased supplies in various categories for the week. 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 prices are little changed in the O/N session, they happened to print a two month high yesterday after the weaker US data releases. Again weaker global equities have boosted investor support for various safer heaven assets, as investors try to avoid risky assets due to uncertainties in the markets. With a genuine fear for global growth, by default, is boosting the demand for the metal as a protector of wealth in the grand scheme of things. Year-to-date the metal has risen +11.8%. With treasury yields expected to remain low for sometime and with the Fed announcement last week 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 ($1,232 -$3). 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 9,179 down -183. The DAX index in Europe was at 6,044 down -31; the FTSE (UK) currently is 5,198 down -13. The early call for the open of key US indices is lower. The US 10-year eased 8bp yesterday (2.56%) and is little changed in the O/N session. US Treasuries prices have rallied hard after a disappointing weekly US claims report and a Philly Fed print now back in contraction. They have managed to claw back the previous two trading session’s losses as equities come under renewed pressure. 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. Next 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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