Forex Blog

January 4, 2012

Other Dollars trade in a Vacuum

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

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

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

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


Loonie

October 27, 2011

EURO Clarity is Market Savior

Filed under: OANDA News — Tags: , , , , , , , , , , , , , — admin @ 4:32 am

The markets this morning have rallied on European policy “clarity”. The EU Summit seems to have fulfilled market’s expectations. Euro leaders providing clarity on Greek PSI, guidance on how the EFSF will be leveraged, and bank recapitalization plans has given confidence to investors to apply risk again. With the IMF on board, potential Chinese investing in EFSF bonds, there is no telling how much of a squeeze this market is capable of applying.

With market positions fairly short the EURO heading into the summit, ‘clarity’ has investors covering some of those positions, supporting the Euro in the near term and reducing “the extreme tail risk of contagion”. Will US Q3 GDP numbers provide the killer blow to medium term risk aversion trading strategies? If so, traditional risk and growth sensitive currencies should be one of the first to outperform.

Forex heatmap

US data yesterday was always going to have little bearing on Capital Markets direction. That would be left up to the Euro delegates, who were attending their second emergency summit in a week.

Septembers US durable headline (-0.8%) was in line with market expectations (-0.9%) after an unrevised -0.1% decline in August. Digging deeper and ex-transportation, the data shows surprising strength, with a rise of +1.7%, keeping the trend positive after a -0.4% decline in the previous month. Analysts note that expanding economies overseas and a-14% drop in the dollar in 14-months is propelling US exports to record levels. Coupled with Government incentives, is giving an added boost to companies’ bottom line. Durables, ex-transportation is up in four of the five last months. The gains appear to be broad based. Non-defense capital orders ex-aircraft (good indicator for business investment) rallied a strong +2.4%, the most since March, after rising +0.5% the prior month. The shipments of non-defense capital goods, used in calculating GDP, fell -0.9% after a +3.1% gain in August. In Q3, shipments jumped +17% at an annualized rate compared with a +11% increase in the previous three months (suggests that business investment picked up). The overall durable message is a positive one.

Other data showed that sales of new US homes rose for the first time in five months in September (up +5.7% or +313k vs. +300k), however, prices continue to drop underscoring the persistent weakness of the US housing sector. The median price for the month declined -10.4%, y/y, to +$204.4k. Despite the price drop, new homes tend to be more expensive than previously owned property or houses in the foreclosed category. Analysts note that present sales figures are well below the historical healthier levels of +750k units-per-month. The US administration continues to come up with new and sometimes innovative ways to help this depressed category. Earlier this week, the Obama administration unveiled a plan that will let borrowers refinance regardless of how far their property is under water. A weak job market, eroding home values and higher personal debt continues to pin the US economy down. The number of new dwellings on the market last month was historically low at +163k, and it would take +6.2 months to deplete inventory levels at current pace, in August, supply was +6.6 months.

The dollar is lower against the EUR +0.61%, GBP +0.05%, CHF +0.55% and JPY +0.38%. The commodity currencies are stronger this morning, CAD +0.71% and the AUD +1.69%.

For a brief period yesterday the loonie nursed heavy losses after the BoC quashed expectations of interest rate hikes and downgraded its growth forecasts, citing Europe’s debt crisis and weakness in the country’s top trading partner south of its own border. The MPR reported that the annualized pace of expansion will average +1.8% in the four quarters through June, compared with a previous estimate of +2.8%. The bank cut its projection for global growth next year by-0.9%, and it said the recovery will be slower than usual as consumers, governments and businesses reduce debt.

“Lower commodity prices and heightened volatility in financial markets stemming from the weaker and more uncertain global economic outlook are projected to weigh on the wealth and confidence of Canadian households,” the report said. Its projection assumes a “gradual reduction in monetary stimulus over the projection horizon, consistent with achieving the inflation target.” The report should convince investors that Governor Carney “will be reluctant to diverge far from the Fed on changes to borrowing costs”.

It seems that dealers are moving further out the curve and are beginning to slowly price in rate hike in the latter half of next year when inflation indicators begin to move toward the Banks +2% inflation benchmark. Carney is also predicting that the Canadian economy grew +2% in Q3 and will grow at +0.8% rate in Q4.

The loonie remains vulnerable to following the broader trends, especially to that which is transpiring in Europe. This morning the currency have broken convincingly through parity, this weeks strong dollar support level, and has printed new loonie highs on the back of changing risk sentiment attitude. Depending on what US growth numbers are like this morning, market bias is a better CAD buyer on rallies (0.9965)

The antipodeans lead the pack in the O/N session. With the RBNZ keeping rates on hold this morning and given the positive EU summit outcome, is providing the basis for a more meaningful recovery in global risk appetite in the near term, supporting the Kiwi and Aussie.

Even the fear that Australian domestic data showing that underlying inflation slowed last quarter, to its weakest pace in 14-years (+0.3% vs. +0.6%), which would allow the RBA to cut the developed world’s highest borrowing costs next week, is having little affect on investors wanting to own some. Despite futures traders pricing in a-25bp cut, the AUD remains at the mercy of global developments and progress in the Euro-zone debt aid package. The currency depreciated almost-10% last quarter on the back of weaker employment growth and global risks increasing.

How long will Euro’s euphoria have investors demanding the AUD? US growth numbers this morning will of course hold considerable weighting on that answer. The market is a better seller of the currency on rallies (1.0600).

Crude is higher in the O/N session ($91.88 up+$1.68c). Oil prices were firmly on the back foot yesterday, after weekly data showed a sharp increase in US inventory levels and as investors remained cautious about Europe’s ability to agree on a comprehensive debt package. Now we got the plan and it seems that all systems are a go in this mornings session.

Crude stockpiles rose +4.74m barrels to +337.6m vs. an expected build of +1.3m. Oil imports rose +1.45m barrels per day to +9.34m. On the flip side, gasoline stocks fell -1.35m barrels to +204.9m, slightly smaller than the -1.6m expected drawdown. The average gasoline demand in the last four-weeks fell -0.7% from a year ago. Distillates, which include heating oil and diesel, happened to fall -4.28m barrels to +145.4m. Analysts had been expecting a +1.9m barrel draw. The refinery utilization rate increased +1.7% points to +84.8% of capacity.

The rise in stocks is in marked contrast to recent price rallies. Brent’s premium over WTI has moved back above +$18, as investors noted the rise in crude stocks at Cushing, Oklahoma, the delivery hub for the light sweet crude contract. Expect investors to continue to run into technical selling on rallies as they wait for a clearer idea of where we are going on the economic front.

Gold advanced above $1,700, to a one-month high, as concerns about Europe’s debt crisis spurred demand for the metal as a protection of wealth. The commodity has been firmly in the driver’s seat all week. The disappointing US consumer confidence print provided the impetus for gold to rally aggressively as the data showed consumers were at their gloomiest in 2-1/2 years. The bullion is in its eleventh-year of a bull market as investors seek to diversify away from equities and some currencies. The metal is up +21% this year.

Everyone wanted to know the details from Europe. Lack of details pushed gold up as a safe-haven bet. Now we know them, how will this market react longer term? The commodity has also found support (store-of-value) on concern that US monetary policy aimed at shoring up growth will eventually spur inflation. Over the past two-weeks, commodities have followed the moves in riskier assets, with the precious metal’s safe-haven appeal diminishing a tad after the price purge swings in the past quarter. Stronger Chinese growth is also providing a source for support. Last week, the yellow metal rallied the most in a week, as a drop in the dollar boosted investor demand.

With global sentiment in the fragile category, gold remains the go to safer haven prospect. If we include the demand for ‘physical’ gold from India, then both of these reasons should provide the strongest tangible support to want to own some on pullbacks ($1,713 down-$10).

The Nikkei closed at 8,926 up+178. The DAX index in Europe was at 6,222 up+206; the FTSE (UK) currently is 5,666 up+113. The early call for the open of key US indices is higher. The US 10-year backed up +7bp yesterday (+2.21%) and another +3bp in the O/N session (+2.24%).

After a couple of consecutive trading day gains Treasury prices have fallen as investors pare some safe-haven bond holdings, taking profit, hoping that European leaders would get their act together and deliver a credible solution to the EU’s deepening debt crisis. The market is also making it easier to take down this week’s Treasury supply, yesterday’s $35b in five-year debt and today’s $29b seven-year notes, part of this week’s total +$99b in note supply.

The dealing desks have also reduced their short-dated holdings ahead of selling from the Fed as a part of it’s +$400b “Operation Twist” program. Yesterday, The Fed sold -$8.87b of debt due from March to September 2014 from its +$1.67t Treasuries holdings.

The $35b 5-year auction saw solid demand at +1.055%. The bid-to-cover was 2.95, above the average of 2.74 for the last four auctions. Indirect buyers bought +49.3% of the offering, the highest in 12-months. The Treasury market for the near term remains “policy-dependent, not data-dependent” until Euro’s rescue plan begins to make sustainable traction.

August 25, 2011

Bernanke to disappoint EURO positions?

Filed under: OANDA News — Tags: , , , , , , , , , , , , , — admin @ 4:44 am

Despite Euro-zone sovereign bonds continuing to be sold off, European Banks funding under stress with CDS at record highs, Greenspan believing that the common currency will break down, a plunge in the German ZEW investor confidence reading, an ifo Business Climate survey printing new yearly lows investors continue to grasp for any good news or news more positive than expected to keep the EUR buoyant. It also seems to prove that the market is no mood to go heavily short ahead of Bernanke’s highly anticipated speech tomorrow.

Reports continue to do the rounds stating that Bernanke is to do nothing at Jackson Hole. The market should expect policy makers to again reassure investors that the Fed stands ready to deploy ‘other’ tools if necessary. It’s important that the Fed gets to retain some degree of flexibility against a backdrop of ‘lower-for-longer’ official interest rates.

Tomorrow, Bernanke and company should say one of three things. First, repeat this summers message, second, lay the groundwork for another extraordinary easing or third, open the door wider to more easing. Last year at this time he said the Fed would ‘do all that it can’ to ensure a continuation of the economic recovery and that buying more debt might be warranted if growth slowed. Two months later, the Fed announced a $600b QE2 plan. The market has gotten ahead of itself and is probably putting too much emphasis on Ben’s speech. Ahead of the meet, the bias will be to own some dollars as many do not see Bernanke coming out swinging and delivering anything too dramatic.

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

Forex heatmap

US durable orders climbed more than expected last month (+4%) as a surge in demand for aircraft (+43%) and autos trumped a decrease in business equipment, including computers and machinery. The auto sector has rebounded from the slump caused by the Japanese earthquake and on the back of a few manufacturers benefiting from growing sales in emerging markets. What is of concern in the report is that the improvement seems to be narrowly based. Digging deeper, orders for non-defense capital goods ex-aircraft, a proxy for future business investment, dropped -1.5%, the most in six months, after a revised +0.6% gain in June.

Despite the optimistic headline order print, regional factory surveys this month have shown that demand has plunged as concern over the European debt crisis worsens. Empire manufacturing data has slowed for a third consecutive month and the Philly Fed results have contracted the most in two years. Even the Richmond results show that its business activity has dropped to its weakest point in 18-months. Much of the growth in the second quarter has come from corporate investment and trade, while consumer spending continues to stagnate, this would suggest that US GDP growth is set to remain subdued. Now we wait for Ben!

The dollar is lower against the EUR +0.04% and CHF +0.29% and higher against GBP -0.08% and JPY -0.17%. The commodity currencies are weaker this morning, CAD -0.16% and AUD -0.33%.

There is no denying it, the commodity growth sensitive currency, the loonie, remains range bound. It’s movements are been dictated to by the risk loving and risk aversion trading strategies that are positioning most portfolios ahead of Ben’s highly ‘over’ anticipated speech in Jackson Hole tomorrow. The CAD managed to trade to intraday highs as US durable goods orders for July beat expectations yesterday. The currency tends to have a strong correlation to the price of oil, and to macro data from south of the border, who consume nearly +70% of Canada’s total exports.

Outlook for the Canadian economy has come under serious scrutiny over the past few weeks. Governor Carney says second-quarter growth is likely to be flat or down slightly. It was only a month ago they had forecasted growth of +1.5% on an annualized basis in the quarter. With weaker US demand growth prospects the currency should come under renewed pressure in the medium term. Parity looms again for the loonie on fears about the stability of the European banking system and on the back of weaker data from its largest trading partner. Technically, the currency needs to fill in that gap. The loonie has dropped –4.1% so far this month, as global equities remain on the back foot. Investors are better buyers of dollars on dips (0.9869).

The AUD for a third consecutive day fell outright in the o/n session as a private report showed deteriorating consumer sentiment in Germany damping demand for higher-yielding assets. US data is potentially reducing the chance of Bernanke announcing any quantitative measures to be implemented soon. The Aussie is on course for a fifth weekly drop against the JPY as traders increase bets for an interest-rate cut from the RBA amid concern that global growth is slowing.

Reports earlier this week show that one of the leading Aussie economic index’s for June fell (-0.8%) and second-quarter construction work missed economists’ estimates (+0.7% vs. +1%). Concerns over developments in Europe and the US continue to overshadowed the RBA’s robust medium term domestic outlook. Many now expect Governor Stevens to remain on hold for the remainder of the year, as ‘risks for the RBA have become more evenly balanced and the outlook remains conditional on the strength of the global economy’. Currently, investors are better sellers of the currency on rallies (1.0456).

Crude is higher in the O/N session ($85.47 up+0.31c). Crude prices have again found support after yesterdays weekly EIA report showed inventories had unexpectedly declined as refinery rates matched their highest level for this year.

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

The report is bullish for crude and bearish for the products. For the moment, Crude prices continue to hold just above strong support levels, support by Libya, exclude them from the equation and the commodity remains vulnerable. The Fed’s monetary policy will be bearish for the dollar and so should be bullish for crude in the longer term. The market now waits for Ben to re-enforce the Fed’s intentions.

It’s a brave soul who wants to trade in the commodity markets this week. Yesterday, the yellow metal completed its largest one-day clean out in eighteen months and today is no different. The ‘perfect storm’ had many weak long investors tapping the market and taking some profit off the table on speculation that financial markets may be stabilizing, eroding the appeal of the precious metal as a safer haven. The commodity has lost over 5% in the past two days, that’s equal all of the last two week gains. Technically it’s a crowded trade that investors wish to pare on expectations Bernanke will do something to boost equity prices tomorrow.

Before this week’s carnage, the commodity trade was up +31%, y/d, as the global debt crises and volatile stock markets boosted the appeal of the metal as an alternative asset. A hike in margin requirements for gold forwards in Shanghai is also helping to curb the precious metal’s meteoric rise. This is a similar move to the COMEX margin hike of +22% earlier in the month.

Big picture, with the Fed’s efforts to drive interest rates lower to support lending should curtail the dollar’s appeal as a safe haven and by default, support commodities eventually. The commodity is heading for its eleventh consecutive annual gain ($1,718-$39).

The Nikkei closed at 8,772 up+132. The DAX index in Europe was at 5,729 up+49; the FTSE (UK) currently is 5,206 up+1. The early call for the open of key US indices is lower. The US 10-year backed up 14bp yesterday (2.27%) and is little changed in the O/N session.

Yields on shorter term Treasuries remain rooted to their record lows amid speculation that the Fed will signal tomorrow that policy makers are willing to take further measures to prevent the US from falling back into a recession.

The current 2/10’s spread is below last year’s low, which coincidentally occurred in August as Ben was preparing his QE2 pre-announcement speech for Jackson Hole. A section of the market is expecting a repeat performance tomorrow. Disappointment should push the US yield curve to continue to trend lower as money is forced to seek yields that are further out the curve. With 2’s tied to o/n funds the only way for the curve to steepen is through higher inflation expectations.

The market has been focusing on the demand for US product as yields fall to new record lows. This week, the US treasury will issue $99b of new notes supply. Already we have seen that demand for 2’s remains strong. Even yesterday’s $35b 5’s was able to print record low yields. The issue was offered at +1.029%, down sharply from last months +1.58%. The bid-to-cover ratio was +2.71, compared with the average of +2.8. The indirect bid was +42.1% compared to the average of +40.3%. Today we get the final of this weeks sales, $29b 7’s.

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August 12, 2011

US data to outperform EUR

Filed under: OANDA News — Tags: , , , , , , , , , , , , — admin @ 4:26 am

What a week, and its only Friday morning. The market still has some data to chew on before one can sit back and figure what all this really means. The Central Bank thoughts and threats, swing’s in equities, and maybe the loss of a reserve currency. These and more has investors even more worried as the rumor mill intensifies.

This morning the focus will be on US July retail sales and August’s University of Michigan consumer sentiment. Some analysts expects that the headline retail sales rose +0.5%, m/m, making it the best reading in four months, with the increase mostly driven by a rebound in autos, after Japan’s supply related weakness earlier. Ex-autos and gas, market expects a modest gain of +0.3% m/m gain. Market should pay extra attention to the core release, a negative surprise, and it’s proof that a drop-off in final demand would drive concerns of recession risk further.

Michigan sentiment should be affected by the recent rout in global equities and the US ratings downgrade last week. Watch the inflation component. Any easing could increase the probability of further Fed implementing easing measures.

The EUR is hanging in tough with a lot of support. Its top side remains contained, with the bottom more vulnerable. The glue holding everything together will last only so long.

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

Forex heatmap

A mixed bag of US data yesterday tried to distract the market from the SNB doing or not doing whatever they are intending to do. The US trade gap widened in June, with the deficit rising to -$53.1b from -$50.8b, as exports fell quicker than imports. It’s the widest margin in three-years, and proof that the US economy grew even slower during the second quarter than estimated by the government. Nearly all the negative surprise came from a -2.3% fall in exports (supposed to be one of the US’s few positives). This would suggest that Europe’s problems are starting to undermine exports. Imports fell by -0.8%, on a mix of weaker demand and falling oil prices.

The surprise was weekly unemployment claims falling-7k to +395k. The market did not expect this given the FAA furlough that had been in effect and ending just before the reporting period. The average claims figure fell by-3.25k to +405k. Continuous claims declined-60k, its largest weekly decrease in six-months, from 3.75m to 3.69m. The percentage of the eligible population receiving unemployment insurance fell to +2.9%. With three consecutive weeks of declines, claims are moving in the right direction. Let’s hope that this is a trend.

The dollar is higher against the EUR -0.01% and CHF -1.18% and lower against the GBP +0.29% and JPY +0.17%. The commodity currencies are weaker this morning, CAD -0.28% and AUD -0.28%.

The loonie advanced from almost its lowest level in seven-months as equities stateside rose, reducing the demand for the buck as a refuge. The CAD, despite this week’s turmoil remains one of the better behaved currencies, even with weaker data. Yesterday, Canada recorded its biggest trade deficit in nine-months in June (-$1.56b the fifth consecutive), as energy and auto exports fell, adding to evidence the country’s recovery is waning. Governor Carney said last month that export growth will remain modest because of a strong currency and the need for companies to regain competitiveness. This month, the loonie dropped -3.8% as global equities tumbled on renewed concern that the Euro-zone’s sovereign-debt crisis is getting worse.

There is a flip-side, because of the stronger Canadian fundamentals and yield differential (for now), investors will want to divest away from the EUR and USD. Once the markets absorb all of this weeks Cbanks actions or lack of, there will be an appetite from investors for a second tier reserve basket. Most commodity and interest rate sensitive currencies certainly belong to this basket.

The loonie remains at the mercy of risk aversion trading strategies and commodity prices. In the O/N market, investors look to be better sellers of dollars on rallies (0.9855).

The wild ride for commodity currencies continues, with the AUD being the prime example. A matter of day’s ago, the market was happily singing its praises, witnessing the currency breach the 1.10 barrier, some weaker global data and a credit downgrade later and this growth and interest rate sensitive currency is bouncing back from the USD trading premium a couple of sessions ago.

The AUD again is on the back foot this, following regional equity prices for direction. This weeks domestic data has been mixed. Full-time employment fell -22.2k in July, while part-time employment gained +22.1k, keeping total employment largely flat. June full-time employment was revised down to +18.2k from +23.4k. The unemployment rate rose to +5.1% from +4.9% in June, with the participation rate unchanged at 65.5%.

On the flip-side, consumer inflation expectation fell to +2.7% in August from +3.4% in July. The weak employment print should keep Governor Stevens rate changes in check, remaining on hold until further notice. Even with core inflation still running above the RBA’s target range, the policy makers can afford to step aside, unless there a dramatic collapse in global financial markets. That can be said for all other Cbanks. Just like the loonie, the AUD will trade with the swings in global risk appetite (1.0337).

Crude is lower in the O/N session ($85 down -$0.72c). Crude prices rallied for a second consecutive day, rebounding from their ten-month low, as declining US jobless claims sent bourses higher, adding to optimism that the US economy is strengthening. Some of the market believes that the Fed will implement a third round of asset buying to bolster the economy further.

US inventory numbers were also bullish for the commodity. The report showed that oil stocks fell -5.2m barrels to +349.7m last week. The market had projected a +1.5m barrel build. Crude imports fell-34k barrels per day to +9.07m. The IEA stated that the US’s SPR saw its stock levels fall -2.5m. Not to be outdone, gas stocks dropped -1.59m barrels to +213.5m, compared with market projections for a +500k barrel build. Average gas demand over the last four-week’s has fallen-3.4%, y/y. Distillates (heating oil and diesel) fell-737k barrels to +151.5m versus an expected rise +1.1m barrels. Refinery utilization increased +0.7% point to +90% of capacity, whereas the market projected a decrease of -0.4%

Crude prices continue to hold just above strong support levels. The Fed’s monetary policy will be bearish for the dollar and so should be bullish for crude in the longer term.

Gold bulls yesterday had their backs against the wall yesterday, as commodity prices plummeted, falling the most in two-months after the CME hiked margin requirements on futures contracts (+22%), a day after printing a record topping $1,800 and on the strength of equities being in the black. Big picture, the metal continues to be a recipient of safe-haven flows. Prices have more than doubled since the recession began in late 2007. This summer, its climb has accelerated because of the US Congress inability to stabilize the government’s ‘medium-term debt dynamics’, and on the back of Europe’s debt crisis threatening to spread to three of its biggest economies, France, Spain and Italy. The Fed’s efforts to drive interest rates lower to support lending are curtailing the dollar’s appeal as a safe haven.

Investors have bought more gold in the last month than in the prior six months according to CFTC data last week. Expect speculators to wait for a deeper correction before they start buying again. This week’s weaker longs should help their cause. The commodity is heading for its eleventh consecutive annual gain. In this environment $2,000 is very much in the realms of possibility over the next six months ($1,762 +$11).

The Nikkei closed at 8,963 down-18. The DAX index in Europe was at 5,889 up+92; the FTSE (UK) currently is 5,213 up+50. The early call for the open of key US indices is lower. The US 6-year backed up 10bp yesterday (2.32%) and is little changed in the O/N session.

US Treasuries prices fell as global equities rallied and a weekly jobs report showed initial jobless claims unexpectedly declined last week, damping demand for safe assets. Dealers also cheapened the back end of the curve as they prepared to take down the last of this week’s issue, $16b 30-year bond.

Treasuries have surged this month, pushing 10-year yields down more than -50bp, as the European sovereign debt crisis and a potential double-dip recession in the US sent pushed S&P’s down-13%.

It was a lousy 30-year sale. The auction was offered at 3.75%, +10bp higher than the level traded right before the issue, signaling weak demand. The bid-to-cover ratio was 2.08, compared to the average of 2.67 from the past four sales. The indirect bid took down +12.2%, compared with +39.1% from the past four sales. It was the lowest over all demand since 2008. The street owns them as the yields were not attractive enough for pension and insurance funds.

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August 10, 2011

Do Not Upset the Swiss

Filed under: OANDA News — Tags: , , , , , , , , , , , — admin @ 4:25 am

Been there, seen that. It sums up the actions from both the Fed and Swiss authorities. The Fed’s pledges have left the CHF exposed to a market having the currency in its crosshairs. Unless the Fed is willing to intervene in the FX space and stop ‘this’ dollar slide, the Swiss acting alone has an near impossible task.

Investors desires for a safe heaven outside of the Euro-zone and US debt dramas is producing massive gains for CHF against other majors. Reason enough for authorities to step up their efforts to cool ‘the’ move. The SNB this morning announced that it would rapidly expand banks’ most readily available deposits from CHF80b to CHF120b, and would conduct FX swap transactions. Last week, the SNB cut its three-month Libor rate target to zero in another effort to curb the CHF appreciation.

Looking at the post price action, this ‘symbolic’ act by the SNB is having limited reaction. Their measures are a repeat of earlier actions. The fact that they have failed to intervene and sell francs is again giving the market the green light to proceed, but, with caution!

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

Forex heatmap

Markets were probably looking for lies or half truth, instead, they got a Fed giving us the raw truth. Policy makers painted a dour picture of the US economy, going beyond the simple transient factors. Ben and company pledged for the first time to keep benchmark rates at a record low, at least through mid-2013, to revive a recovery that’s ‘considerably slower’ than anticipated. They were vocal about a range of policy tools in their armory to boost the economy and said it is ‘prepared to employ these tools as appropriate’. With these promises they stopped short of initiating a QE3 package of large-scale asset buying. Fed expect a ‘somewhat slower pace of recovery over the coming quarters and that downside risks to the economic outlook have increased’.

Interestingly the vote was 7-3. Dissent suggests that the Fed is still a long way off from providing ‘dramatic new support for an economy that even policymakers acknowledge has taken a turn for the worse’. However, in five months the dissenters become nonvoters at the Fed.

The dollar is lower against the EUR +0.06% and JPY +0.47% and higher against GBP -0.33% and CHF -0.25%. The commodity currencies are mixed this morning, CAD -0.47% and AUD +0.21%.

After printing parity in the previous session of panic liquidation, the loonie has found firmer footing, rising for the first time in eight days as an advance in ‘stateside’ equities reduced demand for a refuge in the greenback. Because of the stronger Canadian fundamentals, investors will want to divest away from the EUR and USD. Currently, there is an appetite from investors for a second tier reserve basket. Most commodity and interest rate sensitive currencies certainly belong to this basket.

Yesterday, Canadian housing starts climbed last month at the fastest pace in 15-months, proof that Canadian real estate remains buoyant as borrowing costs stay low. Work began on +205k units on a seasonally adjusted annual basis. Previously, the loonie has been trading on the back foot on concern slowing global economic growth will weigh on demand for raw materials and increase risk aversion trading strategies.

Last week’s historic S&P’s downgrade is creating a new financial and trading environment. For the time being in a while, the loonie will remain at the mercy of risk aversion trading strategies and commodity prices. In the O/N market, investors look to be better sellers of dollars on rallies (0.9810).

The wild ride for commodity currencies continues, with the AUD being the prime example. A matter of day’s ago, the market was happily singing its praises, witnessing the currency breach the 1.10 barrier, some weaker global data and a credit downgrade later and this growth and interest rate sensitive currency is bouncing back from the USD trading premium a couple of sessions ago.

Recent domestic data is providing little support. In the O/N session, the market witnessed Aussie consumer confidence deteriorating for a fourth consecutive month, to the lowest level in more than two years (-3.5% to 89.6) and with no expected turnaround soon.

Big picture, the currency continues to find the going tough, as concern that the global economy is slowing is sapping demand for higher-yielding assets. The US credit downgrade has been pressurizing commodities, which in turn is negative for all growth sensitive currencies. In one session, the currency breached all major key support levels that resulted in parity again being printed, first time in five month. This new range now depends on how the market is digesting yesterday’s FOMC statement. In current climate conditions, investors remain better sellers on upticks (1.0355).

Crude is higher in the O/N session ($82.17 up +$2.87c). The decline of crude prices took a breather before the Fed’s communique. They rebounded from their ten-month low as US equity indices stopped the bleeding and on the belief that the earlier price rout was excessive. The market expected that the Fed’s commitment to monetary stimulus would help fuel demand in the world’s largest economy, however, the new ‘raw’ Ben soon put a stop to that. The Fed stating that risks to the economic outlook have increased and stopping short of initiating QE3, again put the black stuff under pressure. Investors are now betting fuel demand will increase amid shrinking stockpiles.

OPEC cut its oil demand forecasts for the remainder of this year and next as the global economic recovery loses momentum. They have reduced global consumption estimate for this year by-150k barrels a day. The organization is obviously worried about the global economy and falling demand. To date, they do not have a specific price target that would trigger member action.

Today we get the weekly inventory number and analysts expect another small build in the EIA report midmorning. Last week, US gas stockpiles rose sharply and demand over the past four-weeks fell-3.6% compared with a year-ago, adding to concerns about tepid consumption in the midst of the peak summer demand period. Currently, crude is straddling strong support levels and is in danger of penetrating the psychological $75 barrier medium term.

Gold has surged to another new record high, breaking through key psychological barriers, after a US downgrade and on escalating concerns that global economies are losing momentum. The yellow metal continues to be a recipient of safe-haven flows. The metal’s price has more than doubled since the recession began in late 2007. This summer, its climb has accelerated because of the US Congress inability to stabilize the government’s ‘medium-term debt dynamics’, and on the back of Europe’s debt crisis threatening to spread to two of its biggest economies, Spain and Italy. The Fed’s efforts to drive interest rates lower to support lending are curtailing the dollar’s appeal as a safe haven.

With global bourses on the back foot, liquidation of the metal to cover margin calls in other asset classes could pare some of these sharp gains. Investors have bought more gold in the last month than in the prior six months according to CFTC data last week.

Year-to-date, the yellow metal has advanced +24.3%, heading for its eleventh consecutive annual gain. This ‘one directional trade’ is far from over, with speculators continuing to look to buy the metal on pullbacks until proven wrong. There remains a demand for the commodity for insurance purposes as alternative asset class. In this environment $2,000 is very much in the realms of possibility over the next six months ($1,759 +$59).

The Nikkei closed at 9,038 up+94. The DAX index in Europe was at 6,003 up+86; the FTSE (UK) currently is 5,199 up+34. The early call for the open of key US indices is lower. The US 10-year eased 28bp yesterday (2.27%) and is little changed in the O/N session.

Treasuries are rising, pushing 10’s and two-year note yields to an all-time low after Ben promised to keep benchmark rates at record lows for two more years in a bid to revive economic growth. Yesterday’s government sale of $32b three-year notes drew stronger-than-average demand in the first note sale since their debt rating downgrade. Demand for US debt has surged in the last few sessions, as plummeting global bourses boosted the demand for the safety of US product.

The notes drew a yield of +0.50% with a bid-to-cover ratio of 3.29, compared with an average of 3.15 for the past 10 sales. Indirect-bidders took down +47.9% of the notes, compared with an average of +33.9% for the past 10 sales. Direct-bidders received +11.1% of the notes compared with an average of +13.2% for the past 10 auctions.

Today dealers get to take down +$24b of 10’s and +$16b of 30-year bonds tomorrow. Yield is hard to find.

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June 23, 2011

EURO Longs Squeezed

Filed under: OANDA News — Tags: , , , , , , , , , , , , , — admin @ 4:22 am

The EURO continues to struggle this morning, under weight from a combination of ‘soggy’ PMI data and continuing concerns over Greece’s finances. The possibility that austerity measures may not pass through the parliament is again weighing on investors appetite for risk.

The market is reacting to the dovish tone in Bernanke’s press conference by selling risk assets and buying the dollar. Not entertaining the possibility of QE3 implies risk pricing needs to remain ‘skewed significantly to negative outcomes’. It seems Ben is willing to allow a much more significant deterioration in his economy before they return to a pro-active monetary stance.

Least we forget, flash China PMI O/N (50.1) points to a sharper slowdown in Chinese growth. Now that both the employment and new order categories have edged just below 50 suggests that the official PMI will fall at least in line with seasonal patterns, anything greater and more risk will want to be taken off the table.

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

Forex heatmap

The Fed continues to look through weakness and is staying the course. The FOMC statement was largely as expected yesterday, giving no signal of any policy changes soon. Policy makers acknowledges that the US economy is in a soft spot, but advised markets to look through the effects of supply shocks emanating from Japan and the demand destruction caused by previously higher commodity prices. Through the distortions, the Fed is saying that it remains on course on policy measures by allowing QE2 to expire and sticking to its previously understood policy of ‘reinvesting coupon so as to flat line the Fed’s balance sheet’.



Probably the most interesting point of the communiqué was on inflation. The committee ‘anticipates that inflation will subside to levels at or below those consistent with the Committee’s dual mandate as the effects of past energy and other commodity price increases dissipate’. Does inflation ‘at or below’ their target range possibly give the Fed an out if or when it needs to implement further monetary easing?

The dollars is higher against the EUR -0.55%, GBP -0.39%, CHF -0.13% and JPY -0.29%. The commodity currencies are weaker this morning, CAD -0.01% and AUD -0.32%.

Governor Carney presented the BoC Financial system review yesterday and concluded that they see overall risks to financial stability has elevated in the last six months. It seems that global sovereign debt issues and a low interest rate environment in major economies has fueled greater risk taking. How will Canadian policy makers deal with this? Hike rates. The hawkish tone gave the loonie its bid with real money the buyers.

With the Fed cutting its growth objective for the remainder of the year has higher yielding growth sensitive currencies trading under pressure. The CAD health is heavily linked to its southern economy because of the close trading relationship between the two countries. On the crosses the loonie has performed well. Expect the Canadian dollar to be subjected to the pull of either risk or risk aversion trading strategies (0.9742).

The Aussie remains on the soft side against most of its trading partners on prospects that Greece will struggle to pass austerity measures next week to avoid a default, damping demand for growth-sensitive currencies. Previously, it was the RBA’s board minutes for June reaffirming a noncommittal Central Bank that first applied the pressure this week. The market pricing for rate hikes over the next year has fallen 7bp to-6bp.The AUD slide has continued for a second day against the greenback after the Fed signaled it would not add to record stimulus even after growth slowed, spurring declines in higher-yielding assets.

Governor Stevens and company cited growing concerns in Europe, downside surprises in US data and deterioration in non-mining related industries as giving the board enough reason to remain on hold until further notice. The minutes were also less explicit than RBA Governor Stevens’ speech last week on emphasizing upcoming data like the CPI report. The market is pricing a no hike in August unless inflation and employment surprised on the upside and the situation in Greece clears up sufficiently for a powerful rebound in risk appetite. Global data needs to improve before we can embrace any rate hike policy thinking. Investors remain better sellers on rallies this morning (1.0513).

Crude is lower in the O/N session ($93.79 -$1.62c). Oil prices rallied from their four-month lows on the back of a softer weekly EIA report and after European industrial orders climbed, suggesting the Euro region’s economic expansion maintained some momentum into the second-quarter yesterday. This morning the commodity has given up some and more of these gains. Investors are speculating that US fuel demand may weaken after the Fed lowered its economic growth outlook. Analyst’s note, that from its peak this year, crude is off-20%.The technicals see strong support first appearing at around $87.

Last week’s EIA reports showed that oil inventories fell -1.7m barrels to +363.80m, but remain above the upper limit of the average range for this time of year. A surprise was gas inventories falling by +500k barrels last week, after increasing by +600k barrels in the prior week. Analyst’s we expecting a build up of inventories of around +1m barrels. Currently it remains near the upper limit of the average range. Refinery inputs averaged +15.3m barrels per day and +409k above the previous week’s average as refineries operated at +89.2% of their capacity.

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

Gold rose to a seven-week high as fluctuations in FX-land boosted demand for the yellow metal as an alternative investment yesterday. The commodity is in a unique position, this week it has been able to rise despite a dollar strengthening, testament to the demand for the asset. Last week, the metal dropped -0.3% and this after falling -0.9% the previous week. Year-to-date, the commodity has climbed +7.3%. This morning the commodity trades on the back foot after the Fed dampened speculation it would expand stimulus measures and the dollar strengthened.

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

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

Gold is being used as a store-of-value and trades like a currency. The metals bull-run is far from over with speculators continuing to look to buy commodities on these pullbacks ($1,544 -$8.80c).

The Nikkei closed at 9,596 down-32. The DAX index in Europe was at 7,217 down-61; the FTSE (UK) currently is 5,732 down-40. The early call for the open of key US indices is lower. The US 10-year backed up 1bp yesterday (2.98%) and has eased 2bp in the O/N session (2.96%).

Treasuries pared their advances yesterday after the Fed said it would let asset purchases end while maintaining record monetary stimulus. Bonds pulled back after the statement release, disappointed that the Fed did not ‘indicate any inclination’ to move towards further policy accommodation either QE3 or capping certain market rates.

Now that the market is speculating that the end of the Fed’s debt-purchase program this month will slow inflation is again providing a market bid. Some investors continue to apply risk-off trading strategies afraid of a Greek meltdown.

The FI market will now be trying to set itself up to take down supply next week (2’s, 5’s and 7’s). Record monetary stimulus is still needed to support US economic recovery. With the Fed expected to remain on hold for a considerable time is creating a new paradigm of longer term lower interest rates.

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May 12, 2011

EURO and Peripheries are in the Crosshairs

Filed under: OANDA News — Tags: , , , , , , , , , , , , , — admin @ 4:22 am

Euro policy makers are out in full force trying to talk down ‘restructuring’ Greece’s debt problems, their code word for default, as investors again set their ‘crosshairs’ on the Euro-peripheries.

According to Juncker, we should not be talking about a Greek restructuring, ‘because discussions of such sensitive topics only increase risks’. Wake up, it’s one of the realities, with few alternatives left what else is an investor supposed to think?

Greece has a ‘reasonable’ chance ‘of bringing its debt woes under control if it takes very considerable steps to consolidate its budget. This would include privatization and structural reform. According to policy members, Greece has a classic ‘competitive problem, while Portugal has an ‘economic growth problem’ and Ireland a banking problem. The market realty is that they have a ‘money problem’ and are probably bust.

Current price action is indicating that the worst the worst of the liquidation is not yet over. This dollar correction seems to have more room on the upside, and that’s going to pressure precious metals even further.

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

Forex heatmap

Yesterday’s data showed that US trade deficit widened in March (+6% or -$48.18), more than expected, as soaring oil prices caused imports to outperform a record level of exports. The dollars performance again remained at the mercy of the Euro and market innuendos.

To date, the deficit has narrowed sharply during the global recession, with exports (+4.6% or +$172b) and imports climbing (+4.9% or +$220) as global economies improve. The US crude oil imports bill for the month climbed to $27.67b, with imports rising to 295.12m barrels. Digging deeper and on a positive note, US trade deficit with China contracted-4% as US exports surged. The Chinese delegation to Washington has given no indication that they will be speeding up the Yuan appreciation any time soon.

The USD is higher against the EUR -0.05% and GBP -0.37% and lower against CHF +0.07% and JPY +0.08%. The commodity currencies are weaker this morning, CAD -0.29% and AUD -0.90%.

The loonie reacted positively to a stronger than expected trade surplus print, but gave up these gains just as quick and then some, after the surprisingly strong weekly crude inventory report.

The surplus widened to $627m from an upwardly revised +$356m. Exports rose by +3.5% fueled by energy products, while imports on the other hand rallied +3.2%. Trade with its largest partner, the US, narrowed to +$4.8b from $5b. Governor Carney expects exports to remain firm, but has warned that the strong currency will eventually add to ‘long standing competitive challenges’.

Despite the Canadian Finance Minister stating that ‘Canada’s strong currency reflects confidence in its economy’, nervous weak longs are been forced to liquidate as risk off trading dominates this fragile market.

Last week, the CAD retreated from a three-year high as commodities plunged on concerns for Greece’s continued Euro membership, pushing investors to seek temporary sanctuary in the world’s go to safe heaven currency, the dollar, and this despite another stellar jobs report north of the forty-ninth parallel (+58k and +7.6%). The fundamentals and technicals for the loonie have not changed. Investors remain better buyers of the currency on dollar rallies, however, dollar sellers seem to be backing up their orders ever so slightly (0.9663).

The Aussie dollar was the biggest looser in the O/N section, dropping just under-1% outright, as the markets reacted negatively to the much lower than expected employment report. Dealers have cut the pricing for RBA rate hikes over the next 12-months by-11bp to+30bp. Total employment fell-22.1k last month, with the+49.1k fall in full-time employment more than offsetting the+26.9k rebound in part-time employment. The unemployment rate was unchanged at+4.9% as the participation rate fell-0.2 bps to+65.6%. This is only the third-monthly decline out of the previous 20-months. Its worth remembering that other Australian fundamental indicators ‘point to sustained employment growth and pressure on the unemployment rate to fall further’.

Aussie yields are still the highest in the G10 and do look attractive. The expected mix of trade surpluses and rising capital inflows should provide support for the currency on these pullbacks for the time being (1.0582).

Crude is lower in the O/N session ($96.84 -$1.37c). Oil prices have hit the skids, falling across-the-board after a surprisingly strong weekly inventory report and on the back of a cooling Chinese economy coming into focus. This morning, the IEA indicated that they have cut global demand as this years price rally begins to weigh on consumption. They have reduced its estimates for world consumption by-190k barrels a day.

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

Higher oil prices have been denting demand growth and it’s this drop-off, combined with the overall retreat in commodities and a rising dollar that forced this drastic easing of oil prices this month.

Gold has ended its three session rally and retreated under the dollar pressure, eroding the appeal of the precious metal as an alternative asset. The fear that European officials may not grant Greece any further aid, forcing them to restructure their debt as the only alternative (code for default), has risk aversion strategies impeding the yellow metal’s recent rally. Technically, price action indicates that the worst of the liquidation may not be over.

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

The metals bull-run is far from over with speculators continuing to look to buy gold on these deeper pullbacks, however, with inflation expectations dipping this month has the weaker ‘long’s’ remaining on the back foot and second guessing their outright positions as the market encroaches on significant support levels ($1,490 -$10.70c).

The Nikkei closed at 9,716 down-147. The DAX index in Europe was at 7,389 down-105; the FTSE (UK) currently is 5,909 down-66. The early call for the open of key US indices is lower. The US 10-year backed up 2bp yesterday (3.18%) and is little changed in the O/N session.

Dealers cheapened up the curve nicely ahead of the $24b 10-year auction yesterday, even with risk aversion trading strategies dominating. It was a solid auction yielding 3.21% with 3.00 times subscribed versus a 4-auction average of 3.01. Indirect bidders took +47.2% of the supply, below the +53.9% average, and direct bidders took +8.4%. Post auction saw solid demand for product as equities saw red. The market focus now shifts to today’s final sale of the week, 16b long-bonds. With global equities taking a beating, they should come a tad more expensive than expected.

May 4, 2011

Euro Posturing Begins

Filed under: OANDA News — Tags: , , , , , , , , , , — admin @ 4:15 am

Thank Medley, market rumors of a Euro-positive research report have dragged and supports a higher EUR ahead of tomorrows rate announcement. It’s believed that the group indicated that the ECB is comfortable with a stronger currency and is not too concerned with the ongoing periphery sovereign debt crisis. Nor is the rest of the market its seems. It’s unfazed by Portugal’s EFSF EUR87b program, despite being the third Euro-zone country to succumb to the sovereign debt crisis after Ireland and Greece.

The market is looking for some clear indication of when the next ECB hike is coming. Recent inflation data has markets betting that Trichet’s communique could indicate July, however, a signal for June would show more urgency, justifying Trichet’s hawkish credentials and even more positive for the EUR. Can policy makers be moving too fast?

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

Forex heatmap

US factory orders climbed for a fifth consecutive month in March (+3%) yesterday. A broad based increase in orders as well as rising prices for food and oil were factors behind the bigger than expected gain. Manufacturing is helping to carry the economy from the depth of this recessions low in 2009. However, rising energy costs are a concern for factories and raising the challenges for companies to turn a profit. Digging deeper, durable goods orders rose by +2.9%, while ex-transportation also climbed +2.6%. The report showed that March Factory shipments rallied +2.7%, while unfilled orders (a sign of future demand) rose +0.8%.

The USD is lower against the EUR +0.27%, GBP +0.09%, CHF +0.03% and higher against JPY -0.10%. The commodity currencies are stronger this morning, CAD +0.03% and AUD +0.21%.

PM Harper got his majority and the loonie finally found some support, not so much on Canadian political or fundamental reasons, but on the back of a market that has sent investors into classic safe heavens. The loonie has been underperforming against most of its major trading partners, except outright against the dollar. Similar to most other major currencies, the currency managed to print a new three-year high last week, on speculation that the Fed will trail the BoC in raising interest rates.

This week’s general election is a CAD-positive result, with the probability that the loonie could revisit its multi-decade low (0.9059 in 2007) if the dollar negative sentiment persists over the next few months. Investors are looking to own the currency on any dollar rallies (0.9520).

The Aussie dollar had been trading under pressure outright after the PBoC said in a report yesterday that taming inflation is its highest priority. Earlier this week the RBA were not as hawkish as feared when it came to rates, but hawkish nonetheless. As expected, they left their rate policy on hold (+4.75%). Their statement was hawkish compared to the April release, but certainly caught the rate’s market on the back foot, who had pushed yields higher going into the meeting in the wake of higher than expected first quarter inflation.

Governor Stevens’s communiqué ran a balanced mix of downplaying first quarter inflation due to the floods, noting strength in the labor market and a pickup in corporate credit growth but weakness in household credit. Policy makers replaced the ‘stance of monetary policy remained appropriate,’ with ‘in future meetings, the Board will continue to assess carefully the evolving outlook for growth and inflation’, another nugget for possible rate hikes. Why add this warning now if you think it might only apply in 2012?
On AUD pull backs sovereign names continue to covet the currency. The market is now pricing in a +52% chance that the RBA will raise its benchmark rate to +5% by October, down from +62% earlier in the week.

Aussie yields are still the highest in the G10 and do look attractive. The expected mix of trade surpluses and rising capital inflows should provide support for the currency on pullbacks for the time being (1.0880).

Crude is weaker in the O/N session ($110.84 -0.21c). If anything, the news of bin Laden’s death has only increased the volatility in the crude market. Initial reaction was dollar supportive and black-stuff negative, however, his death does not alter the facts that have pushed the buck to a three-year low against most of its major trading partners and does not end the geopolitical concerns in MENA. The market has been leaning on the black-stuff’s prices ahead of this morning’s inventory report as dealers anticipate another build up of stocks.

Last weeks EIA report had inventories rising +6.16m barrels to +363.1m, the biggest one-week advance since July 2010. Crude imports rose +1.21m barrels to +9.23m. In contrast, gas inventories fell for the tenth consecutive week, -2.51m barrels to +205.59m, compared with expectations for a -1.1m drawdown. It’s worth noting that gas inventors fell in spite of domestic demand falling by -1.6% last month on a year over year basis. Finally, distillates (heating oil and diesel) dropped -1.81m barrels to +146.53m. Refinery utilization rose +0.2% to 82.7%. In reality, it looks like refiners have got to convert more of the oil into gas in the coming weeks.

The IEA said it maintains its 2011 global oil demand growth forecast but noted that the high oil prices are beginning to dent demand growth. OPEC have stated that there is ‘no shortage of oil anywhere in the world’ even after supply curtailments in MENA. It’s all about the dollar’s inverse relationship with commodities. The market is back to the drawing board until we can break this volatile intraday range.

Gold prices have been dragged lower by the liquidating of silver position after the CME hiked initial margin requirements for the third time in over a week. Silver prices have been able to surge to 31-year high in recent months. Fundamentals are now supporting some sort of correction. The uncertain macro-economic and political environment will continue to attract investors to gold, as does the continuing weakening of the dollar on the back of US policy makers being slow to tighten their monetary policy.

Gold, as a non-yielding asset, has a higher opportunity cost when interest rates rise. The precious metal has become the currency of choice with the dollar underperforming against its G10 trading partners. Investors have been trimming some of their risk exposure on the back of terrorist reprisal fears.

The metals bull-run is far from over with speculators continuing to look to buy the commodity on dips. Any price pullbacks are viewed as favorable opportunity for investors to continue to diversify into safe-haven assets, as the combination of a weak dollar and higher US inflation expectations support demand for inflation hedges ($1,537 -$2.80c).

The Nikkei closed at 10,004 up+154. The DAX index in Europe was at 7,531 up+31; the FTSE (UK) currently is 6,070 down-12. The early call for the open of key US indices is lower. The US 10-year eased 2bp yesterday (3.26%) and is little changed in the O/N session.

Investors have pared riskier assets as they assess the potential affect of reprisals from bin Laden’s death. Also providing support this week is the Fed buying back product for their debt-buying program.

Yesterday, the Treasury announced that they have halved its original forecast for net issuance in the second quarter from $198b to $142b. They attributed the decline to higher receipts and lower outlays. It’s a necessity to slow its approach to the debt-ceiling. With the coupon issuance to raise nearly $360b, the decline in issuance will come from a further decline in the bill supply, which will obviously affect money market liquidity.      

February 3, 2011

Trichet’s Yada Yada to hurt the EURO

Filed under: OANDA News — Tags: , , , , , , , , , , , , , , — admin @ 11:00 am

Most of the EUR’s gain this week has come on the back of investors believing that the recent hawkish comments from Trichet warrant a Euro-zone rate hike sooner rather than later. The ECB is expected to keep rates on hold this morning. It’s the tone of their communiqué that the market is focusing on, specifically after the firm January CPI. With only three weeks having passed since their last decision, it seems unlikely that ECB President Trichet will send a substantially new message. Expect to hear that inflation risks are balanced and could shift to the upside which would require careful monitoring. An unchanged message will help curb Euro’s upside momentum especially after another weak Euro-zone sales number. However, risk may get a boost from US weekly claims and non-manufacturing PMI.

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

Forex heatmap

Yesterday we got the first of this week’s US job indicators. Even though recent ADP prints have done a lousy job in predicting NFP, yesterday’s headline beat all analyst’s estimates again (+187k vs. +148k). However, there are strings attached, the previous month was negatively revised down by-50k to +247k. The reports lack of consistency is unlikely to alter many forecasts for tomorrow print (+140k). Last month’s NFP was grossly overestimated, close to +200k. The blame was attributed to an end-of-year quirk in the ADP’s methodology. Digging deeper, manufacturing happened to contribute +19k of the gain, the goods-producing sector +21k, while the bulk of the increase came from the service industry (+166k). The only negative print and not a surprise due to the US housing sector woes came from the construction sector, shedding-1k. This morning’s weekly claims and the employment index in non-manufacturing PMI may sway NFP estimates.

The USD$ is higher against the EUR -0.22% and CHF -0.33% and lower against GBP +0.40% and JPY +0.40%. The commodity currencies are stronger this morning, CAD +0.09% and AUD +0.34%. The loonie managed to print a two week high yesterday, outperforming other commodity-exporting countries, after oil traded near its two-year high. Once the commodity rally was able to take its foot off the gas, the CAD pared some of its gains. Anything that indicates that US growth is strong, like the surprising ADP numbers, tends to positive for the Canadian growth outlook and that’s because of the country’s proximity and close trading ties with its largest neighbor. Earlier this week Finance Minister Flaherty indicated that Canada will have a ‘challenge’ with jobless numbers. Canadian employment numbers are out tomorrow. The market expects the Canadian economy to add another +15k jobs after December’s stellar +34k release. Concerns about the over valued Canadian dollar, according to Governor Carney, waning government capital spending, a cooling housing market, and moderating retail sales will eventually combine to limit overall GDP growth this year. These are all stellar reasons for BOC to be concerned, as a ‘persistent strength in the currency is a threat to economic expansion’. With strong risk appetite in vogue, the loonie has cautious buyers on dollar rallies as we head towards the IVY and jobs report (0.9871).

Down-under, building approvals surged +8.7% in December, above the consensus expectation of +1.3% and reversed the + 3.9% drop in November. The market now believes that the earlier tightening by the RBA might be causing less pain in the housing market. Futures traders are betting that the RBA will begin tightening later this year, driven by earlier moves in the US and less severe effects of cyclone ‘Yasi’ than had been feared. The cyclone will probably further dent March quarter GDP following the floods in January. Some geopolitical reduced risk sentiment has pared the AUD advance, after trading near its one month high against the greenback as stocks and commodity prices rose amid signs the global economy is picking up, increasing demand for higher-yielding assets. Through parity is a surprise with a backdrop of a flood disaster, Chinese rate hikes and a toppy equity market. However, there is a risk-on mood spreading across the markets on the back of the improving global economy. This week’s RBA rhetoric was both dovish and 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’ (1.0136).

Crude is higher in the O/N session ($91.49 +63c). The crude rally temporally spiked to a 27-month high yesterday, as Middle-East event risk dominates trading desks. The market worries about the surety of supplies from the region. Middle-East supplies so far have not been disrupted by protests in Egypt. The market should realize that the Suez, even it were blocked for a some time, would only disrupt transportation routes and have little impact on overall supply. However, geopolitical risk premium continues to be priced in. Last weeks EIA report revealed another build up in inventory. Crude stocks grew by +2.6m barrels to +343.2m barrels, which are +4.3% above year-ago levels. The market had expected oil stocks to grow by +3m barrels. Gas was the big surprise, growing by +6.2m barrels, or +2.7%, to +236.2m barrels. That was +3.6% above year-ago levels. The four-week gas demand was +0.6% higher than last year, averaging nearly +8.7m barrels a day. Refineries ran at +84.5% of total capacity, a rise of +2.7%. Finally, distillate inventories (diesel and heating oil) fell by -1.6m barrels to +164.1m. Despite OPEC believing that supply and demand is ‘in balance’, the unknown factor, Egypt will continue to provide support on pullbacks. The country is a significant oil producer and a rapidly growing natural-gas producer with approximately +6% of global daily oil production running through the region. However, fundamentally there is far more oil in storage, more fuel capacity and more idle oil wells to limit a much stronger market rally. It’s fear that generally exaggerates the price.

If it is not supported by geopolitical risk premium, then gold, with the way it has been underperforming of late, has little support fundamentally and technically. For most of this month gold has suffered, down -6.7%, on lackluster physical buying as the commodities appeal deteriorates and on hedge fund liquidation triggering vulnerable support levels. Before tensions in the Middle East, investors had been shying away from the commodity and sought ‘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 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 ($1,329 -$2.30).

The Nikkei closed at 10,431 down-26. The DAX index in Europe was at 7,190 up+7; the FTSE (UK) currently is 5,979 down-21. The early call for the open of key US indices is higher. The US 10-year backed up 6bp yesterday (3.48%) and is little changed in the O/N session. A stronger US ADP report had the FI market pare some of its early morning gains to eventually give some of that back on a Murbarak backlash as he attempted to regain control of Cairo’s streets. There is an appetite to own FI on pullbacks as unrest in Egypt ‘is the sort of event risk that is difficult to hedge, so many will prefer to be better safe than sorry’. What will the curve look like if we happen to get payroll growth this Friday? The Fed stance on ultra low rates is expected to provide strong resistance for the 10’s at 3.50%. Investors continue to demand compensation for the prospect of accelerating inflation and on speculation the US may struggle to fund its deficit. The Fed’s pledge to its asset buyback program will support speculation that any additional rise in yields will be gradual.

January 6, 2011

Still No EURO Buyers

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

This EUR consolidation will not last that long. Once the market has gotten this weeks employment data out of the way, Capital Markets will be expected to refocus their energy on the Euro-periphery stress issues. Next week we have a Spanish bond auction, investors can anticipate the Government to pay up according to the recent Euro funding theme. This morning’s US jobless claims will have no bearing on tomorrow now revised NFP estimates. So far, mixed Euro-zone data this morning has had little affect on the currency. November retail sales disappointed at -0.8%, December economic sentiment improved to 106.2 while consumer sentiment fell to-11 and inflation printed above expectation. Paring of riskier positions ahead of any surprise tomorrow should be the order of today as the dollar dominates.

The US$ is stronger the O/N trading session. Currently, it is higher against 14 of the 16 most actively traded currencies in another ‘whippy’ O/N session.

Forex heatmap

Yesterday’s ADP print ( +270k vs. +100k) has most analysts revising their NFP expectations for tomorrow (+135k and +9.7%). Ordinarily, the market tends to discount ADP release because of its poor tracking capabilities. However, other employment indicators are supporting the upward employment trend and if we included the US tax extension announcement last month, it’s capable of providing substance to the report. It’s worth remembering that an ADP print excludes the government sector. Collectively over the last five months, the government sub-sector has lost approximately-220k jobs. Digging deeper, the hiring surge was focused on the small and medium sized sectors. Further proof that the corporate sector remains content in hoarding its cash and holding back on hiring. Other data showed that the US non-manufacturing sector continues to accelerate. The ISM December non-manufacturing index again beat market expectations (57 vs. 55.7) and posted its strongest growth in nearly five-years. The headline gain was driven by an acceleration in new orders (63 vs. 57.7), the strongest reading in five years. A note of caution, the employment index contracted on the month (50.2 vs. 52.7) and is in stark contrast with the ADP print. We can probably take comfort in the fact that the ISM employment gauges does not have a strong predicting track record. The service sector prices also accelerated, with the price index soaring to 70.0 from a 63.2 prior reading. The manufacturing and services readings suggest accelerating momentum in the US economy and fodder for the dollar bulls.

The USD$ is higher against the EUR -0.29%, GBP -0.26%, CHF -0.05% and JPY -0.25%. The commodity currencies are mixed this morning, CAD +0.17% and AUD -0.20%. Canadian consumer prices were up more than expected yesterday (RMPI +3.5% and IRRP +0.5% m/m) and their impact was limited. The market is focusing on today’s Ivey print and tomorrows North American employment reports rather than on yesterdays backward looking data (November release). The passthrough effects of producer prices into the Canadian CPI basket have been somewhat limited to date. It’s worth noting that ex-petroleum, the gain in IPPI would have been a uninspiring +0.2%. The loonie has taking flight on the back of its largest trading partners expected ‘re-acceleration in activity in the first few trading sessions of the New-Year. This week’s US data, PMI, factory orders and private employment reports, reinforces many analysts views that the US economy is beginning the year in upward momentum and reason enough for short term chartists to be eying 0.9750 CAD in the first quarter. This mornings Canadian Ivey PMI and employment data tomorrow is expected to surprise to the upside, coupled with Euro peripheral stress should further support Canadian government debt as an alternative to the dollar and the EUR. On the flip side, Governor Carney continues to highlights the dangers of a persistently strong domestic currency. Offers to sell dollars are beginning to gather above 1.0030 (0.9944).

The AUD is back below parity after Australian building approvals fell -4.2% m/m in November, in line with market expectations. The print came on the back of a downwardly revised +8.3% jump the previous month. Analysts expect property data to remain weak this quarter in response to Governor Stevens hikes late last year. Expect this weaker data to slow the pace of tightening, but unlikely to end the hike cycle as employment growth remains so strong. Policy members statements this week believe that the government’s stimulus measures will pressurize Governor Stevens to hike rates (4.75%) and that the flood in Queensland ‘may exacerbate already constrained supply conditions and lead to inflationary pressures’. These are good reasons supporting the currency on deeper pullbacks as investors seek to cross the currency vs. the EUR. Last year the currency rose +14% against the dollar which drove down the cost of imports and eroding exporters’ competitiveness. The currency has been trading under pressure outright as US Treasury yields climb, narrowing the yield advantage of assets down-under. Short term offers again appear above parity (0.9976).

Crude is lower in the O/N session ($90.27 -3c). Crude has reversed most of this weeks earlier losses as a surprising gain in the ADP report and growth in the services sector bolstered optimism that the US economy’s recovery is gathering sustainable momentum. With crude depreciating just over-2% from Monday’s 27-month high brought speculative demand. They believe the sell off was over done. The weekly EIA inventory report revealed that oil stocks fell -4.16m barrels last week, three times more than expected. At +335.3m barrels, inventories are above the upper limit of the average range for this time of year. Gas inventories increased by +3.3m barrels and are in the upper half of the average range, while distillates increased by +1.1m barrels. Again, there are too many hurdles to overcome ahead of the psychological $100 barrier crude. Technically, the market is not showing a tighter supply or demand balance. OPEC believes that supply and demand are ‘in balance,’ and expect demand growth will slow as the global economy struggles to recover, amid ample supplies. The market expects to meet price resistance above $90 as there is far more oil in storage, more fuel capacity and more idle oil wells to limit a stronger market rally in theory.

Gold prices fell yesterday, capping the biggest two-day loss in a year, on speculation that an economic recovery will curb demand for the metal as a haven. In the O/N session, prices are little changed. Fast money and the reducing of flight to quality positioning has been pressurizing the yellow metal, as equities, being used as an alternative, is providing more of an appeal in the first week of the New-Year. On deeper pullbacks, the commodity should remains 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. The commodity last year completed its tenth annual advance with bullion rallying +30%, it’s largest rally in three years. Even though the one direction trade feels overdone, investors continue to hold gold as a hedge against long-term inflation and have some strong technical support levels to breach before the markets witnesses a mass exodus. The Euro-zone contagion issues continue to put a floor on metal prices on demand for a haven. Technical analysts believe that gold ($1,373 +$5.40c) will outshine other precious metal in 2011 and peak somewhere above $1,600 in 2012.

The Nikkei closed at 10,529 up+149. The DAX index in Europe was at 6,989 up+42; the +FTSE (UK) currently is 6,069 up+25. The early call for the open of key US indices is higher. The US 10-year backed up 14bp yesterday (3.45%) and is little changed in the O/N session. Stronger private employment data in the US has the FI market on the back foot as we wait for tomorrows NFP release. Accommodative fiscal stimulus continues to pressurize the bond market and again give support to risk assets despite the Fed’s attempt to lower yields with their purchase program. Stronger fundamentals has the market believing that the Fed may ease up on QE2-let’s see what the employment reports are capable of bringing us.

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