Forex Blog

December 15, 2010

Moody’s plays the Grinch, Dollar rally limited

Filed under: OANDA News — Tags: , , , , , , , , , , , , , — admin @ 11:04 am

We might downgrade, we might not downgrade. Moody’s stating that they are considering downgrading Spanish Government debt further is just another example of irresponsible credit management reporting. When Capital Market liquidity is at a premium, the swings tend to be over exaggerated. For most of this month investors have focused on US yields for dollar guidance. Not surprisingly, the dollar has extended its gains this morning after the contagion rating announcement despite slightly lower US yields. Be forewarned, a soft US inflation print again will be supportive for continued QE and help US debt to find their feet after the recent selloff, limiting the dollar gains. Similarly, expect the ongoing Fed purchases to push US yields lower over the holidays, leaving the USD vulnerable as long as Euro periphery news remains subdued.

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

Forex heatmap

Yesterday’s US data was a welcome surprise. US core-retail sales aggressively beat expectations (+1.2% vs. +0.6%),. It was twice the expected pace and its strongest growth in nine months. The headline print also edged higher, managing to record its seventh consecutive monthly gain (+0.8% vs. +0.6%). On the face of it, the uptick in retail sales was most likely volume related and not price. Even the revisions made a strong market affect. The previous months results were revised substantially higher, with the headline print posting a gain of +1.7% (up from the original +1.2%) and core-receipts were up +0.8%, double the original estimate. Digging deeper, the underlying data was equally encouraging. Analyst’s note that retail sales ex-autos, building materials and gas (a component that that feeds directly into GDP) was up +0.92%, the most in nearly a year. Gains were widespread across most of the subcategories, with 8 posting gains and 9 better results. The top performing categories included clothing (+2.3%), sporting (+2.3%) and restaurants (+2.1%). While declines in autos (-0.8%), electronics (-0.6%) and furniture (-0.5%) provided the offset. It seems that consumers are stepping up to the plate and loosening their purse strings and buying discretionary items. It’s worth noting that the discretionary spending subcategory has been increasing over the past five months, also suggesting that the consumer psyche is turning the corner.   

US PPI came in higher than expected, again beating market expectations (+0.8% vs. +0.6%), while core-PPI (ex-food and energy) recorded a +0.3% gain. Year-over-year, both the core and headline advanced +3.5% and +1.2%, respectively. Most of the headline gain was contributed by higher prices of energy goods (+2.1%, index weight of 20%) and consumer foods (+1.0%). Since its lows last December (-0.6%), core-PPI has advanced just under +2%. The usual constraints of household balance sheets, an uneven labor market outlook and excess economic slack, continue to limit pricing power and the knock on to the consumer basket.

The Fed provided us with a ‘modest’ upgrade to the economic outlook yesterday and left policy settings unchanged, as widely expected. In the first paragraph of the communiqué, the committee said the ‘economic recovery is continuing, though at a rate that has been insufficient to bring down unemployment.’ The description of household spending was also upgraded from ‘increasing gradually’ to ‘increasing at a moderate pace’. What happened to retail sales then? Policy makers again have widened their take on the depressed character of housing activity, broadening their scope from ‘starts’ to ‘housing sector’. Finally, despite the somewhat brighter growth situation, ‘measures of underlying inflation continued to trend downward’, a comment that analysts believe is slightly stronger than ‘have trended lower in recent quarters’. It was another boring FOMC meeting ‘to maintain a super-accommodative posture in US monetary policy’.

The USD$ is higher against the EUR -0.56%, GBP -0.45%, JPY -0.42% and CHF -0.17%. The commodity currencies are weaker this morning, CAD -0.25% and AUD -0.83%. Yesterday Canadian labor productivity happened to unexpectedly edge higher (+0.1%) after falling a revised -0.6% in the 2nd Q. The 3rd Q gain reflects modest growth in the Canadian economy (+0.1%) and notably with no changes in the hours worked. To date, in the 4th Q, data is shaping up to repeat a negative decline. This month the loonie has gained +1.8% outright vs. its largest trading partner. Gains in commodities and stocks have been making economic growth currencies more attractive. The CAD has only witnessed modest strength as Governor Carney highlighting the dangers of a persistently strong domestic currency. The loonie continues to struggle within striking distance of parity because of the strong corporate interest to own dollars there. The market expects support for the loonie from the Russian Cbank on dollar rallies on the back of their desire to convert approximately 1-2% of their reserves into loonies. Some of the currencies shine has been taken away with Governor Carney’s comments after the BOC kept rates on hold last week. Carney acknowledged economic growth in the second half of this year is weaker than previously anticipated and expressed concern about the expected recovery in net exports (that’s a strong loonie problem). The market has taken this as a dovish sign for rates. Corporate dollar interest near parity should provide resistance for the loonie until the New-Year.

The AUD fell for the first time this week outright in the O/N session as US Treasury yields climbed, narrowing the yield advantage of assets down-under. The currency has fallen against all its major trading partners on fear that China will act in answer to slow inflation, thus reducing the demand for growth sensitive and higher-yielding assets. Earlier this week, the Aussie had rallied on the back of stronger commodity and equity prices as investors tried to embrace risk. The currency briefly was able to penetrate the parity level, which remains a strong resistance point. The AUD has climbed +9.8% this year (second biggest winner after JPY), on prospects for commodity-driven economic growth and the yield advantage of the nation’s debt compared with other developed markets. Domestic data remains strong, this months employment data blew all analysts expectations out of the water and supports the currency on pullbacks. Not aiding the currency is the concerns for long dated interest rates in the US. Analysts are beginning to agree that the tight labor market will bring the RBA back into the picture, but believe that Governor Stevens is not behind the curve just yet and will not be required to hike rates in February. With consumers boosting their savings significantly in an environment of rising job and wage growth, suggests that the RBA is still ahead of that curve. Governor Stevens has also mentioned that rates are ‘appropriate’ for the economic outlook. Investors remain better buyers on dips, planning an assault on parity again (0.9897).

Crude is lower in the O/N session ($87.54 -74c). Crude prices have fluctuated after the FOMC statement and ahead of today’s weekly inventory report that is expected to reveal another drawdown on stocks. The black-stuff had garnered support from reports over last weekend revealing that China’s refiners increased their processing rate last month. The world’s biggest energy consumer boosted their net imports of the black stuff by +26%, m/m, and increased their processing rates to ease a diesel shortage. Coupled with OPEC announcement to maintain their production quotas and the PBOC refraining from tightening monetary policy is supporting the market, probably to the year end at least. 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. Recent prices have already been elevated on the back of last week’s large fundamental drawdown of inventories and not on the strength of the dollar. The EIA inventory crude headline fell -3.82m barrels to +355.9m. Supplies were forecasted to drop by -1.4m barrels. Technically, the rise in these categories confirms there is nothing wrong with supply, but the demand picture in the US is not that robust. This is certainly in contrast to the stronger fundamentals that are occurring in Asia. Technically, expect the market to meet resistance again at the $90 high printed earlier this month.

Gold prices have found support from China refraining to hike interest rates over the weekend. The muted response to the PBOC decision to raise banks reserve requirements to +18.5% gave investors the green light to strap on some risk. Market fears that China would tighten monetary policy had eroded the demand for precious metals for most of this month. Bottom feeders have managed to stem the slide, believing that the $60 fall from its highs last week was a good opportunity to own a store of value as an alternative investment. It was only natural to see some profit taking after gold surged to a new record ($1,432.50). The commodity remains supported by the persistent concern over Euro debt levels. To date, debt contagion has driven investors into the third ‘reservable’ currency as they seek a store of value. Despite the fear that China will tighten their monetary policy, most likely in the New-year, a move to curb speculation and dampen inflation, global demand remains robust. Even though the one direction trade feels overdone, investors continue to hold gold as a hedge against currency debasement and long-term inflation. The Euro-zone backdrop is trying to put a floor on metal prices on demand for a haven. Year-to-date, the metal is up + 27.5% and is poised to record its 10th consecutive annual gain ($1,393 -$11.10c). Technical analysts believe that gold will outshine other precious metal in 2011 and peak somewhere above $1,600 in 2012.

The Nikkei closed at 10,309 down-7. The DAX index in Europe was at 6,985 down-42; the FTSE (UK) currently is 5,874 down-17. The early call for the open of key US indices is lower. The US 10-year backed up 18bp yesterday (3.47%) and eased 6bp in the O/N session (3.41%). Treasury prices plunged, pushing yields up to June levels on the back of a retail sales print aggressively beating all market expectations, partly on unconfirmed rumors that China was selling treasuries and with the Fed staying the course and maintaining a $600b program of debt purchases. Fundamentally, the market is benefiting from a drop in risk aversion and an improvement in the economic outlook. With no Government supply coming down the pipe for a couple of weeks, one would expect some support for yields at these levels. Fear of a Spanish downgrade is providing the early support for bonds this morning.

November 15, 2010

Merkel’s Europe Looks Small

Filed under: OANDA News — Tags: , , , , , , , , , , , — admin @ 10:44 am

Hey G20, what’s wrong with a phone call? You could have left a message “sorry we failed to agree and we will talk about it again in the New Year”. The upshot, global leaders are blinkered to domestic issues superseding currency stability and trade imbalances. They have agreed to piecemeal an ‘indicative guideline’, yet to be defined. In translation, it’s a signal to the world that a precarious economic situation is developing. Merkel continues to flex her might and insists that investors take a ‘haircut’ on periphery debt. Germany is trying to bully the Irish into submission. This can only lead to the periphery states losing their economic and political identity under the Euro-zone. Germany’s version of a stronger Europe looks very small indeed!

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

Forex heatmap

As expected Fridays Nov. UoM consumer index inched higher (69.3), the improvement of 1.6 pts was distributed between gains of consumers’ present assessment of the economy (79.7 vs. 76.6) and consumers’ slight optimism towards the future (expectation index advanced to 62.7 from 61.9). The minimal m/m swings remain within striking distance of the four month average (68.2). Twice as many consumers expect the economy to improve rather than worsen (+30% vs. +16%). It’s comforting for retails to note that ahead of the holiday shopping season, consumers voiced more favorable consumption attitudes. Finally, the short-term inflation expectations edged higher to +3% vs. 2.7%, while long-term expectation held steady at +2.8%.

The USD$ is higher against the EUR -0.43%, GBP -0.41%, CHF -0.04% and JPY -0.46%. The commodity currencies are mixed this morning, CAD +0.02% and AUD +0.11%. The loonie has temporarily failed on its lack of follow through parity and weakened vs. its largest trading partner on heightened risk aversion sentiment. With commodity and equity prices plummeted last week as China’s inflation numbers suggest a tighter monetary policy by the PBOC is directly affecting growth sensitive currencies. Softer trade numbers this month is strong proof that Canada cannot fundamentally rely on foreign demand to buffer the slowdown in domestic activity. For a commodity supportive currency, the loonie has only appreciated +1.5%, y/d, underperforming other growth currencies. The market is back to embracing the event risk factor and with Euro-peripheral debt problems expect investors to continue to cash in on their profitable long CAD positions.

The AUD continues its downward momentum, registering a two-week low in the O/N session, as Asian bourses declined on speculation that the Euro-zone will struggle to raise funds. Risk aversion was evident on the back of China’s pending rate hike. The slump in commodities and the general strength of the dollar has impeded the advance of growth sensitive currencies. The market is also anticipating that US retail sales climbed for a fourth consecutive month. Some softer jobs numbers last week also justified the unwinding of profitable positions. The Aussie unemployment rate jumped to +5.4% from +5.1%, a six-month high as job seekers swelled to a record, easing concern that a labor shortage will drive up wages. This months sudden jump in risk aversion over European periphery debt issues and a larger than expected Chinese monthly trade balance has again reduce the risk appetite of investors. The Chinese surplus is the second biggest this year. With Chinese authorities demanding higher bank reserves, again will restrict the flow of ‘hot’ money, indirectly and negatively affecting regional bourses and growth currencies. Market players are viewing corrective rebounds as fresh selling opportunities short term (0.9863).

Crude is higher in the O/N session ($85.30 +41c). Oil prices have been unable to sustain two-year highs as global bourses found it difficult to maintain positive traction and on fears that China may attempt to rein in inflation by raising interest rates and curb the commodity demand. The market continues to question the fundamental strength of other economies once the Chinese’s variable is erased from the global growth equation. The commodity found strength this week on the back of disappointing weekly inventory numbers. The report showed an unexpected decrease in stock as imports declined and refineries bolstered fuel production. The supplies of weekly crude fell -3.27m barrels to +364.9m. The market had anticipated inventories to climb +1.5m barrels. Aiding prices was the inventories of gas and distillate fuel (heating oil and diesel) posting bigger-than-projected declines. Gas stocks dropped -1.9m barrels, while distillates fell -5m barrels. Total oil and fuel inventories are now at their lowest levels in six-months after retreating in four of the last five weeks. Refineries operated at 82.4% of capacity, up +0.6%, w/w. Crude-oil imports tumbled -5.7% to +8.09m a day, the lowest level in eleven months. The ‘big’ dollars value will continue to influence prices despite fundamentals.

Gold prices fell last week, crystallizing a weekly loss, on speculation that China will raise interest rates to cool the economy. The stronger dollar has also curbed the demand for bullion. Speculators should expect European debt concerns to eventually provide support on these pullbacks. There were times last week that the one directional play felt so overdone and every time this has occurred, global fundamentals provided a reason to own it. The metal has advanced and fallen on speculation that European governments may struggle to pay debt. That argument depends on what direction the big dollar decides to take. With Capital Markets shifting their focus toward sovereign debt issues and away from QE2 debates, will continue to provide support for this asset class again. Year-to-date, the metal is up + 24.8% and is poised to record its 10th consecutive annual gain. For most of this year, speculators have sought an alternative investment strategy to the weaker dollar and have been using the commodity as a proxy for a ‘third reservable currency’ ($1,366 +$1.40).

The Nikkei closed at 9,827 up +102. The DAX index in Europe was at 6,732 down -2; the FTSE (UK) currently is 5,783 -14. The early call for the open of key US indices is higher. The US 10-years backed up 9bp on Friday (2.74%) and another 8bp in the O/N session (2.82%). Treasury prices have plummeted as the market is speculating that European leaders will eventually have to boost the Euro-zones most-indebted nations, reducing demand for safety. Last week the market had been lent on by dealers as they took down Treasury supply. Even the Fed buying $7.2b’s worth of product, as they embark on a second round easing to reduce unemployment and avert deflation, could not stem the rise of yield. Does this mean that Helicopter Ben theory to promote growth is broke? The market is saying so. Will we experience a whip lash effect in prices after US Retail Sales?

November 12, 2010

80 Billion Euro Irish Bailout Package?

Filed under: OANDA News — Tags: , , , , , , , , , — admin @ 11:02 am

Here we go again. Rumors that the Dubai Group, a conglomerate owned by Dubai’s ruler, missed an interest payment last month, coupled with a medley report on further Greek deficit concerns, sandwiched between doubts about Ireland’s ability to repay its debts is dictating the EUR’s direction. Theses reasons have overshadowed the G20’s attempt to ease currency tensions and secure commitment to more balanced global growth. The corralling of world leaders into one room is only strengthening the lack of confidence in risk positions. Accountability, flexibility, and the lack of multilateral agreements are making Bernanke’s QE2 ‘slight of hand’ release difficult to achieve its objectives. Do not expect the Fed to be fully committed to the buyback if the economy improves. The sudden reversal of the EUR from its lows is on the back of rumors that an Irish bailout is a done deal with a figure of 80b being mouthed.

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

Forex heatmap

It’s always difficult to come in cold to a new trading day after a mid week holiday. The O/N price action tends to cater for two trading sessions. With no data yesterday the market again focused on rumors, innuendo and the ‘talking heads‘ at the G20. This mornings Euro Industrial production fell in Sept by the largest margin in 16-months, on a broad based slowdown (down -0.9% on the month). Proof is in the pudding, states struggling with excessive deficits and credit downgrades is dampening the Euro-zone as a whole. Be on the lookout for a surprising Irish rescue package!

The USD$ is higher against the EUR -0.26%, GBP -0.73% and lower against CHF +0.17% and JPY +0.50%. The commodity currencies are weaker this morning, CAD -0.92% and AUD -1.11%. The loonie has temporarily failed on its lack of follow through parity and weakened vs. its largest trading partner on heightened risk aversion sentiment. With commodity and equity prices paring some of their weekly gains as China’s inflation numbers suggest a tighter monetary policy by the PBOC is directly affecting growth sensitive currencies. Softer trade numbers this week is strong proof that Canada cannot fundamentally rely on foreign demand to buffer the slowdown in domestic activity. For a commodity supportive currency, the loonie has only appreciated +1.5%, y/d, underperforming other growth currencies. The market is back to embracing the event risk factor and with Euro-peripheral debt problems expect investors to continue to cash in on their profitable long CAD positions, especially after last nights move.

The AUD dollar took a beating from all corners last night. A plethora of factors have helped push the currency aggressively back below parity again. Risk aversion was evident on the back of rumors that South Korea implementing further capital controls next week and on China’s pending rate hike. The slump in commodities and the general strength of the dollar has impeded the advance of growth sensitive currencies. Some softer jobs numbers this week seems to have justified the unwinding of profitable positions. The Aussie unemployment rate jumped to +5.4% from +5.1%, a six-month high as job seekers swelled to a record, easing concern that a labor shortage will drive up wages. This week’s sudden jump in risk aversion over European periphery debt issues and a larger than expected Chinese monthly trade balance has again reduce the risk appetite of investors. The Chinese surplus is the second biggest this year. With Chinese authorities demanding higher bank reserves, again will restrict the flow of ‘hot’ money, indirectly and negatively affecting regional bourses and growth currencies. Market players are viewing corrective rebounds as fresh selling opportunities short term (0.9909).

Crude is lower in the O/N session ($85.80 -$2). Oil prices have been unable to sustain two-year highs as global bourses found it difficult to maintain positive traction and on fears that China may attempt to rein in inflation by raising interest rates and curb the commodity demand. The market continues to question the fundamental strength of other economies once the Chinese’s variable is erased from the global growth equation. The commodity found strength this week on the back of disappointing weekly inventory numbers. The report showed an unexpected decrease in stock as imports declined and refineries bolstered fuel production. The supplies of weekly crude fell -3.27m barrels to +364.9m. The market had anticipated inventories to climb +1.5m barrels. Aiding prices was the inventories of gas and distillate fuel (heating oil and diesel) posting bigger-than-projected declines. Gas stocks dropped -1.9m barrels, while distillates fell -5m barrels. Total oil and fuel inventories are now at their lowest levels in six-months after retreating in four of the last five weeks. Refineries operated at 82.4% of capacity, up +0.6%, w/w. Crude-oil imports tumbled -5.7% to +8.09m a day, the lowest level in eleven months. The ‘big’ dollars value will continue to influence prices despite fundamentals.

Gold prices fell this morning as speculation that China may raise interest rates and a strengthening dollar curbed demand for bullion. However, European debt concerns should continue to boost demand on these pullbacks. The commodity again will be used for a protection of wealth and a hedge against faster inflation in China. There have been times this week that the one directional play felt so overdone and every time this has occurred, global fundamentals provide a reason to own it. The dollar’s strength has tried to erode the metal’s appeal as an alternative asset this week, but in vain. The metal has advanced and fallen on speculation that European governments may struggle to pay debt. That argument depends on what direction the big dollar decides to take. With Capital Markets shifting their focus toward sovereign debt issues and away from QE2 debates will continue to provide strong support for this asset class on medium term pull backs. Year-to-date, the metal is up + 26.3% and is poised to record its 10th consecutive annual gain. Precious metals have outperformed global equities and treasuries as Cbanks try to maintain their low interest rates to boost economic growth. Any pullback will continue to be bought. For most of this year speculators have sought an alternative investment strategy to the historical reserve currency and have been using the commodity as a proxy for a ‘third reservable currency’ ($1,389 -$19).

The Nikkei closed at 9,861 up +31. The DAX index in Europe was at 6,722 up +2; the FTSE (UK) currently is 5,814 -2. The early call for the open of key US indices is higher. The US 10-years backed up 3bp yesterday (2.65%) and are little changed in the O/N session. Dealers had been leaning on treasuries all week, making the US government pay up for liquidity. Now that all the auctions have been taken down, not as successful as expected, the market has been chipping away at the higher yields, buying product on event risk and reduction of risk exposure.

August 25, 2010

Noda Yen for me thank you

Filed under: OANDA News — Tags: , , , , , , , , , , , , — admin @ 10:08 am

Its fear that is driving capital markets, the kind of thing that may reinforce the idea of a double-dip recession, not fundamentals or technical’s. An Irish downgrade three-months ago would have sunk the EUR, instead the German Ifo survey rising to a three-year high this morning, is tentatively convincing the market that ‘their’ economy will not lose as much momentum as believed. How long can the one economy shoulder the EUR? Mind you, with US yields so low most economies could. Japan debating over a rising yen has markets speculating on the timing of intervention by the BOJ. Owning the currency is not yet toxic, but positions are been lightened in anticipation. Direct intervention will probably be trumped by monetary easing.

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

Forex heatmap

It’s the ‘bad’ after the ‘bad’. Currently, it’s difficult to sugarcoat any data coming out of North America. US existing home sales happened to plunge to a new record low yesterday. In the absence of any stimulus, the headline print is devastating to the sector (+3.83m vs. +5.26m, -27.2%). The months ahead look similarly dismal, as the inventory overhang headache is worsening. By default, this will lead to weaker house prices for the future. Digging deeper, there was nothing positive in the report. Months supply ballooned to +12.5 months vs. a +8.9 prior print. This has occurred on the back of increased listings and collapsed sales, and we are not evening including shadow inventories in the data (foreclosed homes off the market). Analysts are even predicting future direr months supply prints ahead. By default, this will lead to further erosion of prices and no positive wealth effect. The permanent wealth shock will lead to a higher savings ratio by the consumer, the go to variable for the Fed. Interestingly, most of the record decline occurred in the single family component sub-category (+3.37m vs. +4.62m).

The Richmond Fed data was better than the market had been expecting (11 vs. 8), but continues to lean on the softer side. The manufacturing activity in the district remains in expansion mode. However, that being said, the pace continues to decelerate for the 4th-straight month. Digging deeper, the rate of shipment growth was cut in half from last month. Not helping was the easing up of the new-order volumes and the backlog of orders from July. This will eventually point to a slowdown in shipments over the coming months. Worth noting was the six-month forward expectations plummeting – 77% to 7 (lowest level in two years). New-orders is expanding in the district, but at a slow pace. This is in contrast to other surveys of late. Companies expect capital spending to slow down to levels not seen in over a year. Finally, employment conditions continued to improve, but at deteriorating pace.

The USD$ is lower against the EUR +0.09%, GBP +0.09%, CHF +0.21% and higher against JPY -0.47%. The commodity currencies are stronger this morning, CAD +0.11% and AUD +0.41%. One should not get too upset with the Canadian retail sales data yesterday. In fact it was much stronger than the headline would have you believe (+0.1% vs. -0.4%). The disappointment on the dollar value of retail sales was due to lower prices. In volume terms, total sales advanced +0.9%, m/m, a huge plus and contributor to this quarters GDP final print. What is the BOC to do? Well, prior to the report, futures were pricing in a 32% chance of a hike in Sept. But, one has to assume that they are not solely relying on Canadian fundamentals. With respect to the report and weighing up the strong gains in real-manufacturing shipments, expect Governor Carney to continue to normalize his rate policy by hiking +25bp and then step to the side lines for a breather. Retail sales are only about 40% of consumer spending. Weaker global equity and commodity prices pushed the loonie to a new six-week low yesterday. The currency is not immune to the weaker data out of the US. Over the past two trading sessions, weaker CAD long positions have been squeezed out as fear of a double-dip occurring has investors seeking sanctuary in risk aversion trading strategies. 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 north of 1.0650.

The AUD has ended two downward days on speculation that Japanese policy makers may consider intervening in the markets and dampen the demand for JPY. Comments from Japanese officials have squeezed their currency lower across the board in the O/N session. Global bourses under pressure have been capable of pushing the AUD to test its one month lows this week. 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. Interest rate differentials play a big part of the currency’s attractiveness. Risk aversion will likely force the bull’s hand, capping rallies with better sellers on upticks (0.8870).

Crude is higher in the O/N session ($72.05 up +42c). Yesterday, crude prices fell to a new 7-week low on speculation that US inventories of crude and fuel increased last week as economic growth slows. It is the fifth daily decline undermining investors’ need to hedge against inflation using dollar-priced assets. Last weeks EIA report provided fodder for the ‘bears’ and the market anticipates this morning release will fare no better. 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. 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 rebounded with a vengeance yesterday, and continues to stay the course this morning, from its 4-week lows as investors seek sanctuary in the safer heaven asset classes on the back of weaker equity markets. With global bourses under pressure, investors are trying to retain cash on mounting evidence of an 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. Year-to-date the metal has risen +11.9%. With treasury yields expected to remain low for sometime and with the Fed announcement earlier this month of their intentions to buy bonds, could promote a quickening inflation rate, which would promote pushing commodity prices higher. For most of this year, we have witnessed a gold rally on the back of a weaker EUR ($1,221 -$6.70c). Even with the dollar strengthening, the historical negative correlation is only tentatively holding true at the moment. It’s about preserving wealth that is driving metal and keeping commodities in demand on bigger pullbacks.

The Nikkei closed at 8,845 down -150 The DAX index in Europe was at 5,927 down -8; the FTSE (UK) currently is 5,141 down -15. The early call for the open of key US indices is lower. The US 10-year plummeted 10bp yesterday (2.50%) and are little changed in the O/N session. The short end of the US curve happened to print record low yields after yesterdays worse than anticipated US home sales. Investors are concerned for the strength of the global recovery and are trading to flatten that US yield curve, 2’s/10’s are currently at +203bp. Analysts medium target has been +200bp as fear drives the market to lower rates. Treasuries 2-year note sale came in with a yield of 0.498% (a record low). The bid-to-cover ratio was 3.12, compared with a 4-auction average of 3.19. The indirect bid (foreign buyers) was 29%, compared to the average of 35.4%. The direct bid was 12% vs. 17.9%. In total, the US plans to sell $102b of debt this week. We had the 2’s yesterday (+$37b), 5’s today (+$36b) and 7-year notes tomorrow (+$29b). This will be the smallest monthly offering of ‘the’ combination thus far. Longer term buyers continue to control the market, that being said, product does look rich on the curve.

August 24, 2010

YEN Yada Yada

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

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

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

Forex heatmap

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

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

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

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

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

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

August 18, 2010

Bank of Japan you are costing us money

Filed under: OANDA News — Tags: , , , , , , , , — admin @ 10:17 am

Oh, can’t you feel the relief? No double dip! Yields and stocks soared yesterday. Don’t bet too heavily on it. It’s probably an even bet that ‘the’ dip is within our grasp. With US growth being so ‘modest’, and in this environment, it would not take much to tip the economy into negative territory. That been said, US industrial production take a bow, just the one, for the time being at least. With the BOJ seeing no immediate threat to their domestic economy is costing us a fortune. Every day the market keeps trying to pick the yen’s high or dollar lows. We would get better odd’s winning the lotto and be spending less. When the market gets confirmation that authorities will indeed be standing aside, the dollar will be blowing to the left and not the right!

The US$ is mixed in the O/N trading session. Currently it is lower against 9 of the 16 most actively traded currencies in a ‘choppy’ trading range.

Forex heatmap

US data yesterday brought us a mixed bag of results. US PPI increased for the first time in 4-months (+0.2% vs. -0.5%), signaling slower growth is not resulting in deflation. Core-PPI climbed +0.3%, more than expected and it was the biggest gain in 8-months. With a slowing economy, companies will have ‘little room to pass on costs and will keep overall prices contained’. The subdued inflation indicators allow the Fed to remain on the side line for the foreseeable future. It was not a surprise to see US Housing starts rising less than forecasted (+0.55m vs. +0.57m) and building permits declining to the lowest level in more than a year (+0.57m vs. +0.58m). This is stronger proof of a lack of a rebound in construction following an expired tax credit and much lower mortgage rates. It’s no surprise to see that weaker income growth, elevated inventories, including shadow stock, and higher unemployment should continue to pressurize the housing industry.

It was a much better reading for US industrial production yesterday (+1.0% vs. +0.5%). Previous months data happened to be ‘skewed’ by an artifice lift in utilities (specifically electricity usage). Digging deeper, manufacturing output climbed +1.1%, while utilities were up only +0.1% and mining advanced +0.9%. Focusing on manufacturing, within the category the gains were dispersed across the sub-sectors (autos +9.9%, machinery +1.1% and electronics +1.1%). Analysts note, looking forward weakness in new-orders means future weakness in industrial production figures. Factory orders have fallen over the last few months and ISM manufacturing survey new-orders have also been eroding prior month’s gains. Ex-autos, however, manufacturing output increased +0.6% in July. The survey evidence still points to a slowdown in the pace of the manufacturing recovery, but, should alleviate fears of the manufacturing sector heading right back into a recession.

The USD$ is higher against the EUR -0.28%, GBP -0.37% and lower against the CHF +0.29% and JPY +0.02%. The commodity currencies are mixed this morning, CAD +0.29% and AUD -0.65%. Yesterday’s Canadian manufacturing shipments were far stronger than the headline suggested (+0.1%). Adjusting the dollars in real terms, the shipment print climbed +0.7% outstripping the dollar headline rise. It’s the constant dollar release that is added to the June GDP. Inventories climbed +0.7%, but, on relative terms remains very low. The ratio of inventories to sales edged a tad higher to 1.31, but remains well below last year’s peak. Analysts note that Canada has been successful in working off its inventory excess to date. A plus was the unfilled orders climbing +1.3%, which would suggest further shipments strength in the coming months. Fundamentally, Canada remains somewhat of a safer heaven globally. However, their economy cannot be immune to a US slowdown. It happens to be its largest trading partner with 70% of all exports heading south. The currency has found some momentum vs. the dollar with intraday bulls dragging the loonie higher towards 1.0275. 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.
To own it on the cross would be less volatile and a ‘safer-heaven’ investment with its stronger fundamentals working for it. Frequently, when the US comes under pressure, the loonie is dragged along because of its proximity. BHP Billiton hostile bid takeover of Potash in Canada will keep the loonie firm, no debt involved. Perhaps parity is on the cards again, short term at least.

The AUD came under pressure vs. the JPY on speculation that the BOJ are not ready to intervene on behalf of their currency, this has damped the demand for some of the higher-yielding assets. Government data has also put pressure on the currency’s climb. Reports O/N 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 this week, capping rallies, as equities find it difficult to maintain traction at the moment. In reality with the outlook for both the US and Chinese economies becoming uncertain, growth-sensitive currencies like the AUD, CAD and KIWI, are unlikely to continue to draw strong buying interest from speculators (0.9020). Follow the Asian bourses for guidance.

Crude is lower in the O/N session ($75.17 down -60c). Crude prices continue to trade near their one month low as mixed global bourses have ignited concerns that the recovery will not be strong enough to revive fuel demand. The market expects to see ‘side-ways trading in a tight-range’ this week because of the ‘stuttering economies’. Prices have gravitated towards these lows on the back of a bearish EIA report last week and on data showing that economic growth in both China and the US is slowing. The report showed that US inventories of gas and distillates (heating oil and diesel) climbed last week (+400k vs. a flat expectation, while crude stock fell -3m barrels vs. a loss of -1.9m. Distillate stocks rose by +3.5m to +173.1m barrels (the highest weekly inventory level in 27-years). The demand for oil products also fell, as gas demand hit a 2-month low, while demand for distillates is at the 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. Technical analysts believe that $75 a barrel remains a sticky level to penetrate. The recent macro-data flow indicates that the US activity has slowed down and the market should expect further price pull back as US fundamentals continue to show a market that is still overstocked, particularly on the product side. Speculators remain better sellers on up-ticks in the short term. This morning weekly crude report is anticipated to show a sizable draw, largely as a result of an expected additional slide in imports. We have been surprised before!

Gold prices were little changed yesterday, managing to pare some of the day’s earlier rally as global equities on the rise dissuaded investors from demanding the commodity as a safe heaven asset. For most of this week, a weaker dollar has been helping commodity prices. Big picture, the market continues to require safer assets at the expense of equities and other commodities. 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 +10.8%. 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 ($1,224 -$3.90c). The dollar strength is under scrutiny and 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 9,240 up +79. The DAX index in Europe was at 6,170 down -36; the FTSE (UK) currently is 5,304 down -46. The early call for the open of key US indices is lower. The US 10-year backed up 6bp yesterday (2.62%) and is little changed in the O/N session. Treasuries prices slipped from their 17-month highs after some improved US data yesterday and on the back of global bourses advancing on stronger earning reports in the US. Basically the FI market is taking a breather after the strong run up of late. The underlying sentiment remains positive for treasuries as investors remain extremely nervous about the US. The 2’s/10’s has widened a tad (+212), but, continues to remain in striking distance of analysts predicted +200 target. With the Fed’s intention to resume buying US government debt to bolster a faltering economic recovery will provide further support for a flattening curve bias. The market will be content in owning longer dated product on these deeper pull backs.

August 16, 2010

Risk Aversion full steam ahead without the Yen

Filed under: OANDA News — Tags: , , , , , , , , , , , — admin @ 10:17 am

Traders are getting that stale taste in their mouth again. Investor aversion to risk and low liquidity has increased demand especially for the CHF this morning. With weaker global bourses and general investor uncertainty there is always a rising demand for ‘perceived safety’ and their trading strategies. This scenario will lead to a flatter yield curve, the SNB and BOJ being challenged and a ‘yellow metal’ in demand. EU data this morning showed that July’s CPI inflation numbers confirmed that the annual rate climbed to a twenty-month high (+1.7%), but with the core still very low (+1.0). This is unlikely to give the ECB cause for concern. The market continues to fear BOJ intervention to stop the JPY rising. At the moment they practice verbal intervention, however, there is a perceived risk that they will enter the forex market to sell the JPY or announce further monetary easing. Verbal seems to be the best bang for their buck at the moment.

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.

Forex heatmap

Friday’s numbers are consistent with a ‘sluggish’ US consumer. The Fed has relied heavily on the consumer to drag us out of recession and onto growth. Bernanke’s statement last week again has the market questioning the ‘strengths’ of the US economy. The released data showed that US retail sales rose less than forecasted (+0.4% VS. +0.5%) followed by a consumer confidence print remaining near its 8-month low (69.6 vs. 69.4). This is strong proof that the economic slowdown should extend into the second half of this year. Approximately +70% of the total US economy is made up of consumer spending and is ‘unlikely to pick up in the absence of a recovery in the labor market’ any time soon. US policy makers last week have made their ‘first attempt to shore up a recovery’. An economy that is ‘more modest’ than earlier anticipated. Are we in danger of slipping back into recession?

The USD$ is lower against the EUR +0.34%, CHF +1.00% and JPY +0.29% and higher against GBP -0.15%. The commodity currencies are mixed this morning, CAD +0.28% and AUD -0.14%. Owning CAD by proxy or on the cross looks like a good bet. Being long CAD outright is not paying as the world coverts dollars in times of risk aversion. The intraday liquidity is squeezing the weaker long CAD positions out of a tight trading range. To own it on the cross would be less volatile and a ‘safer-heaven’ investment with its stronger fundamentals working for it. Canadian fundamentals are not immune to its southern neighbor, who is the countries largest trading partner. Frequently, when the US comes under pressure, the loonie is dragged along because of its proximity. With Bernanke stating that the pace of economic recovery is more likely to be modest, it would be foolish not to expect that the bi-lateral trade numbers would not be affected. Last month, governor Carney predicted that trade would ‘shave -1.6% from Canada’s growth this year’. Investors are implementing risk aversion trading strategies as equities and commodities retreat on the back of capital markets questioning the strength of sustainable global growth. The markets reaction to Bernanke’s announcement earlier this week, futures traders are pricing in a +20% chance of a Governor Carney +25bp hike next month before heading to the sidelines for the remainder of this year at least. Watch the crosses. It will be a good indicator for the loonie buyers running out of ammo!

No currency is immune to this ‘questionable growth’ environment. The AUD continues to hover near this months low ahead of the RBA minutes this evening where traders speculate that policy makers will indicate an extended rate pause next go around. On a technical level, the AUD pull back last week looks like the beginning of a correction. Chartists are eyeing a push towards 0.86c. Risk aversion will likely force the bull’s hand this week, capping rallies, as equities find it difficult to maintain traction at the moment. Last week, the AUD underperformed because of weaker fundamentals. Last month’s employment growth (+23k and +5.3% unemployment rate) disappointed and signs that the global economic recovery is slowing also damped demand for higher-yielding assets. In reality with the outlook for both the US and Chinese economies becoming uncertain, growth-sensitive currencies like the AUD, CAD and KIWI, are unlikely to draw strong buying interest from speculators (0.8916). Follow the Asian bourses for guidance.

Crude is higher in the O/N session ($75.61 up +22c). Crude prices softened on Friday extending its weekly loss on the back of a bearish EIA report last Wed., and on data showing that economic growth in both China and the US is slowing. Investors all week have been questioning the natural strength of global demand for the ‘black-stuff’. The weekly supply report showed that US inventories of gas and distillates (heating oil and diesel) again climbed last week (+400k vs. a flat expectation, while crude stock fell -3m barrels vs. a loss of -1.9m. Distillate stocks rose by +3.5m to +173.1m barrels (the highest weekly inventory level in 27-years). The demand for oil products also fell, as gas demand hit a 2-month low, while demand for distillates is at the 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. Technical analysts believe that $75 a barrel remains a sticky level to penetrate. The recent macro-data flow indicates that the US activity has slowed down and the market should expect further price pull back as the ‘one directional upward move’ may be overdone. US fundamentals continue to show a market that is still overstocked, particularly on the product side. Speculators remain better sellers on up-ticks in the short term. An overdue bounce must be in the cards?

Gold prices fell from a 6-week high on Friday as the dollar’s rally temporarily snapped demand for the metal as an alternative investment. All week investors have coveted the metal as a safer heaven investment. A rising dollar was paying no heed to the historical no’ correlation relationship between the two asset classes. Technically, precious metal prices may have got ahead of themselves and the market saw fit to book some profits. Bigger picture, investors continue to require safer assets at the expense of equities and other commodities. This morning the commodity is once again in demand. Year-to-date the metal has risen +11%. 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 ($1,224 +$8). Now that the dollar has entered the technical ‘bull’ trading range as a safer heaven investment, will the EUR’s weakness support higher ‘yellow metal’ prices for much longer?

The Nikkei closed at 9,196 down -57. The DAX index in Europe was at 6,090 down -20; the FTSE (UK) currently is 5,250 down -25. The early call for the open of key US indices is lower. The US 10-year eased 7bp on Friday (2.66%) and is little changed in the O/N session. The 2’s/10 spread continue to flatten (+214), despite all the supply that has been coming down the pipe. On the whole, last weeks US auctions were well received and with softer US fundamental data coupled with the Fed’s intention to resume buying US government debt to bolster a faltering economic recovery will provide further support for a flattening curve bias. The market will be content in owning longer dated product on deeper pull backs.

August 12, 2010

JPY intervention 15-years later

Filed under: OANDA News — Tags: , , , , , , , , , , , — admin @ 10:03 am

Verbal threats are never idle and we are hearing more and more of them from various interested parties. JPY at fifteen year highs vs. the dollar brings back memories. The world was so different then, not! We were still worrying about intervention, when it happened, because of the lack of technology, the impact took longer, but the positioning was the same. Data this morning confirms the Euro-zone industrial production recovery continues (-0.1%) and is the regions main engine of growth. The small drop has followed three consecutive months of healthy rises, one cannot state that the recovery has come too a halt just yet. With most of the stuffing knocked out of them in yesterday’s moves, expect sideways trading action to be the norm for the moment and FI prices to grid higher as risk aversion tries to dominate.

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 ‘whippy’ trading range.

Forex heatmap

Reality, the US Trade deficit (-$49.9b vs. -$42b) is actually speeding up their economic downturn. Fact, the US economy cannot rely on overseas demand for the current domestic weakness. June’s +4.1% rise to a 20-month high experienced no oil-effect in the headline depreciation. Analysts expect theta net-external trade will have wiped off -2.7% from the 2nd Q GDP growth. Digging deeper, annual import growth for the month was +29.2%, while exports recorded +17.7%. Consensus has both slowing from here on out. The import growth was buoyed by the strength in both the capital and consumer gains. The Capital growth will ‘just fade away’ once the projects, once postponed during the recession, are finally completed. Export growth will be affected by a lackluster overseas demand and because of the strengthening dollar. An ongoing eyesore for US trade is the bilateral, seasonally adjusted trade deficit with the world’s second largest economy, China. At a new record high of -$26.4b, one can expect the ‘slow’ pace of the renminbi currency appreciation to re-ignite US/China tension!

The USD$ is lower against the EUR +0.32%, GBP +0.16%, CHF +0.23% and higher against JPY -0.37%. The commodity currencies are mixed this morning, CAD -0.04% and AUD +0.06%. Not dissimilar to its neighbors announcement, the Canadian trade balance release disappointed yesterday, widening last month as exports fell at the sharpest pace in 10-months (-$1.1b vs. -$0.1b). Specifically, there was a decline in shipments of gold, energy and cars. The headline print would suggest trade numbers for this year may be more of a drag on the economy than initially thought. Expect to see analysts readdressing and revising their GDP forecasts. Last month, governor Carney predicted that trade would ‘shave -1.6% from Canada’s growth this year’. Yesterday’s report was one of the variables that happened to push the loonie to a new 3-week low and technically open the door for a mini-dollar rally towards the 1.0650 level. Investors are implementing risk aversion trading strategies as equities and commodities retreat on the back of capital markets questioning the strength of sustainable global growth. Despite the markets reaction to Bernanke’s announcement earlier this week, futures traders are pricing in a +60% chance of a Governor Carney +25bp hike next month before heading to the sidelines for the remainder of this year at least. Watch the crosses. It will be a good indicator for the loonie buyers running out of ammo!

Firstly, lets looks at the data down under, employment releases last night caused some two way action for the AUD. Initially, after last months employment growth (+23k and +5.3% unemployment rate) disappointed, it pressurized the currency, as investors bet that the RBA will extend their pause in ‘the most aggressive round of interest-rate increases by a G-20 member’. Signs that the global economic recovery is slowing also damped demand for higher-yielding assets. Data out of China earlier this week did not help the currency’s position. China’s industrial reports last month grew the least in 11-months, further proof of a slowdown in Australia’s largest trading partner. In reality with the outlook for both the US and Chinese economies becoming uncertain, growth-sensitive currencies like the AUD, CAD and KIWI, are unlikely to draw strong buying interest from speculators. In the present environment, there are only two scenarios that would give the AUD a lift. Firstly, without a sharp ‘further dip in US yields’ and secondly, a market belief that RBA rate hikes are imminent can only drive the currency higher in the short term. We all know that global yields are dropping like hot-cakes, as investors grab yield. Because of the equity actions, the market is a cautious buyer on pullbacks, wary that the recent strong rally technically may be overdone. During this morning’s session, the AUD has managed to reverse its declines vs. the JPY and the dollar on ‘speculation Japanese officials will act to halt an advance in their nation’s currency’ (0.8936).

Crude is lower in the O/N session ($77.07 down -95c). Crude prices extended their losses for a second consecutive day on the back of a bearish weekly inventory report, on data showing that economic growth in both China and the US is slowing and on the questionable natural strength of global demand for the product. The weekly report showed that US inventories of gas and distillates (heating oil and diesel) again climbed last week (+400k vs. a flat expectation, while crude stock fell -3m barrels vs. a loss of -1.9m. Distillate stocks rose by +3.5m to +173.1m barrels (the highest weekly inventory level in 27-years). The demand for oil products also fell, as gas demand hit a 2-month low, while demand for distillates is at the lowest level in 10-months. The report re-confirms the IEA conclusion earlier this week 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. Supplies continue to hover near record highs, introduce the questionable growth variable coupled with recent reports indicating a weakening global economy and we have the making of a stronger ‘bearish run’. The recent macro-data flow indicates that the US activity has slowed down and the market should expect further price pull back as the ‘one directional upward move’ may be overdone. US fundamentals continue to show a market that is still overstocked, particularly on the product side. Speculators remain better sellers on up-ticks in the short term.

Gold prices eased yesterday as the dollar surged the most intraday since Dec. This eroded the demand for the precious ‘yellow metal’ as an alternative investment, temporarily at least. It seems that the natural negative correlation between the two assets is ‘back-on’, but for how long? Initially after the Fed announcement earlier this week, the market bought into the idea that policy maker’s buying of bonds would promote a quickening inflation rate. By default, this initially pushed commodity prices higher. On should expect a limited pull back now that ‘fear variable’ has reared its ugly head. Last week, after another disappointing employment report, speculators sought sanctuary in the safer heaven asset class. For most of this year, we have witnessed a gold rally on the back of a weaker EUR. Since the record highs witnessed on June 21st ($1,266), the commodity has fallen -4.7%. Historically and fundamentally, this is the ‘slowest’ season for physical demand and now with China potentially changing the ground rules should temporarily drag the metal higher. Year-to-date, the commodity has gained +7.6% ($1,202 +$3.00c). Now that the dollar has entered the technical ‘bull’ trading range as a safer heaven investment, will the EUR’s weakness support higher ‘yellow metal’ prices?

The Nikkei closed at 9,212 down -80. The DAX index in Europe was at 6,129 down -25; the FTSE (UK) currently is 5,235 down -10. The early call for the open of key US indices is lower. The US 10-year eased 4bp yesterday (2.70%) and is little changed in the O/N session. The 2’s/10 narrowed again (+219) with the 10’s touching the lowest yield on a closing basis in more than a year. This has occurred despite supply coming down the pipeline. Yesterday’s $24b 10-year note came in at a record low yield of +2.73% compared with 2.732% WI’s. The bid-to-cover ratio was 3.04 compared with an average of 3.09 over the past eight auctions. With global bourses in the ‘red’, demand for safer assets remain strong amid economic worries as the Fed is set to buy Treasuries to support a slowing economy. The indirect bid (proxy for foreign demand) was +46% (the highest in 11-months), compared to 37.4% for the past eight auctions. The direct bid (non-primary dealers) was +11%, compared to an average of +16.2%. With a flattening curve bias, the market will be content in owning longer dated product on pull backs.

January 13, 2010

Obama Takes on Wall Street Bankers

Filed under: OANDA News — Tags: , , , , , , , , , , — admin @ 3:01 pm

Later today, President Barack Obama will announce the application of new fees on those financial institutions that received the greatest benefit from taxpayer largesse. The announcement comes at the height of the banking “silly season” when it seems that every day, we hear of millions more in bonuses to be paid to the very same executives that allowed the near-fatal collapse of the banking system on their watch.

US President Barack Obama

US President Barack Obama

No matter which side of the debate you fall on this issue, we can all certainly agree that from a publicity standpoint, the optics on this are beyond terrible. Unemployment continues to trend at 10 percent in the US with “real” unemployment likely double that figure. Bank profits however are on the rise and with them, pay-outs to executives and this is where it gets sticky. If it had not been for the billions in taxpayer dollars handed practically restriction-free to America’s banks, then there could well have been many more failures on the scale of the Lehman Brothers implosion.

The need to save the US banking sector from a crisis largely of its own making notwithstanding, there is no denying that the banks relied on taxpayer dollars to not only survive, but outright thrive even as much of middle class America continues to suffer. It is this reality that has so many people up in arms. After all, how much of a financial genius do you have to be when the government waits in the wings with buckets of public money to ensure your survival.

Yet, rather than acknowledge the role that public money played in saving the banking system, executives insist on patting each other on the back all the while claiming victory in defeating the crisis. And by patting themselves on the back, I mean giving themselves millions in bonuses that they defend as something they earned due to their own hard word and diligence.

Don’t get me wrong – I am the furthest from being anti-capitalist – I whole-heartedly support for-profit businesses paying those that ensure the success of the firm generously, if not at least appropriately. However, in this case, you have to question the wisdom of paying such huge bonuses given the overall state of the economy. Talk about rubbing the public’s face in it.

Ultimately, it was these very actions that forced the Obama administration to do something – anything – to show the populace that the government is on the side of the taxpayer. The fact that the administration’s approval numbers have plummeted as an ever-greater number of people question the government’s priority, only sealed the fate of the banks.

December 28, 2009

The dollar is stuck in ‘no-mans land’

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

‘Between the years’ is how some analysts describe this week of trading. This tends to be another shortened holiday week where some of the currency movements make little sense. Seasoned traders are happy to make the ‘turn’ with minimum fuss. Liquidity issues will remain. This month has seen only ‘one way traffic’ and that’s been in favor of the dollar. Technically, the directional move has been over done, on a macro-perspective, little has changed, be weary of dollar bears wanting to have a ‘punt’.

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

Forex heatmap

With the UK and Canada on extended holidays today and North American travel tailgated, this session with lack participation, even despite the week that’s in it. There is no data to chew on today, however, expect the US 2-year auction to be the highlight of the day. There are +$44b notes on offer and with the curve shifting aggressively this month it will be interesting to see what the demand is like. Technically, the shorter end of the curve should be absorbed easier than the 7’s on Wednesday. This week is a good time to get caught up on year-end reading.

The USD$ is currently higher against the EUR -0.02%, CHF -0.02%, JPY -0.12% and lower against GBP +0.04%. The commodity currencies are stronger this morning, CAD +0.07% and AUD +0.29%. The loonie managed to strengthen during last week’s Christmas shortened week pushing the currency to it highest print vs. its southern neighbor in 3-weeks. In fact, the loonies strengthened against all 16 of its largest trading partners as Canadian GDP gained for a second straight quarter. Elevated commodity prices and robust equity indices have kept the loonie in ‘demanded’ territory. It has rallied higher on speculation that stronger domestic fundamentals warrant the BOC to hike rates sooner than anticipated. It’s not surprising that Governor Carneys policy of timing may be going step ‘n step with the Fed’s. Year-to-date the currency is up 16% and the Canadian futures market is starting to price in rate hikes sooner than next May. If one prefers being long the greenback, crossing it with ‘this’ commodity sensitive currency is not the ideal answer as analysts continue to favor buying the loonie longer term. EUR/CAD books are starting to see more sell orders building above.

The AUD is higher in the O/N session on the back of stronger commodity prices. However, some investors are speculating that stronger US economic data will warrant the Fed to hike rates ‘sooner that later’ and interest differentials will pressurize the AUD. The RBA believes its monetary policy is ‘now back in the normal range’ after lenders raised business and home-loan rates by more than the RBA themselves have increased (+3.75%) the overnight cash rate target. Traders have aggressively pared bets that the Cbank was in a position to hike rates for a fourth consecutive time in Feb. The currency temporarily remains under pressure despite stronger fundamentals and commodity prices with investors continuing to look for better levels to sell it (0.8882).

Crude is higher in the O/N session ($78.27 up +22c). By the end of last week, crude managed to roar higher on the back of stronger fundamentals, a weaker weekly inventory report and an illiquid market that influences price gyrations. Will the bullish move be sustainable as we head into another holiday shortened week? Various surveys again expect inventories to be lower this week and this scenario should only support prices. Crude inventories fell -4.84m barrels to +327.5m last week. This month alone we have witnessed inventories plummet -3.6%. Digging deeper, last weeks report was even more bullish for prices. Distillate fuel (heating oil and diesel) slipped -3.03m barrels to +161.3m, the biggest decline in 8-months. Gas stockpiles fell -883m barrels to +216.3m. It’s worth noting that this was the first drop in a month and a half. Imports of the black stuff fell -0.8% to +7.71m barrels a day and the lowest level in 15-months. The trend of demand and consumption continues to climb. Gas demand averaged +9.05m barrels a day, w/w, that’s +2% higher than a year ago, while consumption of distillate fuel averaged +3.99m barrels a day, +5.2% higher w/w. Volume remains light because of the holidays, which makes it easier to move the market. For the moment the ‘reserve’ currency will dictate the direction of commodity prices, however, fundamentally we cannot ignore last week’s weaker inventory report. One should expect the black stuff to be better bid on pull backs until the New Year.

Gold rose the most in a week on Thursday when the dollar started to wilt and boosted the demand for the ‘yellow metal’ as an alternative investment. In this morning’s session, the commodity again has started with a bid. The greenback managed to pare just under a ½% vs. its G7’s member currencies last week and is treading water this morning. Month-to-date, the commodity has depreciated just under 11% after printing a record high of $1,227.50 earlier in Dec. Strong US fundamentals has propelled the dollar 4% higher this month. Is this a seasonal or year-end move? Is the dollar ‘bullness’ sustainable? For now, the metal seems to have found some support. Not unlike other asset classes, this month’s holiday swings have been somewhat overly exaggerated ($1,111).

The Nikkei closed at 10,634 up +139. The DAX index in Europe was at 6,002 up +45; the FTSE (UK) currently is 5,402 up +30. The early call for the open of key US indices is higher. The US 10-year bond backed up another 6bp since Thursday (3.80%) and another 4bp in the O/N session. The US curve remains under pressure with 10-yrs printing a 4-month high yield on the back of strong US home data last week. The fear that an accelerating US economic recovery will fuel inflation has dampened the demand for government debt and pushed the 2’s/10’s spread out to 286bp. With more supply coming down the pipeline this week, 2’s (today-$44b), 5’s (tomorrow-$48b) and 7’s (Wednesday-$32b) should pressurizes prices even further. Many analysts are now throwing their weight behind the idea that 10-years will yield 4% by end of next year and that the curve will continue to steepen. However, short term technically we are approaching some attractive yields.

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