Forex Blog

July 6, 2010

EUR stalking to pounce higher

Filed under: OANDA News — Tags: , , , , , , , , , , , , , — admin @ 10:29 am

The majority will be surprised to see the EUR testing Friday’s highs again this morning, especially with the amount of negative EU copy being distributed since the weekend. EU fear mongering from inadequate ‘stress testing’, which may be unable to dictate hidden losses to unmanageable sovereign debt issues, has had a limited negative impact on the currency thus far. The negative Swiss CPI print for June this morning may have re-awakened a fear that, despite what Hildebrand communicated to the market earlier this month, there may be an SNB intervention. Even reports that China is expanding its investment in JGB’s, coinciding with Europe’s fiscal crisis, has done little to dissuade the market. Technically, the market is still trying to decipher the fundamental data. Gut reactions are expensive in this market volatility.

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 ‘volatile’ trading range.

Forex heatmap

Enough has been written about last weeks NFP numbers. There was a certain amount of relief that the headline print came in close to expectations. That been said, it’s difficult to put a positive spin on a release that saw +650k people remove themselves from the labor force and an average work week falling. The trickle down effect will lead to less monies being pumped back into any economy. This week is a slow week for US data. This morning we get the ISM non-manufacturing index for last month. Market consensus has the past several months trend remaining intact. Various chain store sales data/index will keep us occupied Wed. and on Thursday, expect the market to focus on the weekly claims report. Over the last few weeks the trend has been itching to test the upside. Will a ‘break-out’ be sustainable? Amongst the various Cbanks interest rate releases this week, investor’s sentiment will determine what risk actions we should be taking, risk-on or off. Equity markets are pushing for risk-on this morning.

The USD$ is lower against the EUR +0.41%, GBP +0.38%, CHF +0.24% and higher against JPY -0.14%. The commodity currencies are stronger this morning, CAD +0.48% and AUD +1.08%. The loonie again underperformed yesterday, amidst the US holiday, on the back of questionable global growth directly affecting interest and growth sensitive currencies. This morning, global bourses have managed to push it higher. The CAD has been the worst performing currency vs. its southern neighbor from a basket of most traded currencies over the past month. In the grand scheme of things, fear and hesitation is supporting risk aversion currencies like the CHF, JPY and USD for the time being. Dealers are somewhat backing down and even questioning whether the BOC remains in a ‘normalizing’ rate mood after last months expected rate hike. Over the past few week’s the global economic landscape and attitude has definitely changed, pointing to a tough 3rd Q, and even a negative 4th Q. Last week the loonie plummeted to a three week low as GDP data showed that the Canadian economy unexpectedly stalled in April and below market expectations +0.0% vs. +0.2%. With the risk-off trading scenario, the CAD was down -4.2% last quarter, recording its first quarterly decline in a year. On the crosses, CAD is trying to hold its own and under normal conditions is seen as a safer way to play a global economic recovery with links to commodities and less banking. Speculators had been betting that Cbanks will up the ante and use the currency as a safe haven destination for capital. Technically, if USD support around 1.0585 remains intact short term, coupled with risk-aversion trading strategies, could threaten the top-side resistance levels of 1.0750-800.

There was certainly some trepidation about last nights RBA interest rate announcement. Consensus had expected rates to remain on hold. However, various other voices were being heard from the market. Governor Stevens left the cash O/N rate unchanged for a second consecutive month (4.50%). The currency rallied, aided by the regional bourses and investor demand for higher yielding assets. In its following communiqué, the RBA stated that consumer spending and business investment are expanding, this again pushed the currency to outperform all its major trading partners. Policy makers are ‘reinstating their view that domestic growth will be about trend’ and are ‘not alarmed by the global demand backdrop’. In retrospect, policy makers remain ‘very upbeat’. This is certainly disappointing the ‘doves positioning’. The market continues to speculate that the Fed will keep interest rates at a record low to aid a ‘waning US recovery’, is preserving the regions yield advantage. With the crisis in Europe not having a material impact on the Australian economy has ‘bulls’ better buyers on pull backs. Be wary of commodity prices (0.8478).

Crude is higher in the O/N session ($72.62 up +48c). Crude, for a sixth consecutive trading session yesterday fell on global concerns over slower growth and demand for fuel. With China and the US economies showing signs of fatigue, by default would reduce the demand for the black-stuff. Weaker manufacturing and employment reports is keeping the ‘black-stuff’s’ prices at the lower end of a tightly defined trading range. Fear that the global economy is heading for a double dip recession will have crude fighting for every dollar uptick as the bear’s continue to have a stranglehold on prices since last week. Last week’s EIA report showed that gas inventories rallied for the first time in 2-months while crude stocks fell. Gas stocks rose +537k barrels to +218m vs. an expectation of a decline of -400k barrels. On the flipside, crude stockpiles fell -2.01m barrels to +363m vs. an expectation loss of -1m barrels. Supplies of distillate fuel (heating oil and diesel) also managed to climb to a two month high print. Distillate fuel climbed +2.46m barrels to +159.4m. The market had been expecting a +950k barrel gain. It was a market bearish report as the build in gas and distillates are offsetting the larger than expected drop in crude. Oil was down -9.8% for the quarter and -4.8% this year. Crude stocks remain well above the five-year average level, and are +3.2% above a year ago, the biggest year-on-year surplus in 6-months. Currently there are too many negative variables that support the bear’s short positions. Direction is dictated by demand and investor confidence, with ample supply and global growth worries, speculators continue to sell on rallies.

Gold fell -3.4% last week, again retreating from the record $1,264 print recorded last month, as the extreme risk-aversion linked to fears over sovereign debt issues in European countries abated. A firmer dollar over the US holiday period had also limited the gains. Fundamentally, in the short term the metal will find it difficult to rally aggressively, as historically, this is the ‘slower’ season for physical demand and naturally after reaching such heights, in a strong first 6-month, has investors booking profits and limiting their exposure. Despite this, on the longer term view, market concerns over global economic growth are expected to support the ‘yellow’ metal and push prices to new record highs in the 4th Q. The upward bias trend remains intact as long as $1,185 holds. Year-to-date, the commodity has gained +12.5%. Generally, it has become the benefactor when all other currencies fail. Thus far, Europeans have been content in using the commodity as a hedge against their European holdings, believing that the EUR has not bottomed out just yet ($1,212 +400c)!

The Nikkei closed at 9,338 up +71. The DAX index in Europe was at 5,907 up +91; the FTSE (UK) currently is 4,901 up +78. The early call for the open of key US indices is higher. The US 10-year had backed up 5bp since Friday (2.97%) and is eased 2bp in the O/N session (2.95%). Treasury prices for the safer-haven product eased after the NFP headline was not as bad as had been feared, leading to a mild bout of profit-taking. This is a new week with little data. Where does the market go from here? With the US economic outlook not looking so hot will have the market providing some support on these pull backs in the short term (3.00%). Investors are still trying to decipher recent headline prints. Is the US economy sliding into a double-dip recession or are we witnessing a tepid recovery from the worst downturn in 70-years? No matter what, yields will remain low for ‘an extended period of time’.

June 29, 2010

Double-dip debate derails EUR again

Filed under: OANDA News — Tags: , , , , , , , , , — admin @ 10:19 am

With the G20 out of the way the market can get back to ‘reality’. The ‘double-dip debate’ has investors on their toes. A multitude of concerns has risk-adverse trading strategies dominating the O/N currency positioning. Capital Markets is worried about the Chinese recovery as well as the weak economic data from Japan (Ind. Prod. -0.1%, household spending -0.7%). This morning, dealers are driving the dollar, CHF and JPY higher, yields to record lows and equities into the red as they become nervous about the ECB’s plans to refinance a EUR 442b funding program this Thursday and on the announcement that Greece expects to return to the bond market next month. It’s not all doom and gloom, with the Euro-zone economic sentiment index rising (98.7 vs. 98.4) it gives ‘hot-money’ a better average to short the EUR ‘again’!

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

Yesterday’s US income and spending reports were solid. Personal spending picked up last month (+0.2% vs. +0.1%) and there was ‘healthy developments’ for income growth (+0.4% vs. +0.5%). Digging deeper, household spending increased +0.4%, adjusting for price swings, volume also managed to show improvements, up +0.3% from a flat reading the previous month. In respect to spending, durable goods orders increased +1.1% (cars and parts), while the non-durable sector happened to forge out a small decline -0.2%. The purchases of services accelerated to +0.3% in real terms. The Fed’s preferred inflation indicator, the PCE deflator, decreased -0.1% last month, which negated the previous months increase, while the core-PCE (ex- food and energy) advanced +0.2%. Flipping to the income stream, even though personal income increased less than expected, it was the 7th straight consecutive advance. The strength in the sub-categories was evenly disbursed. The private sector wages (+40% of total incomes) happened to increase +0.4%. By sector, the goods-producing and the services-producing both recorded gains. The only sub-category to drag its feet was the government unemployment benefits. It’ worth noting that dividend income continues to contribute a larger percentage of total gains. Finally, the savings rate jumped to +4.0% for the first time in 10-months.

The USD$ is higher against the EUR -0.46%, GBP -0.40%, CHF -0.00% and lower against JPY +0.87%. The commodity currencies are weaker this morning, CAD -0.81% and AUD -1.44%. The loonie was caught in ‘no-mans’ land yesterday after its impressive two session gain on the back of commodities. It did try to test resistance at the 1.0300 level, however, dollar buyers where found in abundance. The recent weakness has given the ‘bulls’ a better average to enter new long CAD positions. Despite domestic fundamental data showing that the Canadian economy is ‘firing on all cylinders’, risk aversion trading strategies dominates as we encroach on the loonies recent lows this morning. On the crosses, CAD is holding its own and in relative terms is seen as a safer way to play a global economic recovery with links to commodities and less banking. Speculators are also betting that Cbanks will up the ante and use the currency as a safe haven destination for capital. Do not be surprised to see the currency trade beyond parity in the coming months as long as the ‘double-dip debate’ does not take hold.

In the O/N session the AUD plummeted the most in three weeks on concerns that the global economy is slowing. Weaker global industrial and confidence data has investors talking of ‘double dips’ which will obviously affect growth and high-yielding currencies. In this quarter alone the AUD has dropped just over +6% vs. the greenback. The initial aftermath of the G20 has not materially changed risk attitude. In fact, it seems that the markets have become more ‘jittery’. Earlier this month, comments from the RBA, who said that Europe’s debt crisis would ‘inevitably weigh’ on global growth, had fueled speculation that the Governor Stevens may keep rates unchanged until at least the end of the year. It seems that that ‘previous rate rises has given them flexibility to leave borrowing costs unchanged at next month’s meeting’. To date, the crisis in Europe has not had a material impact on the Australian economy, but, that’s been called into question. European funding fears has technical analysts wanting to sell the currency on rallies and shifting into more risk adverse currencies like JPY and CHF (0.8730).

Crude is lower in the O/N session ($76.91 down -134c). Crude fell from a seven-week high as the dollar rallied vs. the EUR, reducing the appeal of commodities as an inflation hedge. After rallying earlier in yesterday’s session on fears that Alex would disrupt production as it moves towards the Gulf of Mexico, prices fell on speculation that reports would show that both US consumer confidence and manufacturing would slow this month. The commodity ended last week under pressure after the EIA inventory release reported an unexpected gain in supplies. Oil stockpiles rose +2.02m barrels to +365.1m vs. an unexpected fall of -800k barrels. On the flipside, gas supplies fell -762k barrels to +217.6m vs. an expected market decline of -180k barrels. Imports of crude oil climbed +4.3% to +10.1m barrels a day, the highest level in 18-months. The headline print certainly fly’s in the face of the ‘bulls’ way of thinking. Crude stocks remain well above the five-year average level, and are +3.2% above a year ago, the biggest year-on-year surplus in 6-months. Distillate stocks (diesel and heating oil) rose +297k barrels, less than expected as demand dropped to its lowest level in 7-months. Currently there are too many negative variables that support the bear’s short positions. The fear that a double dip is on the cards has the speculators wanting to sell. Year-to-date, the commodity has appreciated +11%. Direction is dictated by demand and with ample supply and global growth worries has speculators once again wanting to sell on rallies.

Bigger picture, Gold continues to be a safe heaven attraction. Yesterday the commodity retreated from its record highs on technical resistance and profit taking, a healthy purge in the recent one directional trade. With the Fed indicating low rates for an extended period of time has questioned the dollar recent strength in recent trading session’s and by default the commodity has provided an alternative investment vehicle. Technically, pull-backs have been bought. The commodity’s prices will remain robust on speculation that European’s Economic woes will be prolonged. With broader risk appetite under pressure, the market is capable of printing new record highs again and again. The upward bias trend remains intact as the ‘yellow metal’ is trading with a greater consideration of its safe haven status. Year-to-date, the commodity has gained +16%. Generally, it has become the benefactor when all other currencies fail. Thus far, Europeans have been content in using the commodity as a hedge against their European holdings, believing that the EUR has not bottomed out just yet. For now, buyers are waiting in the wings to purchase product on all pull backs as equities flounder ($1,236 -220c).

The Nikkei closed at 9,570 down -123. The DAX index in Europe was at 6,025 down -131; the FTSE (UK) currently is 4,979 down -92. The early call for the open of key US indices is lower. The US 10-year eased 5bp yesterday (3.04%) and another 7bp in the O/N session (2.97%). Treasures were in demand across the US curve on fears that the G20 deficit pledge would dampen global growth prospects. In theory, G-20 said advanced economies (ex-Japan) plan to reduce their deficits by 50% in three years which should on paper curb the record bond auctioning. Also providing a lift for the ‘safer’ asset class is this weeks NFP report where many analysts expect a much weaker headline. The belief that the US economy’s momentum is not being built upon should continue to provide a better bid on deeper pullbacks.

June 28, 2010

Canada’s $1 billion G20 answer

Filed under: OANDA News — Tags: , , , , , , , , , , — admin @ 10:20 am

What did Canada get for the ‘billion-dollar’ boondoggle? G20 members set deficit-reduction targets and agreed to pursue higher capital requirements for banks ‘once’ economic recoveries take hold. The advanced economies will aim to stabilize their debt-to output ratios by 2016. In the real world, too many pledges never seem to sway investor confidence. The tight pledge timing does not take into account the economically unexpected and the unplanned, where is your time table then? Market reaction, muted at best, it will focus on confidence and US employment numbers out later in the week. It certainly should be more ‘headline’ grabbing that the G20’s past weekend exploits.

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

Forex heatmap

G20 has come and gone and investors again seem to be playing lip service to ‘whatever’ was said. The Capital markets trend remains intact with investors concerned about the imbalance of global growth and if growth itself is sustainable. The G20 has endorsed European austerity plans. For PM Cameron it’s a must, as the country was in danger of losing market support and perhaps spiraling into a Greek like effect. The market is back to focusing on this weeks numbers. This morning we get US consumer spending, analysts anticipate little change as Americans are expected to have used wage gains to rebuild savings. Later in the week, we need to see a good US employment print to drag investors back into the market.

The USD$ is higher against the EUR -0.12%, GBP -0.27%, JPY -0.13% and lower against CHF +0.42%. The commodity currencies are mixed this morning, CAD +0.12% and AUD -0.20%. The loonies four day weakness on the back of declines in equities and commodities had investors seeking sanctuary in some risk-aversion currencies abruptly came to an end on Friday. It has continued its impressive run in the O/N session trying to test strong support at 1.0300 levels. With oil and gold prices doing an about turn gave the CAD its bid again. The recent weakness has given the stubborn bulls a better average to enter new long CAD positions. Despite domestic fundamental data showing that the Canadian economy is ‘firing on all cylinders’, the recent bid to the loonie may have been a tad overdone and a healthy purge is what we got. Speculators continue to place bets that Governor Carney will raise interest rates faster than other developed countries. Big picture, the CAD is holding its own as the currency is seen as a safer way to play an economic recovery in the US with linkage to commodities and less banking. Now, with talk that the currency is to be used as a Cbanks safe haven destination for capital should lend even more support to the currency in the medium term. Do not be surprised to see the currency trade beyond parity in the coming months.

The AUD got a temporary lift on speculation that new PM Gillard may compromise on a proposed mining tax after, however, signs that a weaker global economic may exhaust demand for higher-yielding assets in the near term. The initial aftermath of the G20 has not materially changed risk attitude. Traders continue to take the high as global risk sentiment, on the whole, is weakening, which causes growth related currencies such as the AUD to succumb to increased selling pressures. Earlier this month, comments from the RBA, who said that Europe’s debt crisis would ‘inevitably weigh’ on global growth, had fueled speculation that the Governor Stevens may keep rates unchanged until at least the end of the year. It seems that that ‘previous rate rises has given them flexibility to leave borrowing costs unchanged at next month’s meeting’. To date, the crisis in Europe has not had a material impact on the Australian economy, but, that’s been called into question. With European stress test disclosures lined up failing to calm investor’s fears has technical analysts wanting to sell the currency on rallies despite the positive fall out from a compromise on the mining tax (0.8730).

Crude is lower in the O/N session ($78.61 down -25c). Crude prices temporarily managed to advance in the O/N session on weaker global bourses after the dollar lost traction vs. the EUR, increasing the investment appeal of commodities. The commodity ended last week under pressure after the EIA inventory release reported an unexpected gain in supplies and US data showed that the purchases of new homes tumbled the most on record m/m. Oil stockpiles rose +2.02m barrels to +365.1m vs. an unexpected fall of -800k barrels. On the flipside, gas supplies fell -762k barrels to +217.6m vs. an expected market decline of -180k barrels. Imports of crude oil climbed +4.3% to +10.1m barrels a day, the highest level in 18-months. The headline print certainly fly’s in the face of the ‘bulls’ way of thinking. Crude stocks remain well above the five-year average level, and are +3.2% above a year ago, the biggest year-on-year surplus in 6-months. Distillate stocks (diesel and heating oil) rose +297k barrels, less than expected as demand dropped to its lowest level in 7-months. Currently there are too many negative variables that support the bear’s short positions. The fear that a double dip is on the cards has the speculators wanting to sell. Year-to-date, the commodity has appreciated +11%. Direction is dictated by demand and with ample supply and global growth worries has speculators once again wanting to sell on rallies.

Bigger picture, Gold continues to be a safe heaven attraction. With the Fed indicating last week that they are willing to keep rates low for an extended period of time pared some of the dollar recent gains and by default the yellow metal is providing an alternative investment vehicle. The commodity price ended the week on a bid note as ongoing credit worries and concerns about a global economic recovery trigged a safe-haven demand for the metal. Technically, pull-backs have been bought. The commodity’s prices will remain robust on speculation that European’s Economic woes will be prolonged. With broader risk appetite under pressure, the market is capable of printing new record highs again. The upward bias trend remains intact as the ‘yellow metal’ is trading with a greater consideration of its safe haven status. The asset class is well sought after, technically encouraging individuals to want to own more of it for hedging purposes. Year-to-date, gold has gained +16%. Generally, it has become the benefactor when all other currencies fail. Thus far, Europeans have been content in using the commodity as a hedge against their European holdings, believing that the EUR has not bottomed out just yet. For now, buyers are waiting in the wings to purchase product on all pull backs as equities remain under pressure ($1,255 -30c).

The Nikkei closed at 9,639 down -44. The DAX index in Europe was at 6,127 up +58; the FTSE (UK) currently is 5,075 up +28. The early call for the open of key US indices is higher. The US 10-year eased 1bp on Friday (3.11%) and 2bp in the O/N session (3.09%). All last week, Treasury prices remained better bid because of the disappointing US housing data and on the Fed’s announcement that they will keep ‘rates low for an extended period of time’. This week’s direction will depend on how North America interprets G20’s solidarity on deficit target reductions and are they in fact a realistic goal. The main event will be NFP this Friday. The cost of Greek CDS’s surging to a new record is again pressurizing global bourses and given the FI asset class support. The belief that the US economy’s momentum is not being built upon should continue to provide a better bid on deeper pullbacks.

June 22, 2010

EUR appetite lost

Filed under: OANDA News — Tags: , , , , , , , , , , , — admin @ 10:33 am

So we are back to trading risk aversion. The Chinese gesture of loosening their peg status and trying to take the heat off themselves at the G20 meeting has somewhat failed. With a large percentage of the EUR record shorts been closed out after the +0.5% gradual increase in the value of the Renminbi announcement has again cleared the way for the market to begin initiating ‘new short’ EUR positions. The Euro-zone remains in the ‘middle of a structural asset allocation shift away from the regions assets among long-term investors’ as recorded by the EU FI flows and from specific flows relating to global Cbanks, and from Japanese investors. ECB member Noyer comments that ‘some banks in the 16-nation region are facing funding problems’ ahead of the stress tests disclosures next month, has again pressurized global equities. The appetite to want to own the EUR is again weak. The market seems more comfortable trading from the short side as this continues to be profitable.

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

Forex heatmap

With no North American data to chew on, the market was again preoccupied with the follow through of the Chinese well timed announcement ahead of the G8 and G20 meeting this week in Canada. The smoke and mirrors gesture was not able to keep capital markets at there earlier elevated highs. The EUR’s initial euphoric spike at the weekend was seen as an opportunity for the market to sell into now that many of the record shorts had been somewhat pared. Fitch’s downgrading of BNP to AA- from AA further pressurized the EUR and again encouraged risk-aversion trading strategies to be implemented, providing a bid to bonds, the dollar and profit taking in the previously record setting gold market. With dealers watching the leakage occur, SNB Chairman Hildebrand reiterated the requirements to improve confidence in European Capital markets. He believes that the various EU governments publishing the results of their ‘stress tests’ next month will help ‘to foster market confidence and assist European banks in their capital-raising efforts’. ‘Credible stress tests can remedy this problem’.

The USD$ is higher against the EUR -0.00%, GBP -0.10% and lower against CHF +0.33% and JPY +0.25%. The commodity currencies are stronger this morning, CAD +0.09% and AUD +0.14%. At one point in yesterday’s session the loonie managed to record a 5-week high on the back of higher commodity prices and on investors paring of some of the risk-aversion trading strategies after the Chinese ‘flexible’ Yuan announcement. Their measured announcement ahead of the G8 temporarily boosted confidence in the global economic recovery and demand for assets linked to growth. Speculators continue to place bets that Governor Carney will raise interest rates faster than other developed countries. All this despite the BOC Governor stating earlier last week that ‘the uneven global recovery and prospects of renewed weakness in Europe mean that future increases in the central bank’s benchmark interest rate are not preordained’. Big picture, the CAD is holding its own after the BOC’s rate hike and somewhat muted and directionless communiqué earlier this month. It remains the world’s second best performer vs. its southern neighbor. Using the loonie as a safer way to play an economic recovery in the US with linkage to commodities and less banking or fiscal noise has speculators better buyers of the currency on dollar rallies.

The AUD has managed to retreat from its new one month high ‘again’ on concerns that funding trouble at various European banks will dampen global growth. Not helping the commodity driven currency was the Yuan falling the most in 2-years on prospects ‘that the PBOC will intervene to limit gains after dropping its peg to the dollar’. In theory, ‘commodity rich exporting countries should benefit from the increased purchasing power of Chinese manufacturers’. Earlier last week, comments from the RBA, who said that Europe’s debt crisis would ‘inevitably weigh’ on global growth, had fueled speculation that the RBA may keep rates unchanged until at least the end of the year. It seems that that ‘previous rate rises has given them flexibility to leave borrowing costs unchanged at next month’s meeting’. Last week, stronger domestic fundamentals aided the currency. Employment data added +26.9k new jobs vs. an expected +20k. It was the third consecutive month of job gains, emphasizing the RBA’s call that that economic growth will accelerate this year. This pushed dealers into increasing their bets that Governor Stevens will resume the country’s most aggressive round of monetary tightening. So far, it seems that the crisis in Europe has not had a material impact on the Australian economy, but, that’s been called into question. With European stress test disclosures lined up and PBOC announcement failing to calm investor’s fears has technical analysts wanting to sell the currency on rallies (0.8776).

Crude is lower in the O/N session ($77.12 down -70c). Crude prices temporarily rallied to a six week high this week on increased confidence in the global economic recovery after China signaled an end to the Yuan’s fixed rate policy. The big dollar ‘too and fro actions’ vs. the EUR has tried to boost the appeals of commodities as an alternative investment. Year-to-date, the commodity has appreciated +13%.The impact of cheaper oil for Chinese consumers and the stimulus for imports is what is trying to push the black stuff’s prices higher. Earlier last week, the EIA report initially gave the market its bullish sentiment, however, weaker global economic releases managed to encourage some ‘risk-off’ trading strategies. The report was dominated by the drop in refinery capacity rates. US refineries operated at +87.9%, down -1.2% from the previous week. Gas stocks declined -636k barrels to +218.3m last week with gas demand advancing +1.6% to +9.34m barrels a day (the highest level in nearly a year). Historically, gas consumption peaks sometime between US Memorial and Labor Day in Sept. (the height of the US driving season). On the flipside, crude oil rose +1.69m barrels to +363.1m vs. an expected -1m barrel decline. Inventories of distillate fuel (diesel and heating oil) increased +1.8m barrels to +156.6m vs. an expected +1m barrel gain. Direction is dictated by demand and with ample supply and growth worries to data has had speculators wanting to sell oil futures on rallies. The direction is dependant on consumer confidence.

Bigger picture, Gold continues to be a safe heaven attraction. Over the past four trading sessions all pull backs have been bought. The commodity’s prices will remain robust on speculation that European’s Economic woes will be prolonged. It will remain bid until the stronger support levels can be broken, and that does not include the last hours trading actions yesterday. With broader risk appetite becoming subjective, the market has been capable of printing new record highs already this week. Commodity prices weakened late afternoon on Monday as profit taking gained momentum after equities could not sustain their earlier gains. Overall, on a technical perspective, the ‘yellow metal’ is trading with a greater consideration of its safe haven status. The asset class is well sought after as prices have been difficult to break down, which is, by default, technically encouraging individuals to want to own more of it for hedging purposes. Year-to-date, gold has gained +14.5%. Generally, it has become the benefactor when all other currencies fail. Thus far, Europeans have been content in using the commodity as a hedge against their European holdings, believing that the EUR has not bottomed out just yet. For now, buyers are waiting in the wings to purchase product on pull backs ($1,238 -220c).

The Nikkei closed at 10,112 down -125. The DAX index in Europe was at 6,267 down -26; the FTSE (UK) currently is 5,259 down -40. The early call for the open of key US indices is lower. The US 10-year eased 4bp yesterday (3.25%) and another 3bp in the O/N session (3.22%). Thus far this week, China stating that it will allow a more flexible Renminbi had temporarily boosted confidence in the global recovery and triggered gains in equities, thus pushing yields higher. This scenario was short lived as the various asset classes were not able to build on the Asian gains. However, rumblings that the US economy’s momentum is not being built upon could continue to provide some sort of bid on deeper pullbacks. This week we have $108b’s worth of new US product to be auctioned off, starting with today’s $40b 2’s, tomorrow’s $38b 5’s and Thursday’s $30’b 7’s. As per usual, expect dealers to want to make room by cheapening the curve somewhat. However, with equities under pressure and the Fed to commit to ‘extended low rates’ there should be demand for product.

June 18, 2010

EUR positions require their own Stress Tests

Filed under: OANDA News — Tags: , , , , , , , , , , , — admin @ 10:05 am

The thought of even being transparent with the EU Financial Stress Tests has restored some market confidence. To investors, the biggest concern is how tough are these tests? If there are shortcomings, according to Merkel, the EU has ‘taken precautions’ including a 750B EUR financial backstop. Under US stress testing, the government pledged to provide capital when need be. The EU undertaking is short on details, not even a mention of including sovereign debt exposure, hence, the concerns of its stringency. Technically, the EUR is rounding off the week on a high and chartists continue to plot more upside with a bullish close (above 1.2330). The short futures positioning and weaker cash shorts that have been selling into this rally all week will most likely want to lighten up again before day’s end as the squeeze continues towards 1.2550.

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

Forex heatmap

US data yesterday did not help the ‘sustainable growth camp’s’ cause. It was a mixed and worrisome bag of headline prints. The number of people filing for initial claims for UI surprisingly advanced by +12k to +472k claims. Seasonally adjusted, increases were reported in construction, manufacturing and educational services. The four-week moving average (ex-volatile components) fell by only -500 to +463.5k. Digging deeper, the number of people continuing to file UI rose by +88k to +4.57m. However, continuing claims four-week moving average fell by -21k to +4.6m. Not to be outdone, emergency unemployment compensation dropped from +4.995m to +4.804m. Overall, it was again a discouraging report adding to a long string of disappointments from the claims series dating back to the end of last year. Analysts will argue that the headline prints may be somewhat distorted by the ‘ramping up contraction of temporary Census hires’. The sluggish pace of declining claims may suggest that employers remain reluctant to hire and are relying on existing workers to fill demand. This was certainly evident in this week’s production report.

Another report showed that US consumer prices fell for a second consecutive month (-0.2%) and underlying inflation rose slowly (Core index, the Fed’s go to variable, +0.1%), giving Bernanke and Co. room to support their economy with a record low interest rate policy. Benign inflation is certainly supporting the FI asset class.

Finally, the most disappoint release yesterday was the Philly Fed Economic Index. The headline print plunged from +21.4 to +8 this month. The market had expected only a slight dip. Digging deeper, the underlying sub-components were more mixed. The forward looking new orders index rose from +6.1 to +9, shipments softened from +15.8 to +14.2, while inventories rose from -7.9 to +4.6. The prices indices fell, paid from +35.5 to +10, while received fell from +3.5 to -6.5, mostly on the back of weaker energy prices. However, the most discouraging sub-component was employment. It fell from +3.5 to -1.5, its first negative reading in 7-months.

The USD$ is lower against the EUR +0.09%, GBP +0.35%, CHF +0.11% and JPY +0.30%. The commodity currencies are mixed this morning, CAD -0.03% and AUD +0.18%. The loonie got it between the eyes yesterday, the first time in three days, as weaker equities, commodities and a surprisingly subdued wholesales sales report (-0.3%) had investors paring some of their bullish growth positions. BOC Governor Carney said earlier this week that ‘the uneven global recovery and prospects of renewed weakness in Europe mean that future increases in the central bank’s benchmark interest rate are not preordained’. Up until yesterday’s price action, the loonie remained coveted as speculators increased their bets that economic growth will eventually fuel demand for commodities. Big picture, the CAD is holding its own after the BOC’s rate hike and somewhat muted and directionless communiqué earlier this month. It remains the world’s second best performer vs. its southern neighbor. Using the loonie as a safer way to play an economic recovery in the US with linkage to commodities and less banking or fiscal noise has speculators better buyers of the currency on dollar rallies.

The AUD has retreated from its one month highs but is in pole position to record back to back weekly gains as investors risk appetite increased. Earlier this week, comments from the RBA, who said that Europe’s debt crisis would ‘inevitably weigh’ on global growth, is fueling speculation that the Cbank may keep rates unchanged until at least the end of the year. It seems that that ‘previous rate rises has given them flexibility to leave borrowing costs unchanged at next month’s meeting’. When global bourses back peddle on concerns that the world economy may falter always affects growth currencies. Last week, stronger domestic fundamentals aided the currency. Employment data added +26.9k new jobs vs. an expected +20k. It was the third consecutive month of job gains, emphasizing the RBA’s call that that economic growth will accelerate this year. This pushed dealers into increasing their bets that Governor Stevens will resume the country’s most aggressive round of monetary tightening. So far, it seems that the crisis in Europe has not had a material impact on the Australian economy. With European stress test disclosures lined up will calm investor’s fears. Technically, the market continues to want to buy AUD on dips (0.8686).

Crude is lower in the O/N session ($76.19 down -60c). Crude prices retreated from their six week high yesterday after a jump in US weekly claims and higher weekly inventories ignited fears that that global economic growth will stumble. Earlier this week, the EIA report initially gave the market its bullish sentiment, however, weaker global economic releases has encouraged ‘risk-off’ trading strategies. The report was dominated by the drop in refinery capacity rates. US refineries operated at +87.9%, down -1.2% from the previous week. Gas stocks declined -636k barrels to +218.3m last week with gas demand advancing +1.6% to +9.34m barrels a day (the highest level in nearly a year). Historically, gas consumption peaks sometime between US Memorial and Labor Day in Sept. (the height of the US driving season). On the flipside, crude oil rose +1.69m barrels to +363.1m vs. an expected -1m barrel decline. Inventories of distillate fuel (diesel and heating oil) increased +1.8m barrels to +156.6m vs. an expected +1m barrel gain. Even with demand creeping higher, there is sufficient supply and this has encouraged some profit taking after four days of consecutive gains. Direction is dictated by demand and with ample supply and growth worries has speculators selling oil futures on rallies.

Gold continues to be a safe heaven attraction. Over the past four trading sessions all pull backs have been bought. The commodity’s prices remain robust on speculation that European’s Economic woes will be prolonged. With broader risk appetite declining, the market can expect to print new record highs. Technically the ‘yellow metal’ is trading with a greater consideration of its safe heaven status. The asset class is well sought after as prices have been difficult to break down, which is, by default, technically encouraging individuals to want to own more of it for hedging purposes. Year-to-date, gold has gained +14%. Generally, it has become the benefactor when all other currencies fail. Thus far, Europeans have been content in using the commodity as a hedge against their European holdings, believing that the EUR has not bottomed out just yet. For now, buyers are waiting in the wings to purchase product on pull backs ($1,245 -280c).

The Nikkei closed at 9,995 down -5. The DAX index in Europe was at 6,233 up +10; the FTSE (UK) currently is 5,277 up +23. The early call for the open of key US indices is higher. The US 10-year eased 8bp yesterday (3.20%) and is little changed in the O/N session. Treasuries prices rallied after US data yesterday reported a rise in weekly claims, coupled with consumer prices falling reinforced speculation that Bernanke and Co. will keep rates low for an extended period of time. The slumping Philly Fed Economic Index also added its support to the FI asset class. Basically, with inflation remaining somewhat benign and no future inflation pressures on the horizon are evidence that Bernanke and Co. have no reason in thinking about moving rates. Stronger rumblings that the US economy’s momentum is not being built upon should continue to provide some sort of bid on deeper pullbacks. With no normalization of rates on the horizon, yields should remain low and test recent lows once again.

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