Forex Blog

January 5, 2012

Forex Market Outlook 1/5/12

Filed under: Forex News — Tags: , , , , , , , , , , — admin @ 6:51 am

It is becoming apparent that the Euro debt crisis is winning the sentiment battle so far this year as concerns over bond auctions in various nations have the markets on edge.  The economic data story was mixed overnight, which steered the markets toward risk aversion.

This means that we have early Dollar strength and Euro weakness, with lower stocks and commodities and risk currencies.  However, as the Euro is making 15-month lows vs. the Dollar and 11-year lows vs. the Yen, the S&P 500 is holding up fairly well.  So it is possible that the normal risk-on/ risk-off correlations we discuss are beginning to break down, and markets are definitely bifurcated based on which trading session is dominant.

Case in point, yesterday the markets were lower for the majority of the morning as the US session opened, but once the European market closed stocks ended up finishing the day positive.  This is indicative of the fact that the risk in the market is coming from Europe which is no surprise, but it almost seems as though the market here was just waiting for Europe to close in order to begin the party.  So pay attention to the time-zone implications of trading in the markets and how they react as each session closes.

Overnight, Asian markets began the sell-off after Australian trade balance figures came in lower than expected as exports to China were lower by 16%.  Speaking of China, they also lowered the reference rate for the Yuan, marking the biggest decline since November.  The performance of Services index in Australia came in at 49, which was better than last month but still showing contraction rather than expansion.

But perhaps the biggest news of the morning so far was the French bond auction that saw yields rise on a bid-to-cover that was lower than average.  There is great concern that France will receive a credit downgrade from their AAA status, which is likely a reason for lower demand.  It seems to me that countries that are not Germany are going to have further problems issuing debt.  While the bond vigilantes may not be aggressively shorting issues at this time, demand is weak so that may be a benign way of pushing yields higher.  In other words, why would investors buy today if they believe yields will be going higher?    Because Euro leaders have not come to a complete solution, this is likely going to drag on for some time.

In addition to these funding problems, the Greek PM stated that Greece may face an economic collapse as early as March and the Italy’s PM said that the EFSF is woefully under-funded.  Add in some lower Industrial New Orders figures and slightly higher PPI, and the situation is starting to worsen in Europe.

Here in the US, employment data is starting to filter in over today and tomorrow and so far the numbers look great.  The big news of the morning is the ADP employment change, which showed a gain of 325K jobs vs. an expectation of 175K jobs.  This is a blowout number and could be the start of real employment gains.  The Challenger Jobs Cuts figures were also positive after being negative last month.

The initial jobless clams figures came in as expected showing 372K newly unemployed so this number is improving, albeit slowly.  US stock futures have improved off of their lows of the morning on these employment numbers so it is possible that the market pattern I discussed above could occur again today.

However, while we cannot extrapolate better Non-Farm Payrolls at tomorrow’s release, these numbers are a great start and it is likely that expectations for NFP have been revised higher.  I discussed the other day though how these numbers could be distorted due to seasonal hiring and end of the year book-balancing, but this is the type of data that we need to see to continue to improve the economy.

The power struggle between the negative Euro debt crisis and the positive US economic data will continue to be the story going forward until more clarity emerges.  For example, this December ADP number is the highest of 2011, but December’s number has been the highest of the year for the last 3 years in a row.  The numbers then begin to slowly decline throughout the following year.

If this is the pattern that we follow this year then things may not be improving as we hope.  But if we begin to show improvement next month and going forward, then we may be able to catch an economic tailwind that can overshadow the problems in Europe.  If not, then it could be more of the same for 2012.  Stay tuned!

September 29, 2011

USD/JPY To Break-Out?

Filed under: Forex News — Tags: , , , , , , , , , , , , , — admin @ 7:52 am

Over the past few weeks, the USD/JPY pair has been trading in a fairly tight range for the safe haven currencies.  A bottom had been put in near 76 after the Bank of Japan intervened in the currency the last time the Yen saw that level vs. USD.

So there were many questions as to whether or not the Yen would be deemed a more “desirable” safe-haven as the risk aversion due to the Euro debt crisis picked up.   Surprisingly, the markets didn’t really favor one over the other to this point, and the BOJ resolve to weakne the Yen was not re-tested.

Thus a range was created between 76-77 for USD/JPY and it had been trading there ever since.  But now, with the vote for the EFSF having passed in Germany (they were seen as the biggest potential obstacle) the market may move back toward risk taking which should encourage US Dollar buying vs. the Yen.   With clear support established at 76, a confirmed breakout above 77 means that we could be at 79 in no time.

Forget EURO EFSF Issues, It’s Quarter-End Pricing

Filed under: OANDA News — Tags: , , , , , , , , , , , — admin @ 4:34 am

Despite the toing and froing of austerity ideas and Greek sovereign debt solution suggestions, the market remains in a defined range as dealers execute month and quarter end-demand requirements. It can be the silly season for price action, and trying to complete it in this politically and economically charged environment may come at a price. Liquidity remains a premium, as dealers try to end this exhausting month above water.

Now that Germany has handily passed the EFSF ratification (523 vs. 85) this morning, investors should expect some of the market premium to be taken back ahead of US data. Market focus will shift towards the Troika committee, who arrive back in Greece today. They will decide whether Athens has done enough to secure a new batch of aid vital to avoid bankruptcy. Eurozone leaders likely will not decide whether to release Greece’s next bailout installment until the Eurozone Summit on October 13.

Forex heatmap

Trying not to be distracted by what was said, what is being said and what’s expected to be said, the market had to chew on some softer US durable order numbers yesterday. The details in the August report highlight the uneven nature of the US economy and despite all this the economy is doing better than a year ago. Durable good orders decreased by -0.1% from the prior month to $201.7b. The market had been expecting a +0.2% rise in orders. The drop followed a +4.1% total orders jump in July and are up a stellar +10% from a year ago.

Digging deeper, a healthy sign was the spending by businesses on equipment rose. Orders for non-defense capital goods, ex-aircraft, happened to increase by +1.1% after dropping in July. The first half of this year has been tough, especially since consumers have reduced their spending as they worry about finances, future incomes and a high unemployment rate. Confidence numbers earlier this week support their financial concerns and mood for this month. The US manufacturing sector continues to struggle. Despite the recent ISM reports showing growth in the sector, the rate of expansion is ‘something not to write home about’. The decline in durable orders was driven by motor vehicles falling -8.5%. Ex-transportation, orders fell -0.1% after rising +0.7% in July. August shipments of durables fell -0.2%, following three consecutive increases. Finally, unfilled orders (future demand) continue to rise.

The dollars is lower against the EUR +0.74%, GBP +0.61%, CHF +0.56% and JPY +0.09%. The commodity currencies are stronger this morning, CAD +0.30% and AUD +0.72%.

The loonie under performed and lagged against other commodity pairs on the back of BoC Deputy Governor Macklem’s comments yesterday. He indicated that policy interest rates “can be reasonably expected to remain below normal for some time to come”. The CAD managed to drift lower outright as riskier assets remained vulnerable to doubts over the ability of European policy makers to stem a debt crisis that threatens to trigger a global recession.

Greek lawmakers approving a deeply unpopular property tax has opened the way for the return of international lending inspectors and the release of vital aid is been seen as a huge boost to global confidence and risk appreciation. Commodity prices have also been finding it difficult to maintain traction, especially after US durable data, which obviously does not benefit the loonie. The CAD currently trades like a low-beta currency that is trading in a well defined range with corporate Canada itching to own some of the currency on top and risk aversion strategist looking to pick up dollars close to the greenback’s breakout level at the beginning of the week.

Last weekend, BoC governor Carney was ‘encouraged’ by euro-area policy makers’ ‘diagnosis of the seriousness of the situation’. Carney has become more concerned about global growth, especially now that the IMF has revised their growth forecasts. Investors are happy to keep their cards close to their chest until after month and quarter end trading (1.0300).

The AUD strengthened outright and versus the JPY as Asian stocks reversed earlier losses, supporting demand for higher-yielding currencies. Aussie data last night was also pro-currency. Australian job vacancies rose +3.2% in the three months to August from the quarter before. Many analysts believe the downward pressure that has been applied to this growth currency has created a price overshoot as there is too much ‘bearishness priced into the Australian interest-rate curve’. It was one of the worst performing currencies in the pass month, declining -2.6% outright.

Investors remain concerned that European policy makers will struggle to resolve their debt crisis. Despite domestically having all the strong fundamentals, cash-futures are showing that traders are betting the RBA will lower its key rate by at least-75bp by the end of the year. If anything, the RBA is likely to be on hold for an extended time, allowing investors to sell higher yielding assets on rallies with the top side becoming more contained (0.9854).

Crude is higher in the O/N session ($82.05 up+84c). Oil prices remain under pressure and are heading for the biggest quarterly drop in three years, on concern that Europe’s debt crisis will linger and on rising inventory levels. The value of the dollar remains the commodity’s biggest nemesis. Crude is down -7.2% this month and -9.8% this year. Prices have dropped-14% since the end of June, the biggest quarterly loss since 2008.

Last week’s EIA report showed a build up of nearly +2m barrels of crude. This is not bullish and coupled with the Euro sovereign crisis should continue to pressurize commodity prices. Not to be out done, gas stockpiles also rose +791k barrels to +214.9m last week. Supplies of distillate fuel (heating oil and diesel) increased +72k barrels to +157.7m. Refineries operated at +87.8% of capacity, down -0.5% from the prior week.

Weaker growth predicted by the IMF, which points to lower oil demand, will have dealers thinking of shorting the market again. Expect investors to run into technically selling on some of these rallies.

Gold prices declined yesterday, similar to other commodities, as European leaders strive to tame the sovereign debt crisis. The European Parliament voting to make sanctions more automatic against member nations that breach deficit and debt limits took some of the fear factor out of the market and had investors liquidating their positions ahead of quarter-end. After last week’s price action, investor’s are taking a cautious attitude in entering the gold market.

The eight-month low print this week seems well supported and suggests that the market may have registered its near term overshoot target ($1,530). All the bullish factors for wanting to own the yellow metal, like dollar debasement economic imbalances and sovereign periphery debt, remain. To try to apply supply and demand logic in a panicked market is near impossible.

Last Friday’s dollar decline was the largest dollar selloff on record. Investors had been selling metals to cover losses in other asset classes. Gold is one of the few assets that remain in positive territory this year and, because of this, as investors required cash, they sell the assets that have performed. The Fed’s efforts to drive interest rates lower to support lending should, by default, support commodity prices ($1,631 up+$13).

The Nikkei closed at 8,701 up+86. The DAX index in Europe was at 5,613 up+35; the FTSE (UK) currently is 5,199 down-19. The early call for the open of key US indices is lower. The US 10-year backed up+1bp yesterday (1.97%) and is little changed in the o/n session.

Product further out the US curve pushed yields higher yesterday. Treasuries fell, extending the advance of 10-year note yields from a record low print (+1.67%) earlier in the week, as speculation that Europe’s leaders are moving toward agreement on measures to counter the region’s debt crisis sapped refuge demand. Also pressuring prices is the US treasury department coming to the market with $99b’s worth of product this week.

The second debt tranche was the issuing of $35b 5-year notes yesterday at record low yields as investors continued to seek shelter. Just like the shorter product, the 5’s withstood the test of the Fed’s “Operation Twist”. The overall demand was strong at a yield of +1.015% and an impressive bid-to-cover ratio of 3.04, well above the four auction average of 2.78. Indirect bidders took +45.9% of the supply, above the +40.9%average and direct bidders took +13.8%. Analysts had feared that the Fed’s move to sell the short end would hurt demand, this was not to be. Today we get the last of this weeks tranches with $29b 7‘s. The current market conditions should see good demand for supply.

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May 3, 2011

Dollar friendly as Risk loses its Bite

Filed under: OANDA News — Tags: , , , , , , , , , , , , — admin @ 10:36 am

Risk sensitive currencies are on the defensive this morning. The EUR is failing to retain its upward momentum as the market eyes option related levels below. The antipodean currencies are underperforming amongst the majors after the RBA disappointed the rate market in the short term, even a decisive business friendly Conservative majority has the loonie on the back foot. The message is risk off for the time being.

Cable has been one of the biggest losers, falling to a six-day low on the back of April’s much weaker than expected UK manufacturing sector PMI (54.6 vs. 56.7), which ‘underpins the consensus expectations that the BoE will keep rates on hold at +0.5% later this week’. Even the futures market is beginning to price out ‘any’ hike this year.

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 ‘whippy’ session.

Forex heatmap

US manufacturing slowed last month (60.4), but not as much as expected (59.5). However, rising costs remain a problem (85.5). The ISM report contrasts the Fed’s regional surveys which show that manufacturing expanded in April. The data showed that despite performing above expectations thus far this year, manufactures continue to experience significant cost pressures from commodities.

Digging deeper, the main subindexes were mixed, with new-orders falling to 61.7 from 63.3, the inventory index climbing to 53.6 from 47.4 and the employment index remaining little changed at 62.7. The report was not quite as strong as the headline measure would suggest, but indicates a solid ‘ongoing’ expansion in the factory sector. Apart from a mildly troubling reading for manufacturers’ own inventories, the forward-looking components of the survey seem to support the continuation of growth in the months ahead.

The USD is higher against the EUR -0.19%, GBP -0.98%, CHF -0.06% and lower against JPY +0.20%. The commodity currencies are weaker this morning, CAD -0.02% and AUD -0.56%.

PM Harper got his majority with the NDP surprising at the expense of the Liberals. The loonie has underperformed against most of its major trading partners of late, except outright against the dollar. Similar to most other major currencies, it managed to print a new three-year high last week, on speculation that the Fed will trail the BoC in raising interest rates. The election is a CAD-positive result, with the probability that the loonie could revisit its multi-decade low (0.9059 in 2007) if the dollar negative sentiment persists over the next few months. Now that the event risk is out of the way there is interest to own more loonies on these dollar rallies (0.9520).

The RBA were not as hawkish as feared, but hawkish nonetheless. As expected, they left their rate policy on hold last night (+4.75%). The RBA statement was hawkish compared to the April release, but certainly caught the rate’s market on the back foot, who had pushed yields higher going into the meeting in the wake of higher than expected first quarter inflation.

Governor Stevens communiqué ran a balanced mix of downplaying first quarter inflation due to the floods, noting strength in the labor market and a pickup in corporate credit growth but weakness in household credit. However, he went on to say that ‘the marked decline in underlying inflation from the peak in 2008 has now run its course. While the rising exchange rate will be helping to hold down prices for some consumer products over the coming few quarters, over the longer term inflation can be expected to increase somewhat if economic conditions evolve broadly as expected.’ This would suggest that the exchange rate appreciation so far is not enough to keep inflation stable given the growth outlook.

Policy makers replaced the ‘stance of monetary policy remained appropriate,’ with ‘in future meetings, the Board will continue to assess carefully the evolving outlook for growth and inflation’, another nugget for possible rate hikes. Why add this warning now if you think it might only apply in 2012?

The AUD fell outright against the greenback for the fourth consecutive day on the back of some risk profit taking. The market is now pricing in a +52% chance that the RBA will raise its benchmark rate to +5% by October, down from +62% yesterday.

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

Crude is much weaker in the O/N session ($112.75 -0.77c). If anything, the news of bin Laden’s death has only increased the volatility in the crude market. Initial reaction was dollar supportive and black-stuff negative, however, his death does not alter the facts that have pushed the buck to a three-year low against most of its major trading partners and does not end the geopolitical concerns in MENA. There were even market rumors yesterday, denied obviously, that the Israelis were amassing war planes at a US military base in Iraq for an attack on Iran. It was this alone that had crude nearly wiping out all of its initial losses.

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

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

Gold have trimmed some of their bin Laden losses, unlike silver, keeping their bullish trend intact. The uncertain macro-economic and political environment continues to attract investors, as does the continuing weakening of the dollar on the back of US policy makers being slow to tighten their monetary policy. Gold, as a non-yielding asset, has a higher opportunity cost when interest rates rise. The precious metal has become the currency of choice as the dollar underperform against its G10 trading partners.

The metals bull-run is far from over with investors continuing to look to buy the commodity on dips. Any price pullbacks are viewed as favorable opportunities for investors to continue to diversify into safe-haven assets, especially metal being used as a store-of-value ($1,547 -$9.40c).

The Nikkei closed at 10,004 up+154. The DAX index in Europe was at 7,488 down-39; the FTSE (UK) currently is 6,087 up+17. The early call for the open of key US indices is lower. The US 10-year eased 2bp yesterday (3.28%) and is little changed in the O/N session.

FI yields gave up all of their bin Laden gains with benchmark prices rallying close to their six-week high yesterday after US manufacturing grew at a slower pace than the previous month, reinforcing the concern that economic recovery will be gradual. This is very much in line with policy makers thinking and actions after last weeks rate decision. Also providing support was the Fed buying $7.24b worth of product due from May 2018 to February 2021 as part of their debt-buying program.

With the US economy losing some of its momentum and fears of a bin Laden reprisal is providing support on pull backs for the time being.

November 25, 2010

Russia Buying Canadian Dollars

Filed under: OANDA News — Tags: , , , , , , , , , , , — admin @ 2:25 pm

Alexei Ulyukayev, first deputy chairman of Russia’s central bank, said in an interview today that Russia is adding Canadian-denominated assets to its foreign reserves. Ulyukayev noted that Russia is attempting to diversify its holdings of nearly $500 billion, the world’s third largest cache of foreign reserves.

“We have recently begun investing in assets denominated in the Canadian dollar,” Ulyukayev, said in an interview yesterday in Moscow. “So far, the amounts are very small, but there’s perhaps potential for increasing our holdings.”

Ulyukayev’s comments helped make Canada’s dollar the best performer among the 16 most-traded U.S. dollar counterparts yesterday. The currency appreciated as much as 1.5 percent, the biggest intraday move since Sept. 1, to C$1.0092 per U.S. dollar. It traded at C$1.0099 at 5 p.m. in Toronto yesterday, compared with C$1.0247 on Nov. 23. One Canadian dollar buys 99.02 U.S. cents.

Source: Bloomberg

November 1, 2010

‘Shock and Awe to Shucks and Oh’ in two days

Filed under: OANDA News, Uncategorized — Tags: , , , , , , , , , , , — admin @ 10:04 am

The market will talk this up as being the biggest week ever for all asset classes. Copious CBank meetings, mid-term elections and extremely influential data will provide the ingredients for volatility. The jewel in the crown will be the two day FOMC meeting, where the market expects helicopter Ben to announce further QE spending. The problem is that no one knows how much, and Ben, himself, was looking for some ideas last week when he supposedly sent out a survey to FI dealers seeking their opinions. Watching the price action in both FX and FI, one gets the feeling that the market is happily pricing in a large repurchasing program. Do not be surprised to see some of that bullish theory being pared back today.

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

Forex heatmap

On Friday, the US economy advanced at an annual pace of +2.0%, q/q, and came in bang on expectations. It marks the fifth consecutive quarter of expansion. However, some of the underlying details emphasize softer growth, like the larger inventory contribution, which analysts believe could provide downside risks for 4th Q GDP. The data in no shape or form should influence policy makers over the next couple of days. To them, they will be focusing mostly on fiscal policy uncertainty. Digging deeper, the mix of growth was weaker, with final domestic demand posting growth of +2.5%, down from +4.3% in the previous quarter. The biggest decliners were net exports (-2.0%) and residential fixed investment (-0.8%). Exports contributed +0.6% to overall growth, while imports took that and more away. It was mostly inventories that dominated the headline, adding +1.44% to the print and remains notably blow the +2.6 to +2.8% growth levels that we witnessed in the early phase of the US recovery. Finally, prices continued to move up, but registered their second straight quarter of decelerating growth (+0.8%). Bring on QE2.

The USD$ is lower against the EUR +0.30%, GBP +0.01% and higher against CHF -0.28% and JPY -0.05%. On Friday, the Canadian growth rate for Aug. came in as expected (+0.3%), with all the subcategories again putting in a solid performance for the month. Analysts note that the release will in no way influence Governor Carney at the BOC. Policy makers remain focused on the downside risks of the US economy. The Canadian economy continues to be shackled to its largest trading partner, the US, and the very reason why the BOC have prudently stepped to the sidelines. The loonie has been caught in a dollar debasing jet-stream for most of last week. Over the past month, the CAD has been one of the worst performers vs. the buck, despite all the negativity surrounding the greenback. Last week Governor Carney stood down on hiking rates as expected, citing a softer outlook for the Canadian economy. Futures prices have priced in a ‘no-hike’ for the next six-months despite policy makers continuing to see the risk to the inflation outlook as being balanced. The BOC said that the ‘more modest growth profile reflects a more gradual global recovery and a more subdued profile for household spending’. They did not go all out neutral on future rate hikes, but noted that certain factors stand in the way.

The AUD has held investor support for a third consecutive day on speculation that the region will maintain its interest-rate premium as the US and Japan debate further monetary-easing measures this week. Inflation data down-under last week disappointed hawkish speculators. Australian CPI rose +2.8% in the third quarter from a year earlier, after increasing at a +3.1% pace in the previous three month. The market was expecting a rate of around +2.9%. Futures traders have pared their bets from a +47% chance that the RBA would hike to a +16% chance this evening. It’s now expected that any rate increase ‘will be only gradual’. With such a benign rate outlook, the market was betting that the currency would ‘struggle in extending its gains far above parity’ in the medium term. However, the currency has gotten a boost from the price of commodities and the weaker dollar of late. With these variables remaining intact the market can expect another attempt at parity (0.9900).

Crude is higher in the O/N session ($81.95 +52c). Crude prices fell on Friday after a weaker than expected US consumer sentiment print, the ending of a French Port oil strike and the reluctance of the markets to make any major moves ahead of the FOMC meeting. Even with supplies growing, it’s the dollars direction that dominates the black-stuffs prices. Last week’s EIA report again blindsided the market to a certain extent, although the direction was not surprising the volume headline print was. The release was greater than five times analyst’s expectations. Crude climbed +5.01m barrels to +366.2m last week, the biggest increase in four-months. The market had only priced in a +1m barrel gain. Offsetting the reported surplus was the plunge in gas stocks, falling -4.39m barrels to +214.9m. Analysts were estimating an increase of +625k barrels. The net effect was a zero-sum report. Crude analysts note ‘this is currently a shoulder season for product demand ahead of the winter heating season’. Technically, we should see inventories gravitate towards their highs. The market remains wary that the underlying fundamentals have not changed. The ‘big’ dollars value continues to push prices about.

Gold again rallied, recording its third straight monthly gain, on speculation that Ben and his fellow policy makers will increase their debt purchase numbers, weakening the ‘mighty buck’ and boosting the commodity’s appeal as an alternative investment. Gold, month-to-date was up +3.1%, while the dollar index recorded a loss of -1.9%. There are two trains of thought dominating the market at the moment, some argue that a measured move this week may have a muted affect on the dollar, while others suggest that further easing would weaken the dollar irrespective of the size as investors chase higher yielding assets in other countries. The dollars negative correlation relationship remains intact with commodity prices. For most of this year investors have sought an alternative investment strategy to the historical reserve currency. Investors have been using the commodity as a proxy for a ‘third reservable currency’, pushing the metal to record new record highs. To date, gold has outperformed global equities and treasuries (+22.7%), prompting record investment in gold-backed exchange-traded products. The debasing issues of the dollar, coupled with the sustainable growth issues of the US economy have investors generally seeking protection in an asset with a ‘store of value’. Everyone is now focused on the FOMC meeting ($1,362 +$5.10).

The Nikkei closed at 9,154 down -48. The DAX index in Europe was at 6,665 up +64; the FTSE (UK) currently is 5,719 +45. The early call for the open of key US indices is higher. The US 10-eased 2bp on Friday (2.60%) and is little changed in the O/N session. Longer maturities were better bid after the Fed’s preferred inflation measure, core-GDP price gauge, increased less than forecasted (+0.8%) and adds to speculation that helicopter Ben will boost purchases of longer-term assets. Fundamentally, the US continues to experience softer-than-expected inflation data, and it’s this data that will trigger whether or not the Fed does QE. So, it’s back to speculating on the buy back numbers again.

October 21, 2010

EUR held hostage by dollar

Filed under: OANDA News — Tags: , , , , , , , , , , , , — admin @ 9:46 am

We have witnessed a zero-sum game after five sessions of extreme volatility for the EUR. In effect it’s been a seven-cent swing for the currency since last Fridays high recorded after helicopter Ben’s remarks. Chancellor Merkel’s comment that the EUR is ‘shielded by rescue packages’ and the fact that she is bullish on German growth negated all the PBOC tightening monetary policy effect on Tuesday. That was surely a pre-G20 placation move on their part. The maddening currency swings have been driven by the lack of detail on the QE2 front. A Medley report yesterday seems to have appeased the market somewhat. It’s anticipated that the FOMC is ‘converging upon a decision to buy Treasuries of about $500b over the next three-to-six months with an open-ended commitment to buy more assets over the following year, depending on economic developments’. The dollar is expected to be subjected to further market pressures until after the FOMC meeting and the mid-term elections.

The US$ is weaker in the O/N trading session. Currently it is lower against 10 of the 16 most actively traded currencies in another ‘volatile’ trading range.

Forex heatmap

The market held its gains after waiting most of the day yesterday for the muted Beige book release. The Fed’s economic survey brought nothing new to the table, again stating that economic growth continues to be modest with a weak housing market and tame inflation. The surprising nugget was that the districts believe that consumers are ‘slowly regaining confidence’. Across all districts it’s more of the same. Consensus has us believing that there is nothing in the report to dissuade the Fed from their expected course of action. Earlier this month helicopter Ben stated that there was a case for additional stimulus because ‘inflation is too low and unemployment is too high’. Since his remark the market has been pricing in aggressive QE2 somewhat on the lines of the yesterday’s Medley report highlighted above.

The USD$ is lower against the EUR +0.41% and JPY +0.05% and higher against GBP -0.36% and CHF -0.09%. The commodity currencies are mixed this morning, CAD +0.15% and AUD -0.05%. Yesterday, Canadian wholesale trade shot by all market expectations. The headline (nominal) wholesale print climbed +1.2%, m/m, the biggest gain in nine-months. In volume terms, wholesale trade was up +0.9%. Digging deeper, all the sub-sectors, with exception for food, drink and tobacco, managed to report gains. It’s worth noting that the machinery and equipment segment was the key contributor to growth (+3.2%). This data took a back seat to the MPR report, which reiterated what the BOC told us earlier in the week regarding a softer outlook. However, the one bright spot may be the fact that while Carney downgraded the inflation projections, policy makers still see the risk to the inflation outlook as being balanced. On Tuesday the BOC kept rates on hold (+1%). Policy makers downgraded growth (+3% vs. +3.5%, 2010) and the inflation outlook (CPI and core inflation are now expected to converge to 2% at the end of 2012). There are a number of ‘factors’ in the way for another rate hike at present. The BOC said that the ‘more modest growth profile reflects a more gradual global recovery and a more subdued profile for household spending’. They did not go all out neutral on future rate hikes, but noted that certain factors stand in the way. A broadly softer dollar on QE2 pressures will prevent the loonie from losing too much ground, until at least after the FOMC meeting in Nov.

The AUD had a bumpy ride in the O/N session, finding it difficult to maintain traction, as reports out of China pressurized regional bourses and by default curb the demand for growth currencies. Reports show that China’s rate of GDP growth coupled with record inflation acceleration justifies a tighter monetary policy from the PBOC. The AUD fell against the greenback and the yen as Asian shares declined. This weeks RBA minutes showed that policy maker’s decision to keep interest rates unchanged this month had been ‘finely balanced’. On the other hand they did indicate that rates would have to ‘rise at some point’. From a fundamental perspective the minutes reinforced the argument that there could be another hike coming in Nov. or Dec. given that the RBA seems very comfortable with where the currency is currently. Month-to-date, the AUD has climbed +5.9% vs. the buck as data fueled bets that the RBA will raise interest rates before the year ends. Investors are better buyers on deeper pullbacks as the interest rate differential continues to be of appeal for alternative investments (0.9867).

Crude is lower in the O/N session ($82.20 -34c). Crude prices climbed as the dollar tumbled across the board yesterday, erasing most of the previous day’s losses, and on the weekly inventory report showing a smaller than forecasted gain in stockpiles. The EIA report rose +667k barrels last week, less than half what was expected. That being said, the market continues to focus on the dollar’s weakness and its inverse relationship with commodity prices. Investors anticipate the currency to struggle until after the FOMC meeting and the mid-term elections in Nov. Total crude stockpiles were expected to increase by +1.5m barrels. The market is also focusing on the drawdown at Cushing (the delivery point for New York futures). Supplies dropped -1.1m barrels to +34m, the biggest one-week drop in nine-months. Gas stockpiles rose by +1.2m barrels to +219.3m vs. a -1.3m drop. In contrast, distillate stocks (heating oil and diesel) fell by -2.2m to +170.1m barrels. Analysts had expected only a -600k barrel shortfall. The refining capacity utilization rose by +0.6% to +82.5%. Analysts expected a 0.1-percentage point increase. Despite all this, inventories for crude and refined products remain at unusually high levels. Crude analysts note ‘this is currently a shoulder season for product demand ahead of the winter heating season’. Technically, we should see inventories gravitate towards their highs. The market remains wary that the underlying fundamentals have not changed. It’s the dollars value that is pushing prices about.

What a difference a day makes. Gold rebounded from its biggest loss in three months as the dollar tumbled on QE2 rumors yesterday. Investors continue to seek an alternative investment strategy to the historical reserve currency. Interest rates play an important role to the commodities advance. Rising interest rates pressurize gold prices, just look at the markets reaction earlier in the week to China tightening their monetary policy. Year-to-date it has been a commodity in demand for alternative investment purposes. Last week, the market traded with a distrust of currencies and gold seemed to be the only solution as investors used it as a proxy for a ‘third reservable currency’, pushing the metal to record new record highs. With market confidence wavering in currency prices, and with cheap money, has made commodities look attractive on pull backs. To date, gold has outperformed global equities and treasuries (+22.3%), prompting record investment in gold-backed exchange-traded products. The debasing issues of the dollar, coupled with the sustainable growth issues of the US economy have had investors generally seeking protection in an asset with a ‘store of value’. With the Fed on the verge of implementing further QE programs ‘tend to be supportive of asset prices and is fueling concerns about the potential longer-term inflationary affect of such measures’. The opportunity costs of holding gold are low due to low interest rates ($1,345 +$1.50c).

The Nikkei closed at 9,376 down -5. The DAX index in Europe was at 6,547 up +23; the FTSE (UK) currently is 5,754 +25. The early call for the open of key US indices is higher. The US 10-year eased 1bp yesterday (2.48%) and is little changed in the O/N session. Longer dated securities prices remain close to home as several Fed officials express the need for more policy easing. They have also indicated that it’s going to take ‘quite something to derail a second round of QE’. The open ended question remains what form will QE2 take? It’s the unknown that is keeping yields within a tight range. They market is trying to anticipate how much the Fed will buy or even whether they will give an explicit target. Never ending rumors continue to provide support on pull backs.

October 12, 2010

EUR’s 11% gain really too much?

Filed under: OANDA News — Tags: , , , , , , , , , , — admin @ 10:23 am

Since last Friday’s NFP release the market has had quite a bit to chew on. Over the weekend global leaders have failed to narrow their differences on currency values and have turned to the IMF ‘to calm frictions that are already sparking protectionism’. Historically, this is an institution that generally relies on powers of persuasion. Is this the method that Capital Markets can expect to rely on? It’s a fact that countries favor cheaper currencies to aid growth, just do not be so overt about it. Realistically, the negative dollar trade has become overcrowded and profit taking is inevitable. Perhaps QE2 fears for the buck are slightly overdone? Technical analysts will tell us that we should be expecting a dollar extension to a 1.36 handle. Perhaps this afternoons FOMC minutes will give us a surprise or two.

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

Forex heatmap

Last week it was jobs, this week we get to witness key readings on inflation and retail spending down south. Market anticipates benign inflation to be confirmed again as softer price pressures are in no danger of rising any time soon. With CPI this Friday, market consensus is looking for a +0.2% print, while core (ex-food and energy) is seen at +0.1% after the flat reading the previous month. The Fed is scheduled to release this afternoon its Sept. 21st minutes. Back then it announced it was willing to do more to sustain the US economic recovery.

The USD$ is higher against the EUR -0.62%, GBP -0.33%, CHF -0.73% and lower against JPY +0.06%. The commodity currencies are weaker, CAD -0.35% and AUD -0.63%. The loonie has been under pressure since the headline release of its employment report on Friday (-6.6k vs. +10.2k). According to analysts, the details are more encouraging than the ‘headline drop’. Digging deeper, full-time jobs rose by +37.1k, while the destruction of -43.7k part-time jobs managed to keep the headline in the red. Optimists will tell you the conversion of part-time to full-time jobs is a mild positive, as it expands hours worked, and they tend to be better paying and more stable. In the big picture, the slowdown of the Canadian economy has surprised policy makers of late. Now that the labor market seems to be taking a pause, futures prices are looking for the same in the rate policy decision from the BOC next week. The demise of the greenback had the CAD threatening parity earlier last week as commodity prices provided a bullish backdrop for the currency. That being said, interest rate differentials is not the primary reason for wanting to own the currency. The ongoing threat of QE2 continues to gives all major currencies a leg up on the ‘historical reserve currency’. It seems that reason may be beginning to wear thin as the dollar strengthens against all its major trading partners.

The AUD fell for a second day amid speculation the currency’s advance last week to a record was overdone. A stronger employment report down under earlier this month happened to push the currency to new heights vs. the greenback. Australia’s employers added +49.5k workers and the unemployment rate held at +5.1% in Sept. Month-to-date, the AUD has climbed +8% vs. the buck as data fueled bets that the RBA will raise interest rates before the year ends. Futures traders now see a 42% chance that the RBA will increase its target rate next month, down from 66% last week. The dollar and commodity prices continue to pressurize growth currencies short term. Investors are better buyers on deeper pullbacks as the interest rate differential continues to be of appeal for alternative investments (0.9783).

Crude is lower in the O/N session ($81.05 -$1.16c). Oil prices continue to slide this morning, snapping a three-week record printing price rally, as the dollar strengths vs. the EUR, and curbing the appeal of commodities as an alternative investment ahead of OPEC meeting this week in Vienna. This move had nothing to do with inventories or demand. It is a plain vanilla dollar move. Last week’s inventory report was mixed, a little bearish for oil and bullish for the products, that said, the focus remains on pending QE strategies been implemented by different governments. Crude supplies climbed +3.09m barrels to +360.9m, leaving stockpiles +13% higher than the five-year average. Analysts had expected weekly inventories to rise by +413k barrels. In contrast, gas stockpiles fell -2.65m barrels to +219.9m. Supplies of distillate fuel (heating oil and diesel) slipped -1.12m barrels to +172.5m. Refiners reduced their operating rates by -2.7% to 83.1%. In fact, the drop in refinery runs has probably caused the drop in fuel supplies. Also of note was the drop in fuel consumption, falling -6.4% to +18.5m barrels a day (the biggest weekly decline in nearly seven years). Gas demand also fell -4.2% to +8.99m barrels a day. Until the report, higher inventory supplies had been the biggest inhibitor for a market advance over the past quarter. The market remains wary that the underlying fundamentals have not changed, but the dollar value continues to dictate the direction of commodity prices.

Despite everything, Gold is a commodity in demand close to record highs. The long holiday weekend has be unable to deter investors as the one directional trade has been in demand on fear that the ‘buck’ will remain under pressure in the short term. With market confidence wavering in currency prices, and with free money, it’s making commodities attractive on ‘deeper’ pull backs. Aiding the trade has been the collapse of the dollar vs. its major trading partners. Any time that governments are in the business of printing money then the commodity is bound to do well. Technically, the weakness of the dollar may have been overdone in the short term. The market is currently experiencing a pull back in prices, a dollar rally and paring of bear ‘positions’. To date, gold has outperformed global equities and treasuries (+24%), prompting record investment in gold-backed exchange-traded products. A concern about the strength of the dollar coupled with the sustainable growth issues of the US economy has had investors seeking protection in an asset with a ‘store of value’. With the Fed on the verge of implementing further QE programs ‘tend to be supportive of asset prices and is fueling concerns about the potential longer-term inflationary affect of such measures’. The opportunity costs of holding gold are low due to falling interest rates, by default, the market should expect better buying of the metal again ($1,343 -$10).

The Nikkei closed at 9,388 down -200. The DAX index in Europe was at 6,240 down -70; the FTSE (UK) currently is 5,602 -70. The early call for the open of key US indices is lower. The US 10-year eased 3bp since Friday (2.36%) and is little changed in the O/N session. The market has priced in aggressive ‘future’ buying by the Fed over the last few weeks and last Friday’s employment numbers may have put anticipated buying over the top as record yields continue to be printed. QE2 fundamentally will keep yields low, that being said the market may have dragged bond prices too high as the FOMC announcement could disappoint the FI market that has priced in aggressive new treasury purchases. After the long weekend let’s see what dealers make of the G20 spat.

October 8, 2010

Currency wars on hiatus as Jobs take center stage

Filed under: OANDA News — Tags: , , , , , , , , , , , , — admin @ 10:07 am

What is the market focusing on in today’s NFP report? Is it the headline print? The private sector payroll number? Perhaps it’s the unemployment rate? Capital Markets is looking for a below consensus gain of +25k private sector payroll jobs, an increase in the unemployment rate to +9.7% with a flat headline print. This week’s softer ADP print certainly supports this forecast. It seems that the 10% unemployment rate is only a matter of time. It’s not just the employment report we have to deal with, the IMF, World Bank and G7 finance ministers meetings this weekend is expected to keep trading within a tighter range today. Next week the blame game can start for the currency war.

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 ‘subdued ’ trading range ahead of the jobs report.

Forex heatmap

Unlike the disappointing private ADP report, US weekly jobless claims unexpectedly retreated yesterday (+445k vs. +455k), keeping intact the month long downward trend of initial jobless claims. By day’s end the report does not provide a material change to the job situation, however it provides optimism for better things. The headline was the strongest print attained in three months. Digging deeper, continuing claims fell by-48k to +4.462m. That is the lowest level reached in four months and the fourth consecutive retreating week. On the flip side, the number receiving extended (+1.01m) and emergency benefits (+4.1m) increased +99k and +157k respectively and happened to reverse some of the previous week’s declines. It’s worth noting that these are the biggest weekly gains in three months.

The USD$ is higher against the EUR -0.15%, GBP -0.15%, CHF -0.13% and lower vs. the JPY +0.08%. The commodity currencies are mixed, CAD +0.06% and AUD -0.69%. The loonie took it squarely between the eyes yesterday ahead of its own employment report this morning. By default the currency had been steadily appreciating vs. the dollar, but certainly not at the same pace as the other major currency pairs. Yesterday’s data did not help the currency’s cause in any shape or form. Canadian building permits plunged -9.2% in Aug., five times more than analysts expected and the most in ten months. The demise of the greenback had the CAD threatening parity earlier this week as the general economic strength of Canada coupled with the commodities that she possesses provided a bullish backdrop for the currency. Analysts believe there is a risk towards a stronger employment report this morning, which would provide further support for the market to own the CAD on USD rallies. For most of last month the market had begun questioning the ‘true’ strength of the Canadian Economy after the last few data releases came in much softer than expected. As of this week analysts are predicting slower inflation and a ‘more gradual pace of BOC lending rate increases than they did a month ago’. That been said, interest rate differentials is not the primary reason for wanting to own the currency. The ongoing threat of QE2 continues to gives all major currencies a leg up on the ‘historical reserve currency’. So eyes down and let see what happens on the job front.

The AUD is another growth interest sensitive currency threatening to print parity vs. the dollar. The Aussie is heading for its eight weekly gain, the longest winning streak in sixteen months. A stronger employment report down under managed to push the currency to new heights vs. the greenback earlier this week. Australia’s employers added +49.5k workers, and holding the unemployment rate steady at +5.1% in Sept. Month-to-date, the AUD has climbed +8% vs. the buck as the data fueled bets that the RBA will raise interest rates before the year ends. The currency has gained ground against all of its major trading partners as the ‘vix index’ of volatility softened, boosting investor appetite for assets tied to growth. ‘Clearly what happens in the Australian economy is now more dependent upon what happens in China’. Investors are better buyers on deeper pullbacks as the interest rate differential continues to be of appeal for alternative investments (0.9764).

Crude is a lower in the O/N session ($80.98 -69c). Oil slipped from its five-month high yesterday as the dollar gained some traction ahead of North American employment data. A greenback strengthening reduces the appeal of commodities as an alternative investment. Yesterday’s move had nothing to do with inventories or demand. It was a plain vanilla dollar move. This week’s inventory report was mixed, a little bearish for oil and bullish for the products, that said, the focus remains on pending QE strategies been implemented by different governments. Crude supplies climbed +3.09m barrels to +360.9m, leaving stockpiles +13% higher than the five-year average. Analysts had expected weekly inventories to rise by +413k barrels. In contrast, gas stockpiles fell -2.65m barrels to +219.9m. Supplies of distillate fuel (heating oil and diesel) slipped -1.12m barrels to +172.5m. Refiners reduced their operating rates by -2.7% to 83.1%. In fact, the drop in refinery runs has probably caused the drop in fuel supplies. Also of note was the drop in fuel consumption, falling -6.4% to +18.5m barrels a day (the biggest weekly decline in nearly seven years). Gas demand also fell -4.2% to +8.99m barrels a day. Until the report, higher inventory supplies had been the biggest inhibitor for a market advance over the past quarter. The market remains wary that the underlying fundamentals have not changed, but the dollar value continues to dictate the direction of commodity prices.

Despite everything, Gold is a commodity in demand even at record highs. That being said, the weight of the over crowded, one directional trade was due for a correction and yesterday was prime time ahead of this morning’s employment report. From a technical perspective, there was no support for gold at the record high prices. With market confidence wavering in currency prices and with free money it’s making the commodity very attractive on deeper pull backs. Aiding the trade has been the collapse of the dollar vs. its major trading partners. Any time that governments are in the business of printing money then the commodity is bound to do well. Gold has outperformed global equities and treasuries, prompting record investment in gold-backed exchange-traded products. Year-to-date, the yellow metal has managed to climb +22%. A concern about the strength of the dollar coupled with the sustainable growth issues of the US economy has investors seeking protection in an asset with a ‘store of value’. With the Fed on the verge of implementing further QE programs ‘tend to be supportive of asset prices and is fueling concerns about the potential longer-term inflationary affect of such measures’. The opportunity costs of holding gold are low due to falling interest rates, by default, the market should expect better buying of the metal on pull backs ($1,333 -$1.20c).

The Nikkei closed at 9,588 down -95. The DAX index in Europe was at 6,265 down -13; the FTSE (UK) currently is 5,643 -18. The early call for the open of key US indices is lower. The US 10-year eased 3bp yesterday (2.37%) and is little changed in the O/N session. Longer-term debt is the winner on the US curve, leading advances, as traders speculate that the Fed will increase their purchases of debt. Bernanke said earlier this week that the ‘first so-called quantitative-easing round has improved the economy and more purchases would ease financial conditions’. QE2 fundamentally will keep yields low. Yesterday’s weekly claims report provided little change to the curve. Let’s see what NFP brings us this morning.

October 7, 2010

Jobs play second fiddle to devaluation race

Filed under: OANDA News, Uncategorized — Tags: , , , , , , , , , , , , , , — admin @ 10:25 am

There is a currency devaluation race whether we like it or not. The blame game has been rather muted up until now. That may change after the G7 finance ministers meeting tomorrow. The measures being taken to weaken currencies are distorting markets and trade and weighing on dealers nerves. The lead to devalue currencies and loosen monetary policy is been driven by export-led growth countries. That been said, the appreciating currencies cannot be happy either. How are they to partake in a currency devaluation race for the sake of national interest? Buy dollars and be accused of currency manipulation? Blame China more loudly? Do what Ben does, talk about implementing QE before it goes out of style. The ECB and BOE communiqué today should be rather interesting. No-one wants to be left behind. They have political agendas to follow after all.

The US$ is weaker in the O/N trading session. Currently it is lower against 15 of the 16 most actively traded currencies in a ‘whippy’ trading range.

Forex heatmap

Is it a sign of things to come? Yesterday’s ADP report disappointed us with further job losses (-39k vs. +10k) and this despite a mild revision in Aug., where a -10k drop was revised to a +10k gain. The report has managed to reverse a trend that had been in place for the past seven months. After posting monthly gains north of +60k in Apr. and May, ADP has since been loosing steam. Obviously the bigger question is whether the trend has stamina. If so, expect it to start filtering into other reports. The negativity surrounding the report calls into question the strength of tomorrow’s private sector job growth in the NFP report. In reality, the ADP being used as a ‘yardstick’ for NFP remains weak, with an absolute error of +/-100k. Digging deeper, all the weakness in the private sector payroll employment was in the goods-producing sector (-45k), while the services sector added only +6k.Within the goods-producing sector, construction employment declined by -28k and the manufacturing employment fell by-17k (third successive monthly decline). Analysts note that at the composite level small and medium sized companies lost jobs (-14k). Larger corporations fared a tad better and shed-11k positions. On the services side, medium businesses lost-2k individuals, while small and larger entities added +6k and +2k positions.

The USD$ is lower against the EUR +0.25%, GBP +0.19%, CHF +0.29% and JPY +0.61%. The commodity currencies are stronger, CAD +0.05% and AUD +1.16%. Interest differential continue to support growth currencies like the loonie. The currency managed to print a new five month high yesterday vs. its largest trading partner amid speculation that other Cbanks will rely on QE while the BOC remains on hold. The demise of the dollar has the CAD threatening parity and beyond in the medium term. The general economic strength of Canada coupled with the commodities that she possesses provides a bullish backdrop for the currency. On a relative basis the currency has not appreciated as quickly as some of the other majors vs. the dollar ahead of this Friday’s North American employment reports. The currency has rallied just under +6% since its recent lows registered in the middle of Aug. With the markets in ‘risk-seeking mode’, oil straddling $83 and gold registering new record highs daily has put upward pressure on the loonie again. The economic highlight for the remainder of this week will be the jobs report on Friday. Analysts believe the risk is towards a stronger report, which would provide further support for the market to own the CAD on USD rallies. For most of last month the market had begun questioning the ‘true’ strength of the Canadian Economy after the last few data releases came in much softer than expected. As of this week analysts are predicting slower inflation and a ‘more gradual pace of BOC lending rate increases than they did a month ago’. That been said, interest rate differentials is not the primary reason for wanting to own the currency. The ongoing threat of QE2 continues to gives all major currencies a leg up on the ‘historical reserve currency’.

The AUD is another growth, interest sensitive currency on fire like the loonie vs. the dollar. There seems to be a race to parity for these commodity driven currencies. Last night on the back of a stronger employment report down under pushed the AUD to new heights vs. the greenback. Australia’s employers added +49.5k workers and the unemployment rate held at +5.1% in Sept. Month-to-date, the AUD has climbed +8% vs. the buck as data fueled bets that the RBA will raise interest rates before the year ends.
The currency has gained ground against all of its major trading partners as the ‘vix index’ of volatility softened, boosting investor appetite for assets tied to growth. ‘Clearly what happens in the Australian economy is now more dependent upon what happens in China’. Investors are better buyers on deeper pullbacks as the interest rate differential continues to be of appeal for alternative investments (0.9883).

Crude is a tad higher in the O/N session ($83.59 +36c). Oil has printed a five-month high this morning on speculation that steps by Cbanks to promote economic growth will boost the demand for the black-stuff. Also aiding prices is the dollar weakening across the board and boosting the appeal of commodities to investors. The weekly inventory report was mixed, a little bearish for oil and bullish for the products, that said, the focus remains on pending QE strategies been implemented by different governments. Crude supplies climbed +3.09m barrels to +360.9m, leaving stockpiles +13% higher than the five-year average. Analysts had expected weekly inventories to rise by +413k barrels. In contrast, gas stockpiles fell -2.65m barrels to +219.9m. Supplies of distillate fuel (heating oil and diesel) slipped -1.12m barrels to +172.5m. Refiners reduced their operating rates by -2.7% to 83.1%. In fact, the drop in refinery runs has probably caused the drop in fuel supplies. Also of note was the drop in fuel consumption, falling -6.4% to +18.5m barrels a day (the biggest weekly decline in nearly seven years). Gas demand also fell -4.2% to +8.99m barrels a day. Until the report, higher inventory supplies had been the biggest inhibitor for a market advance over the past quarter. The market remains wary that the underlying fundamentals have not changed, but the dollar value continues to support the commodity.

Despite everything, Gold is a commodity in demand even at record highs. Again this morning the yellow metal has recorded a 13th consecutive high on bets that government spending to boost economies will erode the appeal of currencies and increase the demand for metals as alternative asset. Wealthy private investors are even buying it by the ton. There is no confidence in currency prices and with free money it’s making the commodity very attractive. Aiding the crowded, one directional trade, has been the collapse of the dollar vs. its major trading partners. Any time that governments are in the business of printing money then the commodity is bound to do well. Gold has outperformed global equities and treasuries, prompting record investment in gold-backed exchange-traded products. Year-to-date, the yellow metal has managed to climb +22%. A concern about the strength of the dollar coupled with the sustainable growth issues of the US economy has investors seeking protection in an asset with a ‘store of value’. With the Fed on the verge of implementing further QE programs ‘tend to be supportive of asset prices and is fueling concerns about the potential longer-term inflationary affect of such measures’. The opportunity costs of holding gold are low due to falling interest rates, by default, the market should expect better buying of the metal on pull backs ($1,361 +$14).

The Nikkei closed at 9,684 down -6. The DAX index in Europe was at 6,281 down -8; the FTSE (UK) currently is 5,674 -7. The early call for the open of key US indices is lower. The US 10-year eased 7bp yesterday (2.39%) and is little changed in the O/N session. Longer-term debt is the winner on the US curve, leading advances, as traders speculate that the Fed will increase their purchases of debt. Bernanke said earlier this week that the ‘first so-called quantitative-easing round has improved the economy and more purchases would ease financial conditions’. QE2 fundamentally will keep yields low. Yesterday’s weak ADP employment report only added fuel to the fire, increasing speculation that the Fed will be buying more bonds than initially believed. The disappointing report is undermining confidence in the US’s economic recovery. The US yield curve has aggressively and stands at +198bp, remaining better bid on pull backs.

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