Forex Blog

August 31, 2011

Market is anemic ahead of Job data

Filed under: OANDA News — Tags: , , , , , , , — admin @ 4:27 am

It’s the last week of unofficial holidays and this thinly traded market should probably savor these last few days before the rest of the market participants head back to the grindstone.

What have we to look forward to this morning? ADP and Chicago PMI. Analysts consensus expect a+100k print for ADP, just below last months reading. The danger is obviously to the downside, softer data would hold true to form the stream of poor data releases over the past few weeks. The market is certainly insulating itself from a poorer showing from the Chicago PMI, its expected to drop from 57.6 in July to 52.7 this month. It is the last regional manufacturing indicator in August ahead of tomorrows ISM data. To date, all the other regionals have disappointed. A below expectations print could be another non event with so much pessimism already priced in.

This morning German jobless rate held steady (+7%) with the number of jobless Germans continuing to fall (-8k vs.-10k), although the overall pace of improvement is showing signs of slowing. If it was only that easy for NFP to print something of sustainable substance!

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

Forex heatmap

Discouraging indicators yesterday had traders in a sell first mentality with the dollar and the EUR both suffering declines on ‘crumbling confidence in their economies’. The mood in the US plummeted this month (44.5 vs. 59.2), the lowest reading in two-years, mostly on the back of the debt ceiling debate. Digging deeper, consumer expectation for economic activity over the next six-months plunged to 51.9 from a revised 74.9 (75.4). The present situation index fared no better, slipping to 33.3 from 35.7. The conference board noted that the headline decline was well under way before the S&P downgrade and Hurricane Irene (metric cutoff was August 18). Consumers inflation expectation held steady at July’s +5.8% 12-months from now. For an employment data filled week consumers views on the job situation turned negative. There were +49.1% of respondents who think that ‘jobs remain hard to get this month’, up from +44.8% in July. Only +4.7% think jobs are plentiful, down from last months +5.1%. Even more disappointing was the percentage of consumers expecting more jobs in the months ahead declined to +11.4% from +16.9%. Perhaps Friday’s data will be another blind side effort?

The S&P Case-Schiller home price index brought us little comfort despite rallying in June (+1.1%) for a third consecutive month. However, adjusted for seasonal factors the 20-city index declined -0.1%, while year-to-date, unadjusted June prices were down -4.5%. The US housing market has been struggling to recover due to high-unemployment (+9.1%), an abundance of foreclosures, a historic shadow inventory and tighter mortgage requirements.

The dollar is higher against the EUR -0.06%, GBP -0.16% and lower against CHF +0.88% and JPY +0.15%. The commodity currencies are weaker this morning, CAD -0.04% and AUD -0.01%.

Like all good commodity growth sensitive currencies, the loonie for the first half of this week was supported by the rise in risk interest. Yesterday, the currency managed to fall for the first time in three-days as a report State side revealed a dramatic drop in consumer confidence to a 28-month low from Canada’s largest trading partner. Yesterday’s rally in commodities managed to mitigate some of the CAD ‘potential’ loss. Month-to-date, the loonie is heading for its biggest drop in a year on speculation that the BoC would refrain from tightening rates anytime soon. The month-end pressure on global equities is also discouraging investors from wanting to own higher-yielding assets.

Canadian data yesterday revealed that the current account deficit widened in April through June to the second largest on record (-$15.3b). Many analysts have now cut by half their expectations for a BoC policy rate increases through the end of next year.

Last week Governor Carney stated that the Canadian economy has stalled and may have even contracted in the second-quarter. This morning we get the Canadian GDP number m/m and fundamentally, the market will have to wait and see what Friday’s US employment number brings to the table before investors place longer term bets. Outlook for the Canadian economy has come under serious scrutiny over the past few weeks. Yesterday’s Fed minutes revealed a dovish meeting and one that shows that policy makers are still prepared to act if things get worse from here, allowing investors to become better buyers of dollars on dips (0.9790).

The Aussie is headed for a monthly decline outright and against the JPY on signs the global economy is slowing. The currency has lost -3.5% against the dollar since its record high print last month. Declines in the AUD o/n have been limited on prospects that slowing jobs in the US will increase pressure on the Fed to add stimulus, and in turn boost demand for higher-yielding assets.

So, it seems that the currency cannot lose at the moment. If US data continues to improve then local market pricing for interest rate cuts by the RBA will evaporate. On the flip side, if US data takes a turn for the worst, then the AUD will benefit from a weaker dollar. Now that this growth and interest rate sensitive currency would likely be supported on both poor and strong US data, certainly favors a test of the old highs north of 1.10.

However, domestic data is found wanting. Aussie consumer sentiment is holding at two-year lows, private sector borrowing has slumped, retail spending is well below normal, home prices are falling, construction and services sector are weak and manufacturing is contracting at a faster pace. These are all strong enough reasons for the RBA to remain on the side line until it has a stronger handle on the economy. Currently, investors are better buyers of Aussie dollars on pullbacks as long as this risk loving environment remains (1.0670).

Crude is lower in the O/N session ($88.77 down-0.13c). For a third consecutive day crude prices have climbed to their strongest print in a month, advancing with gas and heating oil as East Coast refineries worked to restart refineries after Irene and on signs that the US housing market is perhaps stabilizing. With Sunoco shutting a Philadelphia fuel-making unit and other terminals operating at reduced rates is also providing price support for the black-stuff.

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

The report has been bullish for crude and bearish for the products. For the moment, Crude prices continue to hold just above strong support levels, supported by unrest in Libya where the availability of light oil with low-density and sulfur content output has fallen. The Fed’s monetary policy should be bearish for the dollar and bullish for crude in the longer term.

Classic flight-to-safety instruments got a shot in the arm yesterday. Gold has rallied aggressively after the US consumer confidence number sank to a 28-month low and in doing so has pushed US equities lower. The inverse correlation between equities and gold continues to hold steadfast. Investors again are speculating that the Fed will be required to ease monetary policy in answer to stimulate the economy. This is boosting the appeal of the yellow metal as an alternative asset class. To date, the Fed has kept borrowing costs at a record low for nearly three-years to stimulate the economy.

Already this week the possibility of a stimulus package from the Fed in the weeks ahead had seen the return of risk appetite to the market with ‘safer haven assets’ being liquidated. The commodity is close to paring all of this week losses where both fundamental and technical pressures bore down on the commodity once it approached new record levels.

Year-to-date, the lemming commodity trade is up +29%, as the global debt crises and volatile stock markets boost the appeal of the metal as an alternative asset. The Fed’s efforts to drive interest rates lower to support lending should curtail the dollar’s appeal and by default, support commodities. The commodity is heading for its eleventh consecutive annual gain ($1,833+$3.70c).

The Nikkei closed at 8,955 up+1. The DAX index in Europe was at 5,730 up+87; the FTSE (UK) currently is 5,325 up+57. The early call for the open of key US indices is higher. The US 10-year eased 5bp yesterday (2.18%) and is little changed in the O/N session.

US Treasuries prices have rallied, especially longer dated securities, as consumer confidence plunged this month to the lowest in more than two years, highlighting concern that global growth has slowed and boosting demand for the safest assets.

Yields on shorter term treasuries remain rooted to their record lows after the Fed signaled earlier this month that they are willing to take further measures to prevent the US from falling back into a recession. The spread between 2/10’s has again flattened (+199bp).

The Euro-zone and US consumer confidence data yesterday was ‘grossly weaker than expectations and consistent with what has been going on with weakening data of late’ according to Bill Gross. This is causing the market again to retrace towards the double-dip recessionary price level. Longer dated securities have pared their monthly yield gains that they earned after Bernanke’s Jackson Hole address where he said the Fed has tools to aid the recovery if needed, stopping short of indicating any implementation of QE3. 10-year yields remain range bound +2.35-2.03%.

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August 19, 2011

What’s Your Safe Heaven Currency Choice?

Filed under: OANDA News — Tags: , , , , , , , — admin @ 4:27 am

Capital markets reached a tipping point yesterday, pushed over by Euro bank funding concerns and weaker US data. The market has been seeing red from the bourses ever since. In currencies, it has been eerily quiet, even with the fall of global risk appetite continuing. The FX market has been trading these moves essentially flat. Perhaps the lack of price action has to do with the lack of positions. Trading safe heaven currency choices are limited and getting smaller all the time.

What are FX traders using for safe heaven other than gold? Japan’s finance minister Noda continues to warn the market about intervention and states that further yen strength would ‘elicit measures in the new supplementary budget’. That’s one strike against using JPY.

The SNB continues its charge for a weaker franc. The Bank has revised its year end forecasts and expects EUR/CHF to reach 1.14, previously forecast at 1.13 and USD/CHF at 0.84, previously at 0.83. Everyone knows that sustained CHF depreciation will only occur with improving global economic conditions.

The Fed is telling foreign exchange that they do not need to worry about the funding rate for at least two years. With rates at zero, they have now created the perfect ‘funding currency’, weakening the dollar without making that an ‘official policy statement’.

With the historical reserve currencies impeding the markets natural appetite in these times of stress perhaps the market should be looking more at a basket of Asian currencies, despite their own Cbank’s intervention or a commodity growth sensitive basket? Domestically there the cracks are appearing. Australia dependence on China and Canada’s 70% trading ties with the US are obvious reasons. Natural choices are been limited, perhaps the reason for lack of volatility, or are we just waiting for that Jackson Hole QE3 announcement?

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

Forex heatmap

Red and redder, that’s what the market sees. Yesterday’s US data was just another nail in the in the growth coffin. First, CPI surprised on the upside with a +0.5% seasonal increase. The market was expecting +0.2%, the blame comes from the positive seasonal adjustments for gas, though food and energy with +0.4% gains both exceeded the core rate which came in at +0.2%. It was the largest monthly gain since March. With short term rate expectations already anchored close to zero, yesterday’s headline print ‘handcuff’s the Fed’, giving them little room to ease a lot more. Policy makers have made it very clear that economic growth and jobs are in trouble. However, with little improvement in the labor market, and given what’s going on with economic growth, pricing power should weaken going forward, for the time being it remains stubbornly high.

No one wanted to hear that more Americans filed applications for UI last week. Initial jobless claims rose +9k to +408k. The number was above market expectations. Is the rise sufficient to conclude that the recent positive trend has been broken? The four week average is +402.5k, the lowest level in five months. Continuing claims paints the same picture, at +3.702m the outcome is just above expectations of +3.695m. Again revisions were applied to previous weeks, and they rarely go in ones favor! The four week continuing claims average of +3.716m is the lowest in two-months. All the numbers have been seasonally adjusted, before seasonal, initial claims fell-12k and continuing claims-45k. There was nothing in the report to imply that the recent financial turmoil has caused the US economy to slow further during this month. All the market knows is that the US economy has a long way to go to return to a healthy job market.

It was the disappointing Philly Fed survey (-30.7) that had investors running for the exits. With negative readings on overall activity, orders shipments and employees do support this week’s unexpected drop in Empire State business conditions (-7.7). When you include existing home sales unexpectedly dropping last month (-3.5% to +4.67m units) as cancellations of pending contracts continued to depress buying activity, you have the variable to create a highly volatile nervous illiquid trading environment whose priority is to that seek a safe heaven trading strategy.

The dollar is higher against the EUR -0.03%, GBP -0.00% and lower against CHF +0.71% and JPY +0.26%. The commodity currencies are mixed this morning, CAD +0.14% and AUD -0.21%.

Parity looms again for the loonie ahead of this morning inflation data. Fears about the stability of the European banking system, weaker data from its largest trading partner has been affecting crude and weighing on commodity, growth sensitive currencies.

Yesterday, Canadian monthly wholesale sales rose unexpectedly in June (+0.2%-$47.7b), but a decline in sales volume (-0.5%-because of a declining CAD driving import costs higher) was yet another sign for the market to expect a weak GDP print in the second quarter. Add this to a disappointing trade and manufacturing data for the month and we should have Governor Carney staying on the sidelines even longer.

The Governor speaks today in testimony at a special parliamentary meeting. Market expects him to sound more dovish than he did last month and again will probably reiterate the risks to the economy already identified.

This month, the loonie has dropped -3.8% as global equities tumble on renewed concern that the Euro-zone’s sovereign-debt crisis is getting worse. In the O/N market, investors have been better sellers of dollars on rallies (0.9890).

The AUD for a second consecutive day fell outright in the o/n session as Asian stocks extended global losses, curbing appetite for higher-yielding assets. The Aussie is on course for a fourth weekly drop against the JPY as traders increase bets for an interest-rate cut from the RBA amid concern that global growth is slowing. The RBA’s August minutes showed policy makers are concerned that turmoil in financial markets could slow global economic growth. Concerns over developments in Europe and the US continue to overshadowed the RBA’s robust medium term domestic outlook. Many now expect Governor Stevens to remain on hold for the remainder of the year, as ‘risks for the RBA have become more evenly balanced and the outlook remains conditional on the strength of the global economy’.

If global turmoil continues, it could temper domestic inflation over time and ease pressure on the RBA to raise interest rates. Some futures traders now expect the RBA to reduce its key interest rate by-128bp over the next 12-months. Even with core inflation still running above the RBA’s target range, the policy makers can afford to step aside, unless there a dramatic collapse in global financial markets. That can be said for all other Cbanks. Just like the loonie, the AUD will trade with the swings in global risk appetite. Currently, investors are better sellers of the currency on rallies (1.0382).

Crude is lower in the O/N session ($79.97 down -$2.41c). Crude declined the most in a week yesterday after growth forecasts were cut and on the back of disappointing US data pushing global equities further into the red. The Philly Fed survey showed manufacturing activity contracted sharply in the US this month. Investors continue to run away from risky assets due to the uncertainty surrounding how policy makers will act to contain the crisis in Europe.

This weekly inventory report is also bearish for the black stuffs prices. Oil stocks rose +4.23m barrels to +354m versus an expected inventory decline of-500k barrels, and are above the upper limit of the average range for this time of year. In contrast, gas inventories fell by -3.5m barrels, a week after dipping by -1.6m barrels in the prior week, but are in the upper limit of the average range. Oil refinery inputs averaged +15.4m barrels per day during the week, which were-205k below the previous week’s average as refineries operated at +89.1% of their operable capacity. Over the last four weeks, imports have averaged +9.30m barrels per day, which were-606k below the same four-week period last year.

For the moment, Crude prices continue to hold just above strong support levels ahead of $75, but those levels look vulnerable this morning. The Fed’s monetary policy will be bearish for the dollar and so should be bullish for crude in the longer term. However, markets appetite is telling us different in the short term.

Gold has hit a new high this morning, up just under +2.5% since yesterday, on disappointing weekly jobless claims last week. Investor’s fears again are being tested with various global growth forecasts being cut and on questionable concerns for Chinese growth. The commodity has jumped +20% since the start of the third quarter, with many analysts being forced to revise yearly forecasts as a combination of Euro-zone and US debt crises has renewed buying pressures.

Apart from the administration side effects of owning the commodity (CME’s +22% margin), the metal continues to be a recipient of safe-haven flows. Gold’s prices have more than doubled since the recession began in late 2007. Big picture, with the Fed’s efforts to drive interest rates lower to support lending are curtailing the dollar’s appeal as a safe haven and by default, support commodities. The commodity is heading for its eleventh consecutive annual gain. In this trading environment, $2,200 is very much in the realms of possibility over the next six months ($1,863 +$41.60).

The Nikkei closed at 8,719 down-224. The DAX index in Europe was at 5,410 down-192; the FTSE (UK) currently is 5,000 down-91. The early call for the open of key US indices is lower. The US 10-year eased 12bp yesterday (2.07%) and is little changed in the O/N session.

A disappoint Philly Fed had investors seeking shelter in treasuries and at one point pushing 10’s to new record low yields below 2%. Investors panicking managed to aggressively flatten the yield curve. The 2/30’s spread fell-7bp to a 10-month low on speculation the US economic recovery is stalling.

Yesterday’s CPI data is trying to handcuff the Fed on easing monetary policy further. However, with slower growth and a fragile jobs market should, over time, influence pricing power and inflation. With the short end of the yield curve resigned to trading on top of or close to o/n fed funds, dealers will expect longer-dated product to trade more volatile as investors reach for yield and on speculation that the Fed may extend bond buying away from shorter-dated notes and towards 10-year product to help stimulate the economy. For the near term, bond investors are likely to continue to keep a close eye on equities as they dictate these treasury moves.

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June 14, 2011

May 10, 2011

EURO to Survive a Greek Haircut?

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

As expected, the Greek tragedy dominates the markets. It’s a long performance with no intermissions. The rumors of another Greek bailout package (EUR+60b), to come into force next month, is providing a ray of hope for risk investors.

Credit markets are in corrective mode this morning, with broad tightening across the curve. The indices have nearly reversed all the Greek inspired widening since yesterday. The EUR is also getting a lift from Bin Smaghi’s comments that a debt restructuring (code name for default) would cause more problems than it solves. It’s so true, European banks would have to finally clean their balance sheets to withstand a genuine Greek ‘haircut’ and the market believe they are in no position to withstand this scrutiny. The problem is that Greece needs growth in its tax revenue to finance all this and that’s not easily forth coming.

This months 6-month Greek T-bill auction has also attracted a healthy demand this morning. The sovereign was able to offload +1.625b at a yield below the psychological +5% (+4.88%) with a bid-to-cover ratio of 3.58.

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

Forex heatmap

The USD is lower against the EUR +0.07% and higher against GBP -0.13%, CHF -0.49% and JPY -0.44%. The commodity currencies are weaker this morning, CAD -0.04% and AUD -0.06%.

After three consecutive months of gains, Canadian housing stats declined at a faster pace than expected last month (-3.2%). Most of the weakness was focused in multi-starts (-5.1%) as singles rebounded. This would suggest that the drag on growth for April will likely be more modest than the headline suggests, couple with S&P’s cutting their rating for Greece has temporarily dampened some of the investor demand for riskier assets. The loonie has been able to pare some of yesterdays losses on the back of a tepid rise in commodities after the over extended price movement last week.

Last week, the CAD retreated from a three-year high as commodities plunged on concerns for Greece’s continued Euro membership, pushing investors to seek temporary sanctuary in the world’s go to safe heaven currency, the dollar, and this despite another stellar jobs report north of the forty-ninth parallel (+58k and +7.6%). With corporate CAD buying interest not appearing until above 0.97, the loonie remains at the mercy of energy prices. If one eliminates all the noise, investors wish to be better buyers of the currency on dollar rallies (0.9623).

The global commodity boom is supporting the Australian trade surplus. Data this morning shows that the trade balance rose to a +1.7b surplus in March from a downwardly revised-87m deficit in February. Increased exports of iron ore (+30%, m/m) and coal (+27%) is driving the +9.2%, m/m rise in total exports, outpacing the +1.2%, m/m rise in imports. The recent commodity boom is leading to an increase in both the price of and demand for hard commodities and the Aussie dollar outright. Stronger Chinese trade data O/N (+$11.4b), a sign that tighter monetary policy is ‘not crimping the Asian nation’s growth’ is also a plus for Australia economy.

The currency has been able to rebound from last weeks lows after the RBA sounded ‘surprisingly’ hawkish in its Statement of Monetary Policy. The hawkish Statement came in well above market expectations of forecasts remaining unchanged. Governor Stevens is signaling that ‘current mildly restrictive monetary policy is not enough to contain inflation pressures in the pipeline’. Furthermore, the RBA is indicating that market pricing of one hike over the next year is not enough. Underlying inflation is now expected to be above its 2-3% target band by the end 2013.

Aussie yields are still the highest in the G10 and do look attractive. The expected mix of trade surpluses and rising capital inflows should provide support for the currency on pullbacks for the time being (1.0788).

Crude is lower in the O/N session ($101.52 -$1.03c). Oil prices rebounded yesterday from the plummeting nature of last weeks actions, on signs that global economic recovery remains intact. Market participants believe that the recent purging in most asset classes is somewhat overdone and that we are experiencing a technical rebound after last weeks-15% haircut, the biggest drop in three-years. The market will be weary of this weeks inventory report, expecting another build in inventories.

Not helping the black-stuff was last week’s EIA report, which was much more bearish than expected. The data showed crude stocks rising +3.4m barrels greater than the +2m barrel build expected by the street, signaling less demand from refiners. On the flip side, gas stockpiles fell-1m barrels, while inventories of distillates (heating oil and diesel), fell -1.4m. Analysts had expected that gas stocks would rise +100k barrels. They were looking for distillate stocks to climb +400k. Gas consumption dropped -2.2% to +8.94m barrels a day last week.

Higher oil prices have been denting demand growth and it’s this drop-off, combined with the overall retreat in commodities, and a rising dollar that forced this drastic easing of oil prices this month. The market had been overbought and last week’s purging is largely a momentum thing. Expect the energy market to find more support below these current levels.

Gold has rebounded as investors take advantage of last week’s free fall in prices to enter the market. The uncertain macro-economic and political environment has encouraged investors to want to own their piece of gold. The yellow metal, as a non-yielding asset, has a higher opportunity cost when interest rates rise. Big picture, the commodity has become the currency of choice because of the heightened currency volatility and on the back of a questionable dollar value.

The metals bull-run is far from over with speculators continuing to look to buy the metal on these deeper pullbacks, however, with inflation expectations dipping this month has the weaker ‘long’s’ remaining on the back foot and second guessing their outright positions ($1,515 +$12.10c).

The Nikkei closed at 9,818 up+24. The DAX index in Europe was at 7,480 up+70; the FTSE (UK) currently is 5,993 up+51. The early call for the open of key US indices is higher. The US 10-year eased 1bp yesterday (3.16%) and is little changed in the O/N session.

Treasuries prices are caught in a tug-of-war as they trade within striking distance of their lowest yields this year. European growth and debt concerns has investors reducing some of their risk appetite, while the issuance of $72b’s worth of product this week and the belief that US retail sales will surprise is trying to push yields higher.

The US treasury plans to sell $72b of long-term debt this week, starting with today’s auction of $32b-3, tomorrow’s $24b-10’s and Thursday’s $16b long-bonds. At the moment they certainly appear rich on the curve, expect dealers to try to cheapen that curve.

May 4, 2011

Euro Posturing Begins

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

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

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

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

Forex heatmap

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

April 28, 2011

Dollar Negativity Remains Contagious

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

The mighty dollar selloff continued in Asia, throughout Europe and is now back to the Americas, with a number of crosses recording new record highs. Why? Because Ben has told us so, by the Fed confirming that their monetary policy is to remain ‘very expansionary’ for at least the next couple of quarters, allowing investors to focus on ‘carry and momentum’.

Technically, the dollar has further downside to go, except perhaps against the JPY. It seems that its only immediate savior is a renewed Euro-zone crisis. The technicals are again showing that most currency’s are in overbought territory now that many of the short term targets have been printed. The risk of a correction is rising in the dollars favor, however, there is no compelling reason to want to own the mighty buck. Maybe it will be left up to Central Banks to protest, just like the RBNZ did last night by stating that their currency strength was ‘unfavorable’.

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 ‘volatile’ session.

Forex heatmap

Bernanke gave capital markets very little new information during the Q&A. He focused on defending the Central Banks policy. His comments are not going to change the perception of a dovish Fed or dent the positive global risk appetite view any time soon.

The FOMC statement indicated that the Fed will end its QE2 program as scheduled in June. Policy makes will closely watch inflation, thought the Fed believes the effects from rising oil prices are temporary.

In his press conference, Bernanke indicated that they plan to reinvest treasuries, even after they end the QE2 program, they view this as another form o policy easing (ending reinvestments can be considered the first steps of the a tightening cycle). They do not seem to be worried about the weakening in the dollar. They argue that by fulfilling its dual mandate, the Fed can cause a stronger recovery which will lead to a stronger dollar.

Ben indicated that the top priority is the debt situation and the Fed is encouraged by recent efforts on both sides, but it’s not a problem that can be solved in the short term. In the end, its more of the same with the same conclusion, few people want to hold the greenback.

Yesterday’s US durable goods report was solid on its details. New orders surprised to the upside in March (+2.5%) while February’s report was revised up substantially (+0.7% vs. -0.9%), leading to a positive gain in the first quarter (+2.1%).

Digging deeper, the heavy lifting was provided by business investment (non-defense capital goods ex-aircrafts) surging ahead in March (+3.7%), along with a further increase in vehicles and parts orders (+3.7%). However, business investment contracted for the first quarter as a whole, highlighting some resistance from US businesses to make large ticket investments.

Other categories showed that shipments advanced +1.8%, m/m (fifth consecutive increase) and inventories, but to a lesser degree than shipments, resulting in a decline in the inventory to shipments ratio (1.61). It’s worth noting that unfilled orders continue to advance, suggesting we should expect further increase in shipments down the road.

The USD is lower against the EUR +0.28%, GBP +0.17%, CHF +0.19% and JPY +0.63%. The commodity currencies are stronger this morning, CAD +0.22% and AUD +0.42%.

A surprisingly bearish EIA report released just before the FOMC announcement was able to pressurize crude pieces temporarily and by association push the loonie to test its weekly lows. The CAD negativity was also influenced by a recent poll that the Liberal party was being pushed into third place ahead of next week’s general election by the left wing NDP. An NDP-led minority government is a likely negative for the loonie, as their political mandate and agenda tends to be ‘a little less business friendly, a little less fiscal austere than under a Conservative majority’.

However, big picture, the currency is being supported by a broadly softer greenback, with an accommodating Fed policy. The market can expect the currency to underperform outright and on the crosses as we head closer to the May 2nd general election on event risk.

Fundamental reason have aided the CAD rise of late, but the speed of its rise has been somewhat over zealous, requiring a pull back from its four-year high print. Because of the stronger than expected domestic inflation data, the market has been pricing in a a rate hike for the July BoC meeting.

Expect investors to covet the loonie as an alternative to the EUR and the dollar, assuming risk appetite remains the same now that Bernanke has show his hand (0.9473).

The AUD has rallied to a post-1983 float high above 1.09 overnight after higher-than-expected Australian CPI-inflation in the first quarter has increassed expectations of the RBA hiking rates to contain inflation earlier than any hikes by the Fed. Earlier this week, data showed that Aussie inflation rose +1.6%, q/q, far higher than the consensus forecast of +1.2%, pushing the year-on-year rate to +3.3% from +2.7% in the fourth quarter. It seems that flood related food price spikes and higher oil prices drove the headline. However, the underlying inflation was also high, rising +0.9%, q/q to +2.3% from +2.2%, y/y in the fourth-quarter.

Currently, the RBA seem comfortable with interest rates as highlighted in the released minutes earlier this month. The Governor viewed his policy setting as appropriate, saying they will ‘look through’ higher inflation and slower growth stemming from natural disasters. It’s expected that Governor Stevens will want to see more data that’s not so distorted by weather, which may take some time to come through, before moving on rates again.

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 any pullbacks as the currency marches towards 1.10 outright (1.0919).

Crude is little changed in the O/N session ($113.36 +36c). Recent Saudi, IEA and IMF comments have finally found some support after yesterdays surprisingly crude bearish report, showing weekly inventories gains exceeding even the most optimistic of forecasts. Inventories surged by the most in nine-months as imports increased. This week, the world seems awash with the black stuff despite the MENA supply constraints.

Weekly crude stocks rose +6.16m barrels to +363.1m last week. It was the biggest one-week advance since July 2010. The market was expecting a build of only +1.7m barrels. 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 based on its preliminary data for January and February. Both the IEA and IMF have said that prices above the $100 watermark are beginning to hurt the global economy. OPEC said that they are unlikely to alter output targets when it meets in June as there is ‘no shortage of oil anywhere in the world’ even after supply curtailments in MENA.

Gold has resumed its upward trajectory and recorded new record highs on speculation that US policy makers will be slow to tighten their monetary policy, weakening the greenback and boosting the appeal of metals as an alternative asset class. 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 continues to 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 ($1,532 +$15.80c).

The Nikkei closed at 9,849 up+158. The DAX index in Europe was at 7,455 up+40; the FTSE (UK) currently is 6,071 up+3. The early call for the open of key US indices is higher. The US 10-year backed up 2bp yesterday (3.36%) and is little changed in the O/N session.

Treasuries prices fell, ending its three-day rally yesterday, as the US treasury came to the market with the second of this weeks weekly auctions just after the release of the FOMC statement, where the Fed left rates on hold for an ‘extended period-of-time’. US policy makers believe the economy is in a moderate recovery, however, they have increased their forecast for inflation.

With the new format of the Fed’s announcement and Bernanke’s post Q&A made it difficult for the market to set up to take down product. Yesterday’s $35b 5-year auction went well, despite concerns of who would take the product now that the Fed’s QE2 buying would end soon. The notes drew a yield of 2.124%, with a bid-to-cover ratio of 2.77, compared with an average of 2.8 for the previous 10-sales. Indirect bidders took 40%, while direct bidders took down 11.2% of the notes, compared with an average of 10.2% at the last 10-auctions. Today we get the last of this week’s auctions, $29b 7-year notes.

March 25, 2011

EURO Crapshoot

Filed under: OANDA News — Tags: , , , , , , , , , , , , , , — admin @ 10:12 am

Figuring out the direction of the EUR has been a crap shoot this week. The market is short and the longer we stay here political rhetoric and innuendos seem to want to squeeze more of the weak shorts out of the game. The currency continues to outperform any bad news, downgrades, periphery Prime Ministers resigning, delaying of EFSF objectives or the irate Irish.

Even this mornings German ifo print, seeing its first drop in over a year (111.1), has had little affect on the currency. As long as the US maintains it’s accommodating policy and stock markets keep rising, the dollar will remain under pressure. Trichet does not need to constantly beat the higher rate drum, we hear you.

Now we wait for the Euro-summit press conference. It’s expected to come short of delivering a ‘grand bargain’. It also seems unlikely that there will be agreement on EFSF support for Portugal given the failure to pass additional austerity measures. Do not get caught in the middle or become deafened by the noise!

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

Forex heatmap

US durable goods orders unexpectedly plummeted last month (-0.9% vs. market expectations of +1.5%). For a sector that has been driving the US economy to date, it is worrisome. Should we be cutting our expectations for US growth?

On the plus side, despite it being a volatile number, this year’s overall trend remains positive (+7.6%, y/y). Digging deeper, core-orders excluding the volatile transportation sector, fell -0.6%. Analysts note that orders for commercial aircraft jumped +26.7%, even this gain was unable to push the headline into positive territory. The barometer for business spending, new-orders for non-defense capital goods, fell -1.3% and is certainly not comforting.

There are a plethora of reasons why the business investment indicator has come under pressure of late. There is weakness in the US housing and labor markets, growing fiscal uncertainty and heightened geopolitical event risks to deal with. A bright spot was inventories climbing +0.9% and unfilled orders, a sign of future demand increasing to +0.4%.

We should be relieved that US weekly claims continue to hold below that psychological +400k watermark (+382k vs. +387k). The headline print inched a tad lower, down-5k, to levels last seen in the pre-Lehman crash. Five out of the last seven-weeks have now achieved a sub +400k print.

Analysts note that since peaking two-years ago, claims have moderated by nearly 42%. This is a substantial gain and perhaps it’s proof that a strong pickup in hiring activity has begun?  Digging deeper, two of the three subcategories experienced contractions, continuing (+3.71m down-2k) and extended (-98.2k). The total number of claimants in all programs dropped +187k to +8.766m, a -22.5% decline year-over-year. 

The USD is higher against the EUR -0.10%, GBP -0.29%, CHF -0.66% and JPY -0.27%. The commodity currencies are mixed this morning, CAD -0.02% and AUD +0.12%.

The loonie only knows one direction when global risk sentiment increases and commodity prices remain elevated, and that’s higher outright. The prospects that Portugal could get a bailout is boosting confidence in the Euro-economic outlook, fueling demand for higher-yielding assets. How long will this last?

The market continue to focus on the global ‘big picture’ and somewhat ignoring, for now, all three opposition parties rejecting Prime Minister Harpers Budget earlier in the week. Today we could see the Conservative Government lose a no-confidence vote in parliament which will lead to the announcement of a general election.

Weaker Canadian data this week has done little to tarnish the currency’s value. Big picture, support for the currency continues to come from commodities and increased risk tolerance. On the face of it, the recent negative moves are oblivious to domestic fundamentals. Appetite for risk is sensitive to this week’s outcome of the Euro-summit.

Dollar rallies provide an opportunity to want to own some of the commodity and growth sensitive currency that is supported by stronger fundamentals and a sound fiscal position for the longer term (0.9753).

The AUD is heading for a winning week, advancing as global equities see black and a measure of price volatility declined, boosting demand for higher-yielding assets. The currency is approaching its strongest level outright (1.0258) since it was freely floated in 1983.

The currency is supported by investors pricing out the possibility of a rate cut and pricing in the chance of a rate hike again next month. The probability of a reduction in Australia’s benchmark interest rate on April 5 is 13%, down from as much as 34% last week.

Appetite for growth and commodity sensitive currencies depends on the new found stamina of risk tolerance by investors. Do not be surprised if due to weaker data this morning that some of the recent optimism will be quickly curtailed (1.0238).

Crude is lower in the O/N session ($105.40 -0.20c). Big picture, oil prices remain volatile, with ‘continued’ momentum behind prices on the back of Middle-East tensions. Any uncertainty adds a premium. Libya has seen its +1.3m barrels a day of oil exports cut off due to the month long rebellion and Western sanctions.

Market participants continue to worry how long the disruption will last and it’s this, along with contagion fears in the region that is providing a bid, extending the commodity’s winning streak to seven-days. Libya, Yemen and now Syrian events this week are making it increasingly unlikely that investors will see a ‘swift normalization’ of crude-oil production in the region near term.

Crude has been able to hold on to its gains despite the weekly EIA inventories reporting the expected supply increases. Stocks of crude rose +2.1m barrels last week, right on estimates. Unlike gas, whose stockpiles declined -5.3m barrels. The market had been expecting a drawdown of only-2m. Distillates (heating oil and diesel) were flat for the week. Analysts had anticipated a decline of -1.5m barrels.

On deeper pull backs the Middle East and North African situation will continue to dominate.

We did it! Gold managed to surge to new record high yesterday. There are a couple of reasons pushing the yellow metal into uncharted territory. Unrest in Libya and the Middle-East coupled with Europe’s lingering periphery debt crisis is boosting the demand for the precious metal as an alternative investment. Fear of war will always provide a premium. With so much global uncertainty it’s difficult to find a reason not to own the precious metal.

The commodity’s bull-run is far from over with investors continuing to look to buy the metal on dips. These price pullbacks are viewed as favorable opportunities for investors to continue to diversify into safe-haven assets and push for those new record highs.

Even hawkish global rhetoric has managed to support higher commodity prices. With the commodity being used as a store of value, the asset class is expected to remain better bid on deep pullbacks ($1,433 -$1.40c).

The Nikkei closed at 9,536 up+101. The DAX index in Europe was at 6,953 up+20; the FTSE (UK) currently is 5,892 up+12. The early call for the open of key US indices is higher. The US 10-year backed up 5bp yesterday (3.39%) and is little changed in the O/N session.

Treasuries have again come under pressure, pushing the benchmark 10-year note yield to a weekly high, on speculation that the need for EU bailouts may end with Portugal. Global equities trading in the black is also reducing the demand for safety.

The US government announced that it will offer a total of $99b two’s, five’s and seven-year notes next week. Dealers should find it easy to make room along the curve to absorb the product. A surprisingly weaker US durable goods print was able to pare some of FI losses. However, with investors embracing risk again, 10-year notes are capable of revisiting 3.45% short term. Let’s see what the last day of the EU summit brings us.

Investors can expect geopolitical and event risk in the Middle-East and North Africa to continue to support FI on much deeper pull back.

March 15, 2011

EURO to suffer further losses

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

The dollar is firmer this morning, with markets in risk averse mode, as concerns over Japan’s nuclear crisis intensifies. The continued uncertainty regarding the efforts to stabilize the nuclear facilities represents the greatest risks to the markets. The somber mood is reflected in all asset class prices with ‘historical’ risk aversion trading strategies being applied.

Recent events have had an impact on this morning’s German ZEW confidence release. Sentiment has declined after the Japanese earthquake and a hawkish ECB (14.1). There is fear that both situations could slow short term German growth. With the events in Japan continuing to unfold, the degree of uncertainty remains high and supports further risk-aversion trading strategies.

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

Forex heatmap

Other global events are been overshadowed by Japans earthquake and fears of radiation leakage from their nuclear facilities. In the mix of this crisis, European leaders are trying to coerce the Irish back in line after last weekend developments. On the face of it and after the weekends announcements, Euro-leaders and policy makers are finally getting serious about their own sovereign debt crises.

They have provided support, temporarily, for the EUR by increasing the size of EFSF fund. They have limited the purchases of sovereign debt to the primary market and not the secondary. They are also lowering the interest rate being charged to Greece’s bailout and extended the maturity of their loan. It’s the Irish situation that could burst policy makers bubble.

No change was made in the terms of Ireland’s bailout. The newly elected government has refused to cave and raise its corporate tax rate. This was the Euros demand to relaxing their bailout’s terms. It seems that the Irish will not be steamrolled by Sarkozy and Merkel. It will make the month’s end ratifying economic summit more interesting.

What can we expect from the Fed today? Last weeks US consumer sentiment index highlighted Bernanke’s dilemma. The headline decline was the deepest since the Lehman collapse and the inflation expectations was the highest since Katrina. Which of these two problems requires the most attention, especially in the wake of higher energy costs? For Ben and his policy makers, it’s a question that will not be required to be answered this afternoon.

Global mounting uncertainties could potentially undermine confidence and force the Fed to be on the alert for ‘signs of a new soft patch in the short run’, while the rise in headline inflation will make the Fed pay close attention to measures of inflation expectations in the months ahead. This will take the pressure off the Fed to declare which it considers to be the greater threat and will not require the Fed to soften the ‘extended period’ language this week.

Before Friday’s events, the market was beginning to seek a stronger commitment of an exit strategy and the omission or softening of an extended period would be the beginning of a ‘their’ soft landing from the QE2 policy. Today’s message is expected to avoid any hint that a change in the stance of monetary policy is in the works. With the respect to dissents, the market does not anticipate Fisher and Plosser to feel the need to dissent this week.

The USD is higher against the EUR -0.42%, GBP -0.60% and lower against CHF +0.29% and JPY +0.12%. The commodity currencies are weaker this morning, CAD -0.73% and AUD -1.60%.

The loonie is on the back foot against most of its major trading partners, dragged down by softer energy prices on speculation that Japans demand for oil will be reduced in the short term after last weeks earth quake and on heightened risk aversion trading strategies. The currency had been previously supported by cross action. However, tentative agreement (until ratified later in the month) by Euro leaders on a ‘retooled bailout plan for the region’s most-indebted nations’ has given the EUR some short term support. Fear of radiation leakage is currently crippling all growth and interest rate sensitive currencies.

The market has multiple reasons for wanting to own the CAD in times of stress and elation. It can be owned for risk adverse, growth and commodity reason. Fundamentally and technically the currency probably overshot it’s near term target, it is not a surprise to see the CAD backup outright. Expect the depth of the backup to be dictated eventually by cross-action.

The new reality is a Canadian dollar at or close to parity as the economy adjusts to this paradigm. Big picture, the currency’s rise remains orderly. These dollar rallies provide an opportunity to want to own some of the commodity and growth sensitive currency that is supported by stronger fundamentals and sound fiscal position. However, short term momentum will be dictated by Japanese nuclear events (0.9875).

The AUD was one of the biggest losers in the overnight session, falling to its lowest level vs. JPY in three months after another explosion at a nuclear power plant reduced the demand for higher-yielding assets. The growth sensitive currencies like AUD and SEK are leading the selloff vs. the USD, with the AUD down -1.2% to a six-week low. Last nights RBA minutes were in line with recent official rhetoric and supports markets view that the RBA is likely to sit back and assess the developments in other markets.

RBA policy makers saw the restraint in borrowing ‘as a welcome development, particularly as household debt remained at a historically high level and debt-servicing requirements had recently increased’ according to last nights released minutes. Governor Stevens and his policy members indicated that a ‘mildly restrictive stance of policy continued to be appropriate’.

The heightening risk aversion trade has sparked buying of the yen and selling of the high-yielding currencies coupled with fading expectations for rate increases down-under will likely weigh on the Aussie dollar further in the short term (0.9888)

Crude is lower again in the O/N session ($99.65 -1.54c). Oil has fallen to a two-week low, on fears that the world’s third largest economy’s demand for the black-stuff will be reduced somewhat after their unfortunate natural disaster. The short-term trend still looks to be lower and stronger support is seen around $96. It is believed that Japan has closed 29% of their domestic refining capacity. This has affected about +1.3m barrels of the country’s total of +4.52m barrels per day of capacity. With future consumption questionable, demand from the region is expected to remain soft in the short term.

Prices pared declines after Bahrain sought Saudi support yesterday. Saudi troops will be expected to protect ‘vital installations in Bahrain and maintain stability and security’. Despite the geopolitical concerns in the region appearing to be escalating, global investors will continue to focus on Japan’s affect on the commodity market.

Despite softening in the O/N market on the back of a bid dollar, gold remains in demand as Japan’s strongest earthquake on record and violence in Libya continues to support demand for a haven asset.

Commodity prices continue to be supported by geopolitical factors and inflation threats. Even hawkish global rhetoric has managed to support higher commodity prices. Before last week’s unfortunate events, consumer prices were also boosting the demand for the precious metal as a hedge against global inflation.

Recent data reveals that Chinese’s inflation has accelerated the most in six years, and UK consumer prices the most in two years. Even US data is showing that their inflation numbers are edging higher. With the commodity being used as a store of value, the asset class is expected to remain better bid on deep pullbacks. The metal has climbed +28% in the past year ($1,413 -$11.30).

The Nikkei closed at 8,605 down -10.15%. The DAX index in Europe was at 6,688 down-177; the FTSE (UK) currently is 5,690 down-84. The early call for the open of key US indices is lower. The US 10-year eased 7bp yesterday (3.28%) and is little changed in the O/N session.

The US curve is steepening, with demand for product concentrating on the front end of the US yield curve. Two-year notes pushed yields to their lowest level in five-weeks as risk aversion trading strategies intensify after last weeks Japanese earthquake. Investors are speculating that Japanese insurers will need to sell the longer dated maturities to pay claims for damage.

Japanese investors are the second-largest foreign holders of US debt and own $882b of US Treasuries. The market is expecting them to be a net seller to finance their immediate operations.

Geopolitical and event risk in the Middle-East continues to limit FI losses in spite of stronger economic data. Product should remain better bid on any pull backs until markets can get a clearer picture of the situation.

February 4, 2011

EUR bulls see Red-More blood after NFP?

Filed under: OANDA News — Tags: , , , , , , , — admin @ 10:55 am

Analysts did not change their expectations after ADP, weekly claims or ISM-non manufacturing employment indexes. Consensus remains around +140k. If the headline prints piggyback expectations what happens? Will it be dollar bullish? Will we have to give up some of yesterdays over exuberance in wanting the dollar on the back of Trichet’s ‘broadly balanced’ statement? The headline print could be further complicated by the weather, with dealers likely to blame the heavy snow mid-January if we fall short of expectations. A weak number could stall the USD’s late week rally, however, expect dealers to look beyond that and question the fundamental premise that the US recovery is on strong footing heading into the first quarter. The first move tends to be the wrong move. An expected or a weaker print, the EUR will trade higher, after that, there is the geopolitical weekend risk premium to be priced in and that will require some dollar buying. Week-over-week we have not come very far, we just witnessed a lot of noise.

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

Forex heatmap

Trichet got the ball rolling by putting the bears onside and back into the black. He said that ‘inflation pressures driven largely by soaring commodity prices do not yet pose a threat to price stability over the medium-term’. The Euro-zone inflation accelerated to +2.4% in January (above policy maker’s target of +2%). In his communiqué he indicated that inflation could climb further and would be above +2% for most of the year on the back of commodities. The huge EUR sell off was supported by his comments that rates were appropriate and his non-hawkish tone.

The dollar received support from all directions yesterday. The US service sector continues to accelerate, unexpectedly picking up last month (59.4 vs. 57.1). January marks the fifth consecutive month of accelerating activity and the highest index in six-years. It’s worth noting that the services sector accounts for two-thirds of the economy, a third of exports and 80% of all private-sector jobs. Most of the subcomponents posted gains, including new-orders, backlog of orders, current ‘production’ and employment. Digging deeper, most of the headline gain was driven by acceleration in new-orders (64.9 vs. 61.4). Prices continue to gather pace, with the price index jumping to 72.1 from a 69.5 (strongest reading in three-years). The composite manufacturing and non-manufacturing ISM picked up in January, adding+2.3pts to 59.6.  US momentum continues.

There is no denying it, US jobless claims remain volatile. Weekly claims retreated by-42k to +415k, reversing nearly 80% of the previous week’s gain. Analysts note that the steady descent of the less volatile 4-week moving average has been disrupted in three of the past four weeks, putting it at the highest level in three-months. Digging deeper, both the continuing claims (-84k to +3.925m)) and emergency benefits (-130k to +3.653m) experienced declines, a gain of +62k to +898k in the extended benefits category provided some offset. Remember, continuing claims data lags behind initial claims by one week.

Finally, the last of the winning treble, US factory orders also beat expectations in upward revisions (+1.3% from +0.7%) and growth in December (+0.2%). The positives were led by nondurable orders putting in a strong month (+2.3%) and the factory orders report recorded a modest decline of -2.3% in durable-goods compared to the durable orders data last week showing -2.5%. Transportation weighed on the headline just as it did in the durables report. Ex-transportation, new orders were up +1.7%.  The biggest supporter was industrial machinery orders (+27.9%). It seems that businesses must be feeling good.  


The USD$ is higher against the EUR -0.02%, GBP -0.05%, CHF -0.18% and lower against JPY +0.02%. The commodity currencies are stronger this morning, CAD +0.09% and AUD +0.32%. The loonie shuffled to the side lines against the dollar, quietly waiting for this morning’s employment reports and IVY PMI. Yesterday, the CAD outperformed on the crosses after Trichet’s ‘broadly balanced’ statement had the EUR in a tailspin and risk aversion supported the dollar on further Egyptian chaos. Anything that indicates that US growth is strong, like yesterdays services data, tends to positive for the Canadian growth outlook and that’s because of the country’s proximity and close trading ties with its largest neighbor. Earlier this week Finance Minister Flaherty indicated that Canada will have a ‘challenge’ with jobless numbers. Canadian employment numbers are out this morning. The market expects the Canadian economy to add another +15k jobs after December’s stellar +34k release. Concerns about the over valued Canadian dollar, according to Governor Carney, waning government capital spending, a cooling housing market, and moderating retail sales will eventually combine to limit overall GDP growth this year. These are all stellar reasons for BOC to be concerned, as a ‘persistent strength in the currency is a threat to economic expansion’. With strong risk appetite in vogue, the loonie has cautious buyers on dollar rallies as we all wait for NFP (0.9891).

The AUD again gathered strength overnight, despite the Chinese New Year holiday, in response to a surprisingly hawkish Statement of Monetary Policy from the RBA. The RBA tweaked this years forecasts, but, crucially, left its medium-term forecasts for inflation and GDP unchanged at rates that point to further policy tightening over the next year. Policy makers are ‘looking through the near-term flood affect, focusing on continued tightening in the labour market and the investment surge. Pricing for the RBA over the next year rose another +5bps to +37bps adding to strong gains yesterday. Some geopolitical reduced risk sentiment has pared the AUD advance. It’s difficult to sell AUD on the back of the statement as it removes any chance whatsoever of a rate cut. The market looks for better levels to own the currency as investors look towards the ‘carry trade’ (1.0180).

Crude is higher in the O/N session ($90.73 +15c). Oil retreated as a stronger dollar curbed the investment appeal of dollar-denominated commodities. Crude’s inability to break through key technical resistance above also provided pressure. Trichet’s ‘broadly balanced’ views had the EUR bulls seeing red. The market has been worrying about the surety of supplies from the Middle-East. In fact, supplies so far have not been disrupted. Investors should realize that the Suez, even it were blocked for a some time, would only disrupt transportation routes and have little affect on overall supply. However, geopolitical risk premium will be continued to be priced in on pullbacks, its only natural human nature. Last weeks EIA report revealed another build up in inventory. Crude stocks grew by +2.6m barrels to +343.2m barrels, which are +4.3% above year-ago levels. The market had expected oil stocks to grow by +3m barrels. Gas was the big surprise, growing by +6.2m barrels, or +2.7%, to +236.2m barrels. That was +3.6% above year-ago levels. The four-week gas demand was +0.6% higher than last year, averaging nearly +8.7m barrels a day. Refineries ran at +84.5% of total capacity, a rise of +2.7%. Finally, distillate inventories (diesel and heating oil) fell by -1.6m barrels to +164.1m. Despite OPEC believing that supply and demand is ‘in balance’, the unknown factor, Egypt will continue to provide support somehow for prices. The country is a significant oil producer and a rapidly growing natural-gas producer with approximately +6% of global daily oil production running through the region. However, fundamentally there is far more oil in storage, more fuel capacity and more idle oil wells to limit a much stronger market rally. It’s fear that generally exaggerates the price.

Gold finally found that geopolitical risk premium support yesterday, with prices jumping to a two-week high as the mounting conflict in Egypt boosted demand for the metal as a haven. The commodity has been on the back foot this month on lackluster physical buying as the commodities appeal deteriorated and on hedge fund liquidation triggering vulnerable support levels. Before tensions in the Middle East, investors had been shying away from the commodity and sought ‘price appreciation’ in equities. Fundamentally, the bulls are trapped in this month’s price action with the trend turning against them. Natural physical buying has been less than modest with the commodity off to its worst start in 14-years. Has the gold peaked or is simply a short-term correction? With the Euro-zone being able to sell their bonds, there’s less of a flight to quality. However, the Middle-East scenario is attempting to break that train of thought as investors seek some shelter ($1,349 -$3.60).

The Nikkei closed at 10,543 up+112. The DAX index in Europe was at 7,217 up+24; the FTSE (UK) currently is 6,014 up+31. The early call for the open of key US indices is higher. The US 10-year backed up 5bp yesterday (3.53%) and is little changed in the O/N session. The US curve has shifted slightly higher, pushing 10-year yields to the highest level in two-months, as yesterday’s data showed further strength in services industries. The sector covers +80% of the US economy. The market is waiting for this mornings NFP report for some support. Do we buy or don’t we? There is an appetite to own FI on pullbacks as unrest in Egypt ‘is the sort of event risk that is difficult to hedge and there will always be a percentage who will require some weekend geopolitical insurance. Investors continue to demand compensation for the prospect of accelerating inflation and on speculation the US may struggle to fund its deficit. Higher yields benefit the dollar but will upset Bernanke.

January 31, 2011

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