Forex Blog

January 28, 2011

Market bets a short EUR win today

Filed under: OANDA News — Tags: , , , , , , , — admin @ 11:15 am

The stage is set for a strong dollar performance this morning. When the market overhypes the currency generally disappoints, however, the EUR bears remain optimistic. Consensus seeks an advance GDP estimate for the fourth quarter of +3.6% and the data to show a surge in final sales and a drop in inventories. This would also support a strong first quarter. If we are not disappointed, watch the loonie fly.

Politics, sleight of hand, forceful persuasion must also be added to technical and fundamental analysis to understand certain price actions. S&P’s downgrades Japan’s sovereign debt rating to ‘AA-’ because their Government lacks debt reduction plans. How is this different to the US? Is it their demographics? Nope, it seems the US carry’s the triple ‘A’ notch because of a better fiscal situation and their willingness to rein in deficits according to the rating agency. Even the G20 questions the US’s ability to handle its record budget deficit and Obama’s State of the Union reduction solutions. Apparently a rating agency has a better handling of the situation.

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

Forex heatmap

US data was all over the place yesterday and provided little comfort for the dollar bulls. Starting with the pluses, US pending home sales beat expectations (+2% vs. +1%), but the outlook looks less rosy. December provided us with a third-consecutive monthly gain, but at a decelerating clip. The gain looks promising for this months existing home sales report, released in two-weeks. It’s worth noting that pending home sales data reflect ‘contracts’ and not ‘closings’ and normally occur with a lag time of two-months.

The communiqué noted that ‘modest gains in the labor market and the improving economy are creating a more favorable backdrop for buyers, allowing them to take advantage of excellent housing affordability conditions. Mortgage rates should rise only modestly in the months ahead, so we will continue to see a favorable environment for buyers with good credit’. It certainly puts a positive spin on the market. However, rising mortgage rates, increasing foreclosures and ongoing income security fears will impede any progress. Rising mortgage rates are already giving way to lower mortgage applications.

When things get bad we tend to blame the weather. Last week’s US jobless claims jumped +51k to +454k, partly because poor weather caused administrative backlogs. Efforts by some of the southern US States to reduce their backlog contributed to the spike, but did not account for all the increase. Over the coming weeks we will get the ‘clean run’ on the data. The more gauge, the four-week average of new claims, climbed +15.7k to +428.7k, the highest level in two-months. The data suggests that the job market may not be improving as quickly as individuals perceive. Digging deeper, continuing claims jumped +94k to a seasonally adjusted +3.99m. While an additional +4.62m received extended benefits, down almost-100k. In total, +9.41m received either state or federal benefits down-224k from the prior week.

December’s durable goods order’s fell for a second consecutive month. The headline print came in at -2.5% following a revised -0.1% decline in November. The volatile transportation equipment category had the largest decrease, falling -12.8%. If we excluded transportation, core-durables orders rose +0.5%. The market had expected a +1% increase. A tad softer, but when combined with recent data showing an improvement in US consumer confidence reinforces the likelihood that today’s GDP could show growth north of +3%.

The USD$ is higher against the EUR -0.01% and GBP -0.22% and lower against CHF +0.05% and JPY +0.33%. The commodity currencies are mixed this morning, CAD -0.16% and AUD +0.15%. The loonie has been rather active within its tight trading range. Softer commodity prices and Japan’s downgrade saga had investors willing to embrace some risk aversion trading strategies and lessening their demand for higher-yielding currencies. The lack of Canadian data is providing no direction, next data point comes on Monday, Canadian GDP. Technically, the loonie is trading around the tone of other asset classes and on the weakness of JPY on the crosses. Carney yesterday said in Davos that he was ‘quiet comfortable with Canada’s monetary policy’. Let’s hope so, he is the country’s last line of defense. Medium term, with the Fed maintaining its plan to buying treasuries can only be an advantage for the currency as investors become more comfortable with risk assets. Governor Carney said last week that the Canadian economy has ‘considerable slack’ that will keep core inflation below +2% until the end of next year. But, with the pick up in global appetite for risk, speculators will now be looking for better levels to sell the dollar outright (0.9951).

The AUD has traded under pressure ever since Prime Minister Gillard announced a one-off tax from 1 July 2011 to fund post-floods reconstruction. The market has seemingly interpreted this as a form of fiscal tightening which eases the pressure for RBA to tighten monetary policy. Dealers have promptly lowered their bets on increases to the benchmark interest rate over the next year. Pricing over the next 12-months fell-7bp to +22bp after yesterday’s announcement. Weaker inflation and the devastation caused by floods will very likely delay further RBA hikes beyond the first quarter. Last weeks data out of its largest trading partner, China, has the market convinced that the PBOC will move to hike their reserve rates. Their actions will reduce further the demand for the commodity sensitive growth currency. The credit downgrade by S&P’s of Japan is also capable of taking some ‘risk’ off the table. Offers again appear at parity (0.9928).

Crude is higher in the O/N session ($85.71 +5c). Crude remains soft after an unexpected gain in yesterday’s US jobless claims bolstered concern that the US economy will be slow to recover. Bearish fundamentals continue to dominate. Last week’s EIA report revealed that inventories ballooned. Stocks climbed +4.84m barrels to +340.6m vs. expectations of a +1.2m barrels rise. Not to be out done, gas supplies increased +2.4m barrels, against expectations of a +2.1m. The only negativity came with distillate supplies (heating oil and diesel) decreasing-100k, less than the expected-300k. Refinery’s in puts averaged +14.1m barrels per day, which was-212k barrels below the previous week’s average as refineries operated at +81.8% capacities. Weekly imports averaged +9.4m barrels per day, up by +386k barrels. Over the last four-weeks, imports have averaged +8.9m barrels, +517k barrels per day above the same four-week period last year. Earlier this week the Saudi Oil Minister indicated that OPEC may increase production levels to meet increasing global fuel demand. His comments have certainly put a medium term cap on the black stuff. He indicated that global demand was expected to increase around +2% this year. OPEC believes that supply and demand are ‘in balance’. Fundamentally, there is far more oil in storage, more fuel capacity and more idle oil wells to limit a stronger market rally in the medium term. Technically, an $83 barrel remains on the horizon.

Gold again is suffering on lackluster physical buying as the commodity’s appeal as a safe haven deteriorates. Prices continue to straddle its three-month low. With increased risk appetite in the market, investors are shying away from the commodity seeking ‘price appreciation’. Currently, the market does not expect gold to outperform other asset classes. With global confidence growing, one gets the feeling that the bulls are trapped and will soon be pushing that panic sell button. Fundamentally and technically the trend has turned rather badly against the longs. Month-to-date, the commodity has fallen -6.3% and only weeks after recording a +30% annual return. 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? The metal has shred $100 from its December highs. With the Euro-zone being able to sell their bonds, there’s less of a flight to quality, which could cause this asset class to be staring at a sub $1,300 a once soon. The market remains a seller on up ticks ($1,317-$2.30).

The Nikkei closed at 10,360 down-118. The DAX index in Europe was at 7,161 up+6; the FTSE (UK) currently is 5,923 down-42. The early call for the open of key US indices is lower. The US 10-year eased 1bp yesterday (3.41%) and is little changed in the O/N session. US treasury prices had a Ping-Pong sort of day. They pared initial losses after the US durable goods unexpectedly fell, initial unemployment claims rose last week and on the back of the Fed buying $6b worth of debt in their buyback program. Fundamentally, yields have risen too far given that inflation is running slower than the Fed wants. The last of this week’s $99b auctions was the well received $29b 7’s. They sold at a strong 2.744% compared with the 2.762% WI’s. The bid-to-cover ratio was 2.85%, stronger than the four auction average of 2.89%. Indirect bids took 52% while the direct too 6% less than the four-auction average of 8%. FI will take its cue from this mornings GDP flash.

January 26, 2011

No Oscar for King’s Speech-EUR a winner

Filed under: OANDA News — Tags: , , , , , , , , , , , , — admin @ 11:03 am

Mervyn King will not be swayed by ‘adverse publicity over high inflation’. The BOE believes that the increase in prices are not domestically generated. Similar to most CBankers, King is expected to leave rates unchanged until circumstances stabilize and consumer confidence increases. Unlike Cable, the dollars main support this week could come from today’s FOMC announcement and this Friday’s fourth quarter GDP release. Consensus does not believe that this afternoon’s statement will suggest a near term change in monetary policy. Expect Capital Markets to focus on the inflation outlook language and on whether any of the new ‘votes’ on the committee dissent in a hawkish tone.

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

Forex heatmap

It was never going to be a surprise to the market. US home prices remained under pressure in November according to the S&P’/Case Shiller Home price index reported yesterday (-1.6% vs. -0.8%). Even with the headline print surfing just above the 2009 year lows, the picture remains bleak. Already, some analysts are calling for a double-dip in prices. Ongoing foreclosures are expected to add to the inventory glut depressing prices, homeowners’ equity and construction even further. The lack of a sustained housing rebound and unemployment above 9% is likely to keep the Fed relatively cautious in this afternoon’s statement.

The market was expecting a stronger consumer confidence print and yesterday’s release did not disappoint (60.6 vs. 53.3). Despite coming in below last May’s 62.7 reading, the details are encouraging. The present situation index saw a sharp jump higher (31 vs. 24.9) and currently straddles a two-year high. The expectation index also saw a solid gain (80.3 vs. 72.3). Analysts note that business present perceptions of improved conditions were strong and that the six-month view showed gains in employment and income. There were notable negatives in the report, consumers planning to buy a major appliance recorded a fresh recession low and inflation expectations rose for a third consecutive month. The positive CB print contrasts other recent releases like the Michigan CSI, which tends to be price sensitive, while the CB release is employment weighted. Even though the data is market positive, the report is not a ‘reliable guide to consumer spending on a monthly basis’. That being said, consumer fundamentals are improving and they are Bernanke’s go to variable.

The USD$ is lower against the EUR +0.10%, GBP +0.28% and JPY +0.14% and higher against CHF -0.34%. The commodity currencies are stronger this morning, CAD +0.06% and AUD +0.09%. Softer than expected inflation data in Canada for December yesterday is reinforcing expectations that the BOC will move cautiously on rising interest rates, supporting the dovish comments by Carney after keeping rates on hold last week. Higher energy prices (+13%) and some base-year effects were behind the pickup in headline inflation in December (+2.4%). Disinflationary pressures from excess capacity are expected to continue to restrain core-inflation (-0.3%). Should the global economy slow and commodity prices drop further, then core inflation will be subdued for quite some time pushing any possibility of tightening further out the curve? Carney said last week that the Canadian economy has ‘considerable slack’ that will keep core inflation below +2% until the end of next year. The release had the loonie temporarily testing parity again, that was short lived with the currency finding some traction on the back of US consumer data. With softer commodity prices and benign inflation, speculators continue look for better levels to sell the CAD.

Earlier this week, the Aussie dollar’s immediate reaction was to fall -0.5% after the release of the CPI data showing headline inflation falling to +2.7%, y/y, from +2.8% in the fourth quarter, vs. a market expectation of +3%. Since then, it has managed to claw back some of these losses, but not with much conviction, especially with softer commodity prices widespread. Market pricing of RBA rate hikes for the next 12 months fell to 28bp from 35bp. Weaker inflation and the devastation caused by floods will very likely delay further RBA hikes beyond the first quarter. Futures dealers expect the RBA to resume its tightening bias in the second half of the year, given rising wages, construction and housing related costs and energy and food prices. Last weeks data out of its largest trading partner, China, has the market convinced that the PBOC will move to hike their reserve rates. Their actions will reduce further the demand for the commodity sensitive growth currency. Earlier this week, Treasury Secretary Swann stated that the country faces an ‘enormous’ economic fallout from floods. ‘Queensland’s rapid development has meant that its economic performance has a much bigger influence over our national economy’. With growth expected to slow this quarter, a tightening policy would not be the prudent course of action. Currently, the market pricing of rate cuts (4.75%) for the RBA February policy meeting and of rate hikes later in the year remains broadly unchanged. Offers again appear at parity (0.9978).

Crude is higher in the O/N session ($86.86 +67c). Crude yesterday fell to a two-month low yesterday amid speculation that OPEC is to boost output and that todays weekly inventory report is expected to record another build up. Earlier this week the Saudi Oil Minister indicated that OPEC may increase production levels to meet increasing global fuel demand. His comments have certainly put a medium term cap on the black stuff. He indicated that global demand was expected to increase around +2% this year. Last week the IEA raised its estimates for this year’s global demand for a fourth consecutive month as the economic recovery seems to be gathering momentum. They anticipate that global consumption will increase by +1.69%. Last week’s US inventory report provided another excuse to offload oil contracts. Crude stockpiles increased +2.62m barrels to +335.7m. Not being left behind were gas supplies rising +4.4m to +227.7m barrels. It’s worth noting that the four week gas demand was +2%, y/y, higher and averaged +9m barrels a day. US refineries ran at +83% of total capacity, a drop of -3.4%. The supplies of distillates (diesel and heating oil) rose by +1m to +165.8m barrels vs. an expected weekly increase of +900k barrels. OPEC believes that supply and demand are ‘in balance’. There is far more oil in storage, more fuel capacity and more idle oil wells to limit a stronger market rally in the medium term. The commodity is expected to test key support levels around $85.

After capping its third consecutive weekly loss on speculation that borrowing costs will rise as the US economy recovers, gold prices have tumbled to a three month low yesterday as demand ‘waned for the yellow metal’ as an alternative investment. With global confidence growing, one gets the feeling that the bulls are trapped and will soon be pushing that panic sell button. Fundamentally and technically the trend has turned rather badly against the longs. Month-to-date, the commodity has fallen -6.3% and only weeks after recording a +30% annual return. Buying has been modest in the commodity, off to its worst start in 14-years. There is serious discussion being given to whether the gold market has peaked or if it is simply making a short-term correction. Aiding the metal is the Euro sovereign-debt crisis and this despite the Euro-finance minister’s pledge to strengthen a ‘safety net for debt-strapped countries’. However, in reality as long as the Euro-zone is able to sell their bonds, there’s less of a flight to quality into gold. The market remains a seller on upticks ($1,335 +$3).

The Nikkei closed at 10,401 down-63. The DAX index in Europe was at 7,142 up+83; the FTSE (UK) currently is 5,988 up+71. The early call for the open of key US indices is higher. The US 10-year eased 4bp yesterday (3.33%) and is little changed in the O/N session. A couple of factors happened to give FI a bid yesterday. The $35b two-year sale was well received and attracted more demand than the average of the last 10 auctions. Indirect bidders took +27% (the lowest in six-months) vs. a 36.6% four-auction average. Direct bidders took 15% vs. a 13.3% auction-average. Traders will now turn their attention to today’s difficult 5-year auction just ahead of the Fed announcement. Yesterday’s bid-to-cover was 3.47, below the 3.66 average. With Obama calling for a spending freeze as a way to reduce the federal government’s budget shortfall has also given the belly of the curve a lift. Capital Markets now wait for Ben’s next move.

December 20, 2010

EURO Jackals lie in wait

Filed under: OANDA News — Tags: , , , , , , , , , — admin @ 11:16 am

A five notch downgrade by Moody’s is not much of a surprise, however with EU policy makers being rather vocal and having serious concerns that recent Irish legislation introduced to fix its banking system threatens the ECB’s ability to run its liquidity operations will certainly have the EURO bulls questioning their current positions. Fundamentally and technically, the EUR remains under pressure after the EU summit failed to produce a breakthrough. Add a little Korean military tension into the mix, thin liquidity and some nervous traders and we have a currency that is preparing for its next downward leg, unless one of the variables change.

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

Forex heatmap

Trichet again is thinking out loud and every time this happens little develops. He believes that the EUR is not the root of all the ills and that Governments should act responsibly, manage their day to day spending. The Euro-zone members should do more individually and collectively to combat the crisis. In theory its an extremely sound thought, however, most of the periphery countries are beyond maintenance and are currently on the cusp of requiring intervention. The EUR jackals smell blood.

The USD$ is higher against the EUR -0.28% and lower against GBP +0.11%, JPY +0.21% and CHF +0.14%. The commodity currencies are stronger this morning, CAD +0.07% and AUD +0.17%. The loonie continues to modestly underperform against its major trading partners despite the stronger fundamentals out of North America. On Friday, the currency completed is second consecutive losing week as investors lost some of their appetite for risk. The positive commodity and equity markets have been trumped by EU contagion concerns and the flight to own US assets. Data in this holiday shortened week may also provide little support for the loonie. Canadian policy makers remain weary of Europe’s funding challenges, US growth risks and with benign domestic inflation worries will not pressurize the BOC to tighten monetary policy any time soon. This month the loonie has gained +1.1% outright vs. its largest trading partner. The currency has only witnessed modest strength compared to other growth sensitive currencies as Governor Carney highlights the dangers of a persistently strong domestic currency. The loonie continues to struggle within striking distance of parity because of the strong corporate interest to own dollars there. Better dollar buying remains on dips.

AUD is finding it difficult to gain traction, trading near a one-week low against JPY on concern that the Europe’s debt crisis will worsen and tensions on the Korean peninsula will intensify, again curbing demand for higher-yielding assets. The currency has been trading under pressure outright as US Treasury yields climb, narrowing the yield advantage of assets down-under and on fear that China will act in answer to slow inflation, reducing the demand for growth sensitive and higher-yielding assets. Year-to-date, the currency has climbed +9.1% (second biggest winner after JPY), on prospects for commodity-driven economic growth and the yield advantage of the nation’s debt compared with other developed markets. Domestic data remains strong, this months employment data blew all analysts expectations out of the water and supports the currency on pullbacks. Not aiding the currency is the concerns for long dated interest rates in the US. Analysts are beginning to agree that the tight labor market will bring the RBA back into the picture, but believe that Governor Stevens is not behind the curve just yet and will not be required to hike rates in February. With consumers boosting their savings significantly in an environment of rising job and wage growth, suggests that the RBA is still ahead of that curve. Governor Stevens has also mentioned that rates are ‘appropriate’ for the economic outlook. Demand for the currency will remain limited on speculation the minutes from the RBA’s previous policy meeting will signal the central bank won’t increase rates. Investors remain better buyers on dips, planning an assault on parity again (0.9896). There has been interest to short AUD/CAD as a hedge vs. long gold trades.

Crude is higher in the O/N session ($88.08 +6c). Crude prices are being supported by positive economic US data, but with inventories remaining high there is limited top side potential ahead of year end. Last week’s EIA report showed that the category of distillate fuel (includes heating oil and diesel) increased +1.09m barrels to +161.3m. This supply print will provide some bearish proof for the report, unlike the weekly headline print showing supplies plunging the most in eight years as imports tumbled and refineries bolstered fuel output. Stocks plunged -9.85m barrels to +346m last week vs. an expected decrease of -2.5m barrels. Also aiding prices midweek was imports falling-15% to +7.69m barrels, the lowest level in two years, and refineries operating at +88% of capacity, the most in three months. It’s worth noting that inventories along the Gulf Coast (where 50% of US refiners are located) fell -9.02m to +173.4m as the region levies taxes on year end supplies. The large draw down is mostly due to end of year inventory management at refineries or in other words cooking someone’s books. The black-stuff had previously garnered support from reports revealing that China’s refiners increased their processing rate last month. The world’s biggest energy consumer boosted their net imports of the black stuff by +26%, m/m, and increased their processing rates to ease a diesel shortage. Coupled with OPEC announcement to maintain their production quotas and the PBOC refraining from tightening monetary policy is supporting the market, probably to the year end at least. OPEC believes that supply and demand are ‘in balance,’ and expect demand growth will slow as the global economy struggles to recover, amid ample supplies. Technically, expect the market to meet resistance again at the $90 high printed earlier this month.

Being long the lemming gold trade has the weaker bulls tentatively worried after last week’s price action. Gold pared some of its advances on Friday, on speculation that the dollar will extend its rally, eroding demand for the precious metal as an alternative asset. Investors are booking year end profits following a +25% rally this year. It’s speculated that the selling has been caused by ‘year-end posturing, or even movements of large funds out of the market’. The stronger US data of late points to a recovering economy with a low inflation rate. However, thus far, the commodity remains supported on deeper pull backs by the persistent concern over Euro debt levels. For most of this year, debt contagion has driven investors into the third ‘reservable’ currency as they seek a store of value. Even though the one direction trade feels overdone, investors continue to hold gold as a hedge against currency debasement and long-term inflation. The Euro-zone backdrop is trying to put a floor on metal prices on demand for a haven. The commodity is poised to record its 10th consecutive annual gain ($1,384 +$5.40c). Technical analysts believe that gold will outshine other precious metal in 2011 and peak somewhere above $1,600 in 2012.

The Nikkei closed at 10,216 down-87. The DAX index in Europe was at 7,006 up+24; the FTSE (UK) currently is 5,875 up+3. The early call for the open of key US indices is higher. The US 10-year eased 16bp on Friday (3.32%) and is little changed in the O/N session. Bonds completed their third consecutive weekly drop last week. Their longest stretch of declines in three months, as evidence that the US economy is recovering reduced demand for the safety of government debt. Investors it seems are tentatively paring their holdings of US debt as risk appetite improves. Liquidity remains a premium as we enter the holiday stretch. The 2/10’s spread has widened to 278bp. The market seems cautious about anything good for bonds ‘coming out of the tax-cut extension’ , however liquidity remains a premium.

December 17, 2010

Dollar loses its Swagger

Filed under: OANDA News — Tags: , , , , , , , , , , , — admin @ 11:12 am

What a little love between friends can achieve, a EUR that’s a damn sight stronger this morning. Euro leaders have decided to amend the Euro Treaty to make possible the creation of a permanent mechanism to aid troubled Euro-zone countries. The details are iffy, but translating political jargon, they will work on them as it’s in their common interest to have a strong stable currency. With Congress approving an extension of the Bush-era tax cuts, coupled with this morning’s stronger than expected German business Ifo survey has led to a cautious recovery in risk loving currencies. The dollar is loosing its swagger, these thin markets will have dealers hunting for short EUR stops just above this weeks highs.

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

Forex heatmap

Yesterday, we were fed some mildly better than expected US release followed by a Philly Fed headline that hit it out of the park. The jobless claims data continues its downward trend (+420k vs. +421k). Month-to-date, the monthly average is down -17.5k compared to the November release and has the market believing that the December NFP should be much healthier than last months. Initial jobless claims have retreated for ten of the past fifteen weeks. The less volatile four-week moving average has been moving lower since August (+422.8k) and currently sits at its lowest level in two years. The trend sits in prime position to want to breach that +400k psychological barrier sooner rather than later. The details of the report were not as strong. All the subcategories posted gains, reversing nearly all the previous month’s improvement. It worth noting that continuing claims data (+4.135m vs. +4.113m) lags behind initial claims by one week, and the extended (+0.977k) and emergency programs (+3.85m) another week behind that. Certain unemployment benefits for the long-term unemployed expired at the end of last month, and Obama’s Tax-cut proposal will include a thirteen-month extension.


The US housing sector will be a drag on fourth quarter GDP. We witnessed mixed reports for housing starts (+555k vs. +534k) and permits (+530k vs. 552k) yesterday. The details for starts were better than the headline gain as the data focused on single family homes (+6.9%). Housing starts averaged +588k in 3rd Q, and if we assumed a flat December print, then we should expect approximately a +544k print or a decline of -7.5%.  Analyst’s note that the rise in singles will mitigate some of the decline because of the higher value added involved in single home. With permits falling it would suggest further softness in the New-Year.


The Philly Fed headline print (24.3 vs. 22.5) comes with a warning, despite the headline being somewhat encouraging and confounding consensus expectations for a drop, it is the strongest reading on manufacturing conditions in five years. However, the details burst the bubble. The increase was due to a faster acceleration in prices paid and received. Digging deeper, seven of the nine subcomponents posted improvements, of which one experienced a decline (inventories) and one reentered growth territory (prices received).The hiring activity and shipments registered slower growth which was offset by the six-month index posting its fourth consecutive monthly improvement.

The USD$ is lower against the EUR +0.80%, GBP +0.01%, JPY +0.11% and CHF +0.68%. The commodity currencies are mixed this morning, CAD -0.06% and AUD +0.00%. The loonie continues to modestly underperform against its major trading partners despite the stronger fundamentals out of North America. Yesterday it happened to be commodity prices weighing on the range bounded currency. Stellar Canadian manufacturing data this week coupled with Cbanks interest to convert a portion of their reserves into CAD is supporting the loonie on dollar rallies. Manufacturing data posted a solid gain in both the headline (+1.7%) and details midweek, supporting last week’s strong export numbers. Analysts note that most of the subcategory gains flow directly into GDP. Do not expect Governor Carney to be swayed by the release when it comes to tightening monetary policy. The sustainability of the gains will always be questioned as the appreciation of the currency tends to have a lagging effect. The Governor has already indicated, in the October MPR, that net trade is expected to be a mild positive contributor to growth next year. Canadian policy makers will remain weary of Europe’s funding challenges, US growth risks and with benign domestic inflation worries, Carney will not be pressurized any time soon. This month the loonie has gained +1.8% outright vs. its largest trading partner. Gains in commodities, stocks and Euro contagion fears have made the loonie more attractive. The currency has only witnessed modest strength compared to other growth sensitive currencies as Governor Carney highlights the dangers of a persistently strong domestic currency. The loonie continues to struggle within striking distance of parity because of the strong corporate interest to own dollars there. Better dollar buying remains on dips.

It’s hardly believable, but the AUD is poised for another weekly gain outright as global equities advance and EU leaders agree to create a permanent crisis management system, boosting demand for higher-yielding assets. With risk back on, the currency can make another assault on parity. The currency had been trading under pressure outright as US Treasury yields climb, narrowing the yield advantage of assets down-under and on fear that China will act in answer to slow inflation, reducing the demand for growth sensitive and higher-yielding assets. Year-to-date, the currency has climbed +9.1% (second biggest winner after JPY), on prospects for commodity-driven economic growth and the yield advantage of the nation’s debt compared with other developed markets. Domestic data remains strong, this months employment data blew all analysts expectations out of the water and supports the currency on pullbacks. Not aiding the currency is the concerns for long dated interest rates in the US. Analysts are beginning to agree that the tight labor market will bring the RBA back into the picture, but believe that Governor Stevens is not behind the curve just yet and will not be required to hike rates in February. With consumers boosting their savings significantly in an environment of rising job and wage growth, suggests that the RBA is still ahead of that curve. Governor Stevens has also mentioned that rates are ‘appropriate’ for the economic outlook. Investors remain better buyers on dips, planning an assault on parity again (0.9876). There has been interest to short AUD/CAD as a hedge vs. long gold trades.

Crude is higher in the O/N session ($88.05 +35c). Crude prices softened yesterday, as seasonal factors pointed to warmer weather over the holiday period. This week’s EIA report showed that the category of distillate fuel (includes heating oil and diesel) increased +1.09m barrels to +161.3m. This supply print will provide some bearish proof for the report, unlike the weekly headline print showing supplies plunging the most in eight years as imports tumbled and refineries bolstered fuel output. Stocks plunged -9.85m barrels to +346m last week vs. an expected decrease of -2.5m barrels. Also aiding prices midweek was imports falling-15% to +7.69m barrels, the lowest level in two years, and refineries operating at +88% of capacity, the most in three months. It’s worth noting that inventories along the Gulf Coast (where 50% of US refiners are located) fell -9.02m to +173.4m as the region levies taxes on year end supplies. The large draw down is mostly due to end of year inventory management at refineries or in other words cooking someone’s books. The black-stuff had previously garnered support from reports revealing that China’s refiners increased their processing rate last month. The world’s biggest energy consumer boosted their net imports of the black stuff by +26%, m/m, and increased their processing rates to ease a diesel shortage. Coupled with OPEC announcement to maintain their production quotas and the PBOC refraining from tightening monetary policy is supporting the market, probably to the year end at least. OPEC believes that supply and demand are ‘in balance,’ and expect demand growth will slow as the global economy struggles to recover, amid ample supplies. Technically, expect the market to meet resistance again at the $90 high printed earlier this month.

Being long the lemming gold trade has the weaker bulls tentatively worried after this week’s price action. Gold fell yesterday, the most in a week, on speculation that the dollar will extend its rally, eroding demand for the precious metal as an alternative asset. Investors are booking year end profits following a +26% rally this year. This weeks declines have taken the market somewhat off guard. It’s speculated that the selling has been caused by ‘year-end posturing, or even movements of large funds out of the market’. The stronger US data of late points to a recovering economy with a low inflation rate. However, thus far, the commodity remains supported on deeper pull backs by the persistent concern over Euro debt levels. For most of this year, debt contagion has driven investors into the third ‘reservable’ currency as they seek a store of value. Even though the one direction trade feels overdone, investors continue to hold gold as a hedge against currency debasement and long-term inflation. The Euro-zone backdrop is trying to put a floor on metal prices on demand for a haven. The commodity is poised to record its 10th consecutive annual gain ($1,376 +$5.40c). Technical analysts believe that gold will outshine other precious metal in 2011 and peak somewhere above $1,600 in 2012.

The Nikkei closed at 10,303 down-7. The DAX index in Europe was at 7,031 up+8; the FTSE (UK) currently is 5,901 up+21. The early call for the open of key US indices is higher. The US 10-year eased 3bp yesterday (3.42%) and is little changed in the O/N session. Treasury prices remain soft, pushing debt yields to a seven-month high, on stronger US fundamentals reducing the demand for safety. With the Senate passing the tax-bill and foreign investors beginning to cut their holdings of US debt as risk appetite improves has speculators seeking better returns elsewhere. Liquidity remains a premium as we enter the holiday stretch.

December 16, 2010

EURO Buyers and Sellers beware

Filed under: OANDA News — Tags: , , , , , , , , — admin @ 11:08 am

It’s the beginning of the silly season where liquidity concerns cramp your style and the obvious becomes irrational. Buyers and sellers beware. A strong Spanish auction this morning has been unable to provide that everlasting support for the EUR, instead temporarily capping the currency’s high as Capital Markets prefer to focus on the EU summit where the debt contagion funding debate is making EUR supporters more nervous. It’s difficult to believe that EU leaders will quickly agree on the potential for a possible extension to the EFSF considering the opposing views, especially Germany’s. Follow the US yield curve, it may provide us with dollar short term direction.

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

Forex heatmap

There were mixed blessings in the US data yesterday. The industrial production report was stronger than expected on several levels. The headline print for November beat analyst’s estimates (+0.4). Even the previous month’s upward revisions added three-tenths to the bottom line. Digging deeper, gains of more than 1% in non-transit business equipment and non-auto consumer durables produced an above trend +0.7% increase in the non-auto manufacturing. It’s worth noting that the volatile auto assembly component softened more than expected (+7.5m units vs. +8.2m m/m). On the whole, the report would suggest that there should be some surprises in store for the fourth quarter results.

The modest US CPI turned few heads yesterday. The total and core print was very much in line with analysts estimates of +0.1%. The growth in the overall index eased two-tenths to +1.0%, y/y, while growth in the core rose two-tenths to +0.8%. The underlying data was mixed, split between what were mostly either modest gains or declines. The biggest decliners included new-vehicles (-0.4% m/m, weight of +6.4% in the index) and personal computers (-0.4% m/m, weight of +0.2%). Ex-food and energy, most other gainers registered lukewarm advances, providing little positives to the headline. The housing component (+42% of the index) managed to hold steady.

Finally, on a happier note, the Empire State Manufacturing Survey index (10.6) reversed most of last month’s surprising headline decline, with some of the details having ways to go to appease the markets. The unofficial ISM-weighted composite index advanced just +1.5pts to 48.4 after having fallen by-7pts the previous month. Orders and shipments both returned to positive territory, but inventories, delivery times and employment all were below their break-even. On a brighter note, the expectations index remains healthy, suggesting that regional manufacturers are still reasonably optimistic about the future.

The USD$ is lower against the EUR +0.23%, GBP +0.38%, JPY +0.27% and CHF +0.01%. The commodity currencies are mixed this morning, CAD -0.07% and AUD +0.10%. Canadian manufactures yesterday posted a solid gain in both the headline (+1.7%) and details, supporting last week’s strong export numbers. Analysts note that most of the subcategory gains flow directly into GDP. Do not expect Governor Carney to be swayed by the release when it comes to tightening monetary policy. The sustainability of the gains will always be questioned as the appreciation of the currency tends to have a lagging effect. The Governor has already indicated, in the October MPR, that net trade is expected to be a mild positive contributor to growth next year. Canadian policy makers will remain weary of Europe’s funding challenges, US growth risks and with benign domestic inflation worries, Carney will not be pressurized any time soon. This month the loonie has gained +1.8% outright vs. its largest trading partner. Gains in commodities, stocks and Euro contagion fears have made the loonie more attractive. The currency has only witnessed modest strength compared to other growth sensitive currencies as Governor Carney highlights the dangers of a persistently strong domestic currency. The loonie continues to struggle within striking distance of parity because of the strong corporate interest to own dollars there. Better dollar buying remains on dips.

Demand for AUD remains limited on speculation that divisions amongst EU members will impede agreement on a plan to limit future debt shocks ahead of the Euro-two day summit this morning. The currency trades under pressure outright as US Treasury yields climb, narrowing the yield advantage of assets down-under. This week, the currency has fallen against all its major trading partners on fear that China will act in answer to slow inflation, thus reducing the demand for growth sensitive and higher-yielding assets. Year-to-date, the currency has climbed +9.1% this year (second biggest winner after JPY), on prospects for commodity-driven economic growth and the yield advantage of the nation’s debt compared with other developed markets. Domestic data remains strong, this months employment data blew all analysts expectations out of the water and supports the currency on pullbacks. Not aiding the currency is the concerns for long dated interest rates in the US. Analysts are beginning to agree that the tight labor market will bring the RBA back into the picture, but believe that Governor Stevens is not behind the curve just yet and will not be required to hike rates in February. With consumers boosting their savings significantly in an environment of rising job and wage growth, suggests that the RBA is still ahead of that curve. Governor Stevens has also mentioned that rates are ‘appropriate’ for the economic outlook. Investors remain better buyers on dips, planning an assault on parity again (0.9880). Sellers remain topside with parity again providing strong resistance.

Crude is lower in the O/N session ($88.25 -30c). Crude prices rose yesterday after the weekly EIA report showed supplies plunging the most in eight years as imports tumbled and refineries bolstered fuel output. Stocks plunged -9.85m barrels to +346m last week vs. an expected decrease of -2.5m barrels. Also aiding prices was imports falling-15% to +7.69m barrels, the lowest level in two years, and refineries operating at +88% of capacity, the most in three months. It’s worth noting that inventories along the Gulf Coast (where 50% of US refiners are located) fell -9.02m to +173.4m as the region levies taxes on year end supplies. The large draw down is mostly due to end of year inventory management at refineries or in other words cooking someone’s books. The black-stuff has also garnered support from reports over last weekend revealing that China’s refiners increased their processing rate last month. The world’s biggest energy consumer boosted their net imports of the black stuff by +26%, m/m, and increased their processing rates to ease a diesel shortage. Coupled with OPEC announcement to maintain their production quotas and the PBOC refraining from tightening monetary policy is supporting the market, probably to the year end at least. OPEC believes that supply and demand are ‘in balance,’ and expect demand growth will slow as the global economy struggles to recover, amid ample supplies. Technically, expect the market to meet resistance again at the $90 high printed earlier this month.

Gold fell yesterday, the most in a week, on speculation that the dollar will extend its rally, eroding demand for the precious metal as an alternative asset. The stronger US economic data points to a recovering economy with a low inflation rate. It was only natural to see some profit taking after gold surged to a new record last week. The commodity remains supported on deeper pull backs by the persistent concern over Euro debt levels. Year to date, debt contagion has driven investors into the third ‘reservable’ currency as they seek a store of value. Despite the fear that China will tighten their monetary policy, most likely in the New-year, a move to curb speculation and dampen inflation, global demand remains robust. Even though the one direction trade feels overdone, investors continue to hold gold as a hedge against currency debasement and long-term inflation. The Euro-zone backdrop is trying to put a floor on metal prices on demand for a haven. Year-to-date, the metal is up + 27.1% and is poised to record its 10th consecutive annual gain ($1,385 -0.30c). Technical analysts believe that gold will outshine other precious metal in 2011 and peak somewhere above $1,600 in 2012.

The Nikkei closed at 10,311 up+2. The DAX index in Europe was at 7,024 up+8; the FTSE (UK) currently is 5,900 up+18. The early call for the open of key US indices is lower. The US 10-year backed up 5bp yesterday (3.47%) and is little changed in the O/N session. Treasury prices plunged, pushing yields up to June levels on the back of stronger US data this week, the Senate passing the tax-bill and on foreign investors beginning to cut their holdings of US debt as risk appetite improves and investors seek better returns elsewhere. With no Government supply coming down the pipe for a couple of weeks, one would expect some support for yields at these levels.

November 26, 2010

EURO Black Friday for the peripheries

Filed under: OANDA News — Tags: , , , , , , , — admin @ 11:16 am

It is difficult to have a strong conviction in a thin market, movements tend to be over exaggerated with a heard mentality, unless you are winning of course. Bundesbank President Weber did his bit yesterday, and tried to drag the EUR higher, stating that the currency was not in danger, Spain was highly unlikely to need Euro-zone aid and that the EFSF may always be increased. It must be difficult to contradict you boss, especially when she is Chancellor. The rules state that the Bundesbank and the ECB should be impartial and independent. Who has more clout, Merkel, Weber or Trichet? Who are they kidding, it’s the PBOC. It’s anticipated ‘meaning measures’ to assist peripheral markets may be announced this weekend. So what? It’s the political opposition to such measures that is the currency’s problem.

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

Just when we thought we could end the week on a quieter note. Black Friday is turning into a Black Friday for the Euro periphery countries. The EUR again has succumbed to heavy selling this morning as reports suggest that the ECB and other Euro members are pressuring Portugal to apply for financial assistance. Not helping the situation is the periphery bond spreads ballooning to new record highs. It seems by pressurizing the Portuguese government, the ECB and countries in the currency union aim to avoid a bailout of Spain. The market has no confidence in papering over the cracks.

On a side note, it is interesting that the market is not talking more about the Chinese and Russian officials agreeing to use their own currencies in bilateral trading instead of the dollar. The dollar, the ‘world’s’ reserve currency, had been used by both countries until now in most of their bilateral trade.

The USD$ is higher against the EUR -0.83%, GBP -0.49%, CHF -0.14% and JPY -0.30%. The commodity currencies are weaker this morning, CAD -1.00% and AUD -1.63%. The loonie was about to win the gold medal for being the best performer this week amongst the majors after encroaching on its eight month highs yesterday, achieved on speculation that Governor Carney will have to step up to the plate sooner rather than later to tighten monetary policy as growth accelerates. In a holiday shortened trading week in North America, the loonies move tend to be exaggerated as Canadian Banks only have themselves to deal amongst. Earlier this week, the currency had been subjected to the flight to quality trading activity and the demand for the traditional historical reserve currencies, the dollar and yen. After yesterday’s parity trading tease we are back to reality and embracing risk-aversion strategies again. Data this week showing that inflation accelerated last month and retail sales rose in September temporarily teased the market as we waited for new contagion fears. Investors and dealers believe that the inflation headline print warrants bringing the BOC back to the table, at least in the first quarter of next year. Even the Russians who continue to add the loonie to their reserves will get better levels to increase their position on European concerns.

China again has entered the fray and being Australia’s largest trading partner, any threat of tightening monetary policy tends to affect Australasian currencies. The AUD has fallen against all its trading partners after the PBOC said earlier this week that it will strengthen liquidity management and ‘normalize’ monetary conditions, damping demand for higher-yielding currencies. With China concentrating on containing strong inflation rather than boosting growth will affect commodity sensitive currencies. Comments O/N by Governor Stevens from the RBA has extended the currency’s weekly decline. He said the nation’s interest rate setting is appropriate for the ‘period ahead. Coupled with softer investment in new plant and equipment data has speculators selling the currency on rallies short term. As the leading commodity currency, the AUD is highly vulnerable to any Chinese monetary actions (0.9648).

Crude is lower in the O/N session ($83.17 -69c). Crude rallied aggressively before the holiday period as a modest rise in weekly inventories calmed worries about a much larger increase. Crude inventories rose by +1m barrels and despite expectations that stocks would decline, the increase remains slight compared to the massive decrease the previous week. It’s the steady drop over the past two months for total inventories of crude and fuel products that has created this bid to the market. Refineries are increasing runs in response to good margins. Utilization rate increased by +1.5% to 85.5% of total refining capacity, another sign that demand was improving. Gas inventories rose by +1.9m barrels, while stockpiles of distillate (heating oil and diesel), fell by-500k barrels. Analysts had expected gas stocks to fall by-900k and distillates to fall by-1.5m barrels. Technically, crude has bounced off handsomely from the psychological $80 barrel all on fundamentals despite the Euro-zones contagion fears. It’s certainly an impressive response despite the stronger dollar index.

The overweighed one-directional lemming trade, gold, is holding its own despite risk-aversion softening. On Tuesday, the yellow metal rose the most in two weeks, on demand for a haven in the midst of Europe’s sovereign-debt crisis and escalating tensions in Korea. Investors have tentatively shred risk and are seeking flight to quality assets on pullbacks. All week, despite the plummeting EUR and a dollar in demand, the commodity has held its own. Investors, for most of this year, have been using the commodity as a hedge against inflation and store of value. Speculators expect the Euro-zones debt concerns to eventually provide stronger support on pullbacks, anticipating that Capital Markets may shift their focus toward other Euro-zone debt issues. Year-to-date, the metal is up + 21.8% and is poised to record its 10th consecutive annual gain ($1,367 -$7.20c).

The Nikkei closed at 10,039 down-40. The DAX index in Europe was at 6,818 down-62; the FTSE (UK) currently is 5,636 down-62. The early call for the open of key US indices is lower. The US 10-years backed up 14bp on Wednesday (2.90%) and eased 2bp in the O/N session (2.88%). Treasuries plummeted before Thanksgiving, wiping out most of the gains posted over the past couple of trading sessions, as the refuge appeal declined and reports showing US economy is gradually strengthening reduced the demand of the $29 billion seven-year issue. The bid-to-cover ratio, 2.63, was the lowest since March. However, Contagion fears dominate this morning early session and the flight to quality resumes.

November 8, 2010

Smelling PIIGs erase post QE2 gains

Filed under: OANDA News — Tags: , , , , , , , , , , , — admin @ 11:06 am

With QE and NFP event risk out of the way, the dollar has continued its follow-on profit taking and position reduction driven by rising Euro-zone peripheral sovereign yields this morning. Capital Markets have shifted their focus towards the ailing periphery PIIGs after three months of myopic trading pending QE2 announcement. Described as the ‘week from hell’, consensus has us believing that the change in US policy last week, ‘undermines the spirit of multilateral cooperation that G20 leaders have fought so hard to maintain during the current crisis’. Bernanke continues to defend his actions and is determined to focus on ‘at home objectives rather than overseas economies’. Expect currency and trade imbalances to dominate the G20 meeting in Korea this week. Bernanke has been doing the ‘dog and pony show’, trying to justify pending large-scale asset purchases and how they will boost economic growth through lower borrowing costs and higher stock prices. According to the Fed, inflation concerns are ‘overstated’. The rest of the world is worried about the impact of a covert devaluation of the dollar. Is this the beginning of currency protectionist rhetoric?

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

Forex heatmap

US Employment numbers blew all market expectations out of the water on Friday, the headline was stronger than expected and managed to recored the first positive monthly print in five months (+151k), even the monthly revisions were strong, however, the unemployment rate continues to hover near that psychological +10% rate. Aiding the dollar somewhat, was the European retail sales numbers softening and proof that Spain’s economy stagnated, additional proof that PIIGS are struggling to plug their budget gaps. What did we learn last week? First, the US economy is perhaps stronger than we have been giving it credit. Second, the Fed validated market expectations and that Friday’s surprisingly strong number may eventually reveal that the market improvement in the outlook has not been proportionately matched by positioning. The market still has room to acquire more risk taking, maybe. The Fed requires the equity market rally to continue, with free money and few asset classes to invest in, a higher equity market increases an individual’s wealth effect and hopefully promote spending, investing and boost confidence, leading to economic growth. Has the Fed’s actions persuaded investors to look again at equities as an asset class?

The USD$ is higher against the EUR -0.73%, GBP -0.35%, CHF -0.48% and lower against JPY +0.15%. The commodity currencies are weaker this morning, CAD -0.38% and AUD -0.47%. Canadian employment headline print on Friday disappointed analysts (+3k), even the unemployment rate falling a notch was not for the most positive of reasons (+7.9%). The Canadian economy has now fully recovered the number of jobs lost in the recession, however, employment growth has started to slow. With the domestic economic recovery losing momentum future growth will also be affected. The Canadian job market has averaged +6k per month over the last four months, as opposed to the first six-months, when job growth averaged +51k. The uneven profile for employment is occurring as economic growth has downshifted to something closer to trend or slightly below. The 4th Q hours worked recorded a modest gain (+0.2%, m/m, +1.3%, q/q annualized) and less than in 3rd Q (+1.6%, q/q annualized), signaling a slower profile for 4th Q GDP growth. The unemployment rate has fallen for the wrong reason, the decline can be attributed to the drop in the labor force (-4k). Despite this, the loonie happened to trade through parity on Friday and continues to underperformed against all of its major trading partners even as commodity prices register new medium term highs. Weaker Canadian Ivey PMI data last week (56.7 vs. 65.8) mixed with a bit of concern of Ben’s rhetoric of weakness of the US economy and Canada’s natural close ties will should have the loonie continuing to underperform its other G8 partners, short term.

The AUD has snapped its one week win streak on speculation that European nations’ efforts to cut spending will crimp economic growth and sap demand for higher-yielding assets, like the Aussie. The AUD has been this quarter’s best-performing major currency vs. its US counterpart. Interest rate differentials have been a big plus for the currency. Governor Stevens is expected to increase interest rates further even as the US and Japan leave borrowing costs near zero. Policy makers at the RBA said that economic growth will accelerate next year and ‘the Aussie’s advance will help slow inflation’. With the Australian economy continuing to grow ‘at or above trend and inflation remaining in the upper part of the band’ provides support for further monetary-policy tightening from the RBA. The currency trades at a strong premium to its US counterpart after Bernanke’s QE2 announcement. The interest rate differential and the issue of dollar liquidation favor commodity growth sensitive currencies. Australasian bourses and commodity prices in the black will favor the AUD over the longer term. The currency remains in demand on pull backs as the carry look attractive to investors (1.0110).

Crude is lower in the O/N session ($86.27 -58c). Oil on Friday surged to its highest level in two years as last months NFP convincingly beat market expectations, proof that the US economy is recovering, while the dollar recorded another weekly decline vs. its G20 allies. A positive employment report tends to be good news for the market situation. More jobs leads to increased gas demand and refinery boosting runs. The black-stuff also received support after last week’s EIA report showed that fuel supplies plummeted when refineries reduced operating rates to the lowest level in seven-months. Crude stocks rose +1.95m barrels to +368.2m vs. an expected +1.5m barrel climb. Offsetting all of these gains was the gas inventories headline print. It fell -2.69m barrels to +212.3m, the lowest level in twelvemonths. Providing a leg up was the refineries operating at +81.8% capacity last week, the weakest print in seven-months causing the crack spread (crude into oil) falling -46% in that period. Technically, the decline in stocks is primarily due to the low production numbers been witnessed. Gas stockpiles were expected to be little changed from the previous report. Distillate supplies (heating oil and diesel) decreased -3.57m to +164.9m, providing the biggest drop in over two-years. Currently. OPEC is happy with prices between $70 and $85, although an increase to $90 would not impede economic growth. Technical analysts believe on an RSI basis that the commodities price is trading close to easing. The market remains wary that the underlying fundamentals have not changed. The ‘big’ dollars value continues to push the price about.

Gold rallied to a new record on Friday, after posting the largest one-day move in twenty-months on the back of the Fed buying more debt announcement last week. Covertly, policy makers are trying to drive the greenback lower, which by default would boost the demand for precious metals as alternative investment. After Friday’s surprising NFP report, the dollar caught a break on the ‘bashing front’, despite this, commodities remained better bid, temporarily side stepping the strong inverse relationship between the two. The commodity has posted seventeen record highs in little more than five weeks in Sept and Oct. Last week, it managed to rise more than +2.9% on the week. The metal should remain in demand on speculation that steps to support growth through QE and low interest rates will boost demand for the commodity as an alternative to some currencies, the store of value theme. Any pullbacks will continued to be bought. For most of this year speculators have sought an alternative investment strategy to the historical reserve currency and have been using the commodity as a proxy for a ‘third reservable currency’, hence the reason for the record highs. The debasing fears of the dollar should have investors seeking protection in an asset with a ‘store of value’ ($1,391 -$6.40).

The Nikkei closed at 9,732 up +107. The DAX index in Europe was at 6,745 down -8; the FTSE (UK) currently is 5,865 -10. The early call for the open of key US indices is lower. The US 10-years backed up 4bp on Friday (2.53%) and are little changed in the O/N session. The FI asset class has been in a spin after the FOMC actions last week. The front end of the yield curve recorded record low yields after the Fed said it would buy an additional $600b of US debt to keep borrowing costs low and sustain the economic recovery. The tail backed up after Bernanke said they would buy fewer longer-term securities than many had anticipated. Not helping the longer maturities is the pending $72b note and bond auctions this week. From here on in the market will be talking about specific areas of the curve now that the Fed has extended its bond buying program. It will be interesting to see how much dealers are willing to charge.

November 5, 2010

Printing press Smelling PIIGS dollar EURO and now NFP?

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

After this week, for some, trucking school looks attractive, while others seem to have invented their own printing press. ‘Big dollar’ liquidation has dominated, and speculating on the ideal pair should have been rewarding. After this mornings NFP release, Capital Market’s focus will begin to shift back towards the ‘smelling PIIGS‘, making the one directional bet a bit more difficult to cash-in on. After the data and rhetoric that has been force-fed to us this week, the market should witness a limited dollar impact from a moderately stronger jobs report. With the Fed fully committed to its QE2 program, at least for now, stronger-than-expected data will tend to support risk appetite and gains in growth, while weak data may be less helpful for risk appetite, but unlikely to generate an outright trade risk reversal.

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

Forex heatmap

Yesterday’s US Preliminary non-farm productivity happened to jump +1.9% in the third quarter, marking the sixth increase in the last seven-periods. The real output grew at an annualized rate of +3.0%, while hours worked rose +1.1%. The unit cost of labor, meanwhile, fell -0.1% and is -1.9% lower y/y. Compensation per hour has also jumped +1.8%, but, real-compensation per hour increased by a much smaller +0.4%. Analysts note that companies continue to focus on cutting expenses to boost profits. It’s the reason Bernanke said progress towards cutting unemployment and boosting growth was ‘disappointingly slow’. Last week’s unemployment claims rebounded unfavorably from the previous weeks three month low on Thursday (+457k vs. +437k). Digging deeper, on the plus side, the two-week average of +447k is slightly below the psychological +450k print. Continuing claims fell to +4.34m from the preceding week’s revised level of +4.382m. Meanwhile, and after showing a substantial decrease in the previous week, extended benefits surged up by a net +358k. Because last week’s drop in initial claims was not followed through this week, the jobs situation remains lackluster. Some dealers and analysts have been revising today’s NFP expectations down from the +60k print to +25k, keeping private sector employment the same along with the unemployment rate at +9.6%.

The opening statement from Trichet paints the same picture. The ECB has no immediate plan to change interest rates as officials gauge the impact of the Fed’s bond-purchase plan and the renewed tensions in the Euro region bond markets, specifically the periphery problem areas. Technically, they have signaled no immediate willingness to depart from their exit strategy. ‘The Governing Council continues to view the current key interest rates as appropriate’ and ‘expects price development to remain moderate.’ He ended his communiqué by stating that economic momentum in the region remains ‘positive’, although ‘uncertainty is prevailing’. It’s truly an art form to say so little with so much.

The USD$ is higher against the EUR -0.12%, GBP -0.35% and lower against CHF +0.08% and JPY +0.05%. The commodity currencies are mixed this morning, CAD -0.13% and AUD +0.09%. The loonie has underperformed against all of its major trading partners even as commodity prices register new medium term highs. This week the CAD had been waiting for its own event risk in the shape of PM Harper’s ‘yay or nay’ to BHP Billiton $40b takeover of Potash. The negative response has lead to unwinding of some speculative long CAD positions acquired in front of the deal. Until the Fed’s $600b announcement, the loonie, along with other commodity growth sensitive currencies, have enjoyed the strongest gains vs. the dollar over the past five trading days. Weaker Canadian Ivey PMI data (56.7 vs. 65.8) mixed with a bit of concern of Ben’s rhetoric of weakness of the US economy and Canada’s natural close ties will have the loonie underperforming other currencies strengthening bias vs. the US dollar in the medium term. This morning is all about North American employment numbers.

The AUD is staring down its second consecutive weekly gain on bets that the RBA will increase interest rates further even as the US and Japan leave borrowing costs near zero. Governor Stevens at the RBA said that economic growth will accelerate next year and ‘the Aussie’s advance will help slow inflation’. With the Australian economy continuing to grow ‘at or above trend and inflation remaining in the upper part of the band’ provides support for further monetary-policy tightening from the RBA. The currency trades at a strong premium to its US counterpart after Bernanke’s QE2 announcement. The interest rate differential and the issue of dollar liquidation favor commodity growth sensitive currencies. Australasian bourses and commodity prices in the black will favor the AUD over the longer term. The currency remains in demand on pull backs as the carry look attractive to investors (1.0134).

Crude is higher in the O/N session ($86.58 +9c). Commodity prices are going to be broken after Helicopter Ben’s announcement this week. Not to be left behind, oil prices rallied for a fifth consecutive day, printing new six-monthly highs, smashing the $85 barrier as the dollar plummets vs. all its major trading partners on US policy makers discreet intentions of keeping their currency in an underperforming state. The commodity has also received support after the weekly EIA report showed that fuel supplies plummeted when refineries reduced operating rates to the lowest level in seven-months last week. Crude stocks rose +1.95m barrels to +368.2m vs. an expected +1.5m barrel climb. Offsetting all of these gains was the gas inventories headline print. It fell -2.69m barrels to +212.3m, the lowest level in twelvemonths. Providing a leg up was the refineries operating at +81.8% capacity last week, the weakest print in seven-months causing the crack spread (crude into oil) falling -46% in that period. Technically, the decline in stocks is primarily due to the low production numbers been witnessed. Gas stockpiles were expected to be little changed from the previous report. Distillate supplies (heating oil and diesel) decreased -3.57m to +164.9m, providing the biggest drop in over two-years. The market remains wary that the underlying fundamentals have not changed. The ‘big’ dollars value continues to push the price about.

Gold aggressively advanced yesterday, along with most commodities, a day after the Fed’s buy more debt announcement, driving the greenback lower and boosting demand for precious metals as alternative investment. The fresh cash infusion is expected to aid the yellow metal over the longer term. Commodities should remain coveted on speculation that steps to support growth through QE and low interest rates will boost demand for the yellow metal as an alternative to some currencies, the store of value theme. A negative move for the dollar is bound to affect the yellow metal’s price. Last month, gold rose +3.7% while the dollar fell -2.2%. Investing in the gold market is becoming more a momentum play. Any pullbacks continued to be bought. For most of this year speculators 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’ and the reason for the record highs. The debasing fears 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’ ($1,387 +$4.60).

The Nikkei closed at 9,625 up +267. The DAX index in Europe was at 6,741 up +7; the FTSE (UK) currently is 5,861 -1. The early call for the open of key US indices is lower. The US 10-years eased 7bp yesterday (2.49%) and are little changed in the O/N session.
From here on in the market will be talking about specific areas of the curve now that the Fed has extended its bond buying program. Debt prices remain firm, led by gains in the belly of the curve, while the long-bond underperformed after the Fed’s asset-purchase program benefits ‘medium-term debt’. The FI asset class also found support after yesterday’s US weekly claims beat market expectations, dimming hopes for growth in this morning NFP release. Since yesterday, market revisions on prediction for the employment number are like a moving target.

November 4, 2010

Todays Central Bank trifecta BoE ECB and BoJ

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

Now that the Fed has acted accordingly and asset classes are performing to the script what really happens from here? How much more dollar liquidation can the EUR or JPY take? Regarding JPY, expect the BOJ to provide all the required information at this evenings policy meeting that was conveniently brought forward in anticipation of what the Fed was going to do perhaps? The trifecta of Cbanks meet today, BOE, ECB and BOJ. They certainly will not make the same splash in their currencies, but it will be interesting to read their communiques. The Fed’s actions, today’s Cbank talks and tomorrows employment numbers will gives us a much clearer picture of where and how asset classes want to perform for the remaining weeks of this year.

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

Forex heatmap

One feel like a parrot repeating that the Fed stood pat at <0.25%, announced a +$600b QE program for long term maturities, over a longer time scale and reiterated that rates would remain low for an extended period. The vote was 8-1, with Hoenig again dissenting. He believes that the risks of additional securities purchased outweighed the benefits and that ‘this continued high level of monetary accommodation increased the risks of future financial imbalances’. The net effect would ‘cause an increase in long-term inflation expectations that could destabilize the economy’. The Fed noted that the pace of recovery in output and employment continues to be slow. Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising, though less rapidly than earlier in the year, while investment in nonresidential structures continues to be weak. Employers remain reluctant to add to payrolls. Housing starts continue to be depressed. Longer-term inflation expectations have remained stable, but measures of underlying inflation have trended lower in recent quarters. Although the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, progress toward its objectives has been disappointingly slow. This has resulted in the Fed maintaining its existing policy of reinvesting principal payments from its securities holdings. In addition, the Committee intends to purchase a further $600B of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75B per month. The Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability.

Recent US data certainly has surprised to the upside and was too little too late to have influenced policy makers QE2 strategy. Yesterday’s factory orders beat market expectations (+2.1% vs. +0.0%), even the revisions were a welcome sight (-0.5%). Despite the headline being somewhat impressive, the details, according to analysts were less supportive because, yet again, aerospace orders remain the lone jewel in the crown. Previously, they happened to drag durable goods orders higher on the headline, while the sub-components registered newer lows and adding non-durables for a complete factory orders report, ex-transportation, was only up +0.4%, m/m. Also disappointing and used as a proxy indicator for business investment, capital goods orders ex-defense, was also softer on the month. This leaves the three-month average again on the weaker side. Not to be outdone, the US service industry also grew faster than expected and recorded the fastest pace in four-months (54.3 vs. 53.2) and should be a positive contributor to GDP growth. Digging deeper, nine sub-components surprised to the upside, with only new export orders (-2.5 pts) and supplier deliveries (-4 pts) disappointing. The strongest gains were recorded in the prices paid (+8.2 pts), business activity (+5.6 pts) and order backlogs (+4 pts). The combined ISM manufacturing and services results signal the tenth consecutive month of growth.

The USD$ is lower against the EUR +0.44%, GBP +0.58%, CHF +0.25% and JPY +0.16%. The commodity currencies are stronger this morning, CAD +0.01% and AUD +0.25%. The Fed announced the expected and currencies performed somewhat according to script and that includes the loonie. This growth sensitive higher yielding currency is going to gain from commodity aided inducements in the longer term. The CAD was waiting for its own even risk yesterday and that was PM Harper’s ‘yay or nay’ to BHP Billiton $40b takeover of Potash. The negative response could lead to pro-trade problems arising and the unwinding of some speculative long CAD positions acquired in front of the deal. The net new purchase of around $600b is probably about where the market thought the Fed would be. The loonie, along with other commodity growth sensitive currencies, have enjoyed the strongest gains vs. the dollar over the past five trading days and it would not be surprising to see some of those gains booked for profit. Parity provides strong support, first time around at least. Technically, the loonie has been caught in ‘the dollar debasing jet-stream’. Canadian data highlights this week sees the Oct. Ivey PMI today and the employment release tomorrow.

The AUD rose to its strongest level in more than six years against its Canadian counterpart after BHP Billiton $40b hostile takeover bid for Potash was blocked by the Canadian government. The currency trades at a strong premium to its US counterpart after Bernanke’s QE2 announcement. The interest rate differential and the issue of dollar liquidation favors commodity growth sensitive currencies. Australasian bourses and commodity prices in the black will favor the AUD over the longer term. In the O/N session, weaker sales data missed economists’ expectations and the trade surplus shrank by more than forecasted, temporarily dampening demand for currency. The retail sales headline print advanced +0.3% in Sept., compared with the median forecast for a +0.5% rise. Exports fell -2%, narrowing the trade surplus to $1.76b vs. the anticipated gap of +$2b. Analysts expect the strength of the commodity sector will keep spare capacity tight and the RBA to continue hiking in 2011. The currency remains in demand on pull backs as carry look attractive to investors (1.0094).

Crude is higher in the O/N session ($85.88 +$1.41c). Crude prices rallied for a fourth consecutive day, briefly trading strongly through the psychological $85 a barrel, as the dollar trades near a nine-month low vs. the EUR after the Fed move to buy an additional $600b of Treasuries to spur the economy. The commodity has also been well supported after the weekly EIA report showed that fuel supplies plummeted as refineries reduced operating rates to the lowest level in seven-months yesterday. Crude stocks rose +1.95m barrels to +368.2m vs. an expected +1.5m barrel climb. Offsetting all of these gains was the gas inventories headline print. It fell -2.69m barrels to +212.3m, the lowest level in twelvemonths. Also providing a leg up was the refineries operating at +81.8% capacity last week, the weakest print in seven-months causing the crack spread (crude into oil) falling -46% in that period. Technically, the decline in stocks is primarily due to the low production numbers been witnessed. Gas stockpiles were expected to be little changed from the previous report. Distillate supplies (heating oil and diesel) decreased -3.57m to +164.9m, providing the biggest drop in over two-years. The market remains wary that the underlying fundamentals have not changed. The ‘big’ dollars value continues to push the price about.

Gold happened to pare some of its losses yesterday after the Fed ‘walked a careful line in launching QE2, pledging to buy +$600b over eight months to boost the economy. Despite the headline print being slightly larger than expected, but spread over a longer period, the fresh cash infusion is expected to aid the yellow metal over the medium term, proof being in this mornings price action. Commodities should remain coveted on speculation that steps to support growth through QE and low interest rates will boost demand for precious metals as an alternative to some currencies. A negative move for the dollar is bound to affect the yellow metal’s price. It’s about playing catch up. The depth of the pull back have been testing the underlying strength of the commodity. Last month, gold rose +3.7%, printing a new record high of $1,388.10 an ounce, as the dollar fell -2.2%. Gold has come off because of the high expectations built into the Fed announcement. The market was technically overbought, it had become a momentum play, and now requires a good dip to give a good buying opportunity. For most of this year speculators have sought an alternative investment strategy to the historical reserve currency. The market has been using the commodity as a proxy for a ‘third reservable currency’, the reason for the record highs. The debasing fears of the dollar, coupled with the sustainable growth issues of the US economy have had investors seeking protection in an asset with a ‘store of value’($1,358 +$20.10).

The Nikkei closed at 9,358 up +199. The DAX index in Europe was at 6,694 up +77; the FTSE (UK) currently is 5,839 +90. The early call for the open of key US indices is lower. The US 10-years eased 5bp yesterday (2.56%) and are little changed in the O/N session. Early in yesterday’s session Treasury prices rallied on expectations of less treasury issuance now that the Republicans have taken back ‘the house’. Bernanke has again indirectly provided support for the asset class when he said that concern about the central bank’s asset-purchase program are ‘overstated’. Their approach has worked in the past and they expect it to do so again. Next weeks auctions were also announced yesterday. The US treasury plans to issue only $72b of new product (3’s $32b-$2b less than Aug, $24b 10’s and $16b long-bonds). Lower projected budget deficits have allowed the government to reduce borrowing requirements.

November 3, 2010

EURO has nowhere to go but higher

Filed under: OANDA News — Tags: , , , , , , , , , , , , — admin @ 10:02 am

Event risk will dominate the remainder of this trading week. The insurance premiums of the mid-term elections have been priced in. Now, it’s time to turn our focus to the remaining G8 Cbanks and the North American employment reports. Today’s FOMC announcement is expected to set the trading tone for the remainder of the year. Unless we are totally blindsided by Helicopter Ben (it’s rumored that he may hold a press conference directly after the FOMC release to explain all), capital markets focus could gravitate back towards the Euro-zone. The NFP is certainly a work in progress, but, we all know that the unemployment rate hovers close to +10%, so that’s not a game changer. The Irish situation is quickly heading towards an IMF bailout. Why not take the Fed’s lead? The Fed is expected to buy US treasuries to reduce interest rates, boost the economy and indirectly encourage weaker dollar holdings. In Europe we get the opposite effect as QE actions will only support the EUR. The biggest threat to the EUR is the risk of a breakup. When Trichet intervenes by buying Irish or Greek debt, it is EUR positive as it reduces solvency pressures. The currency has no way to go but up.

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

Forex heatmap

What can we expect from the Fed today? Consensus seems to have settled on an announcement of about $500b in purchases of longer-term US Treasury securities over the next six months. This could take the shape of a $100b per month for five to six months or perhaps it may be front loaded, either way, policy makers will make it clear that they are ready to extend these purchases if need be (LSAP-for longer-term securities purchases). Will this week’s stronger than anticipated Oct. ISM manufacturing affect today’s decision? It’s not expected to, any member with concerns will perhaps be more vocal during the meeting. Fed officials need US economic growth to perform for an ‘extended period’. One data point does not make a trend. The agreed amount will be along with the MBS reinvestment program (to remain unchanged). It’s worth noting that the Open Market desk reinvests $20-$30b each month in repayments of principal on the agency securities and the MBS’s that it bought over the past two years. Analyst’s note that they are reinvesting in Treasuries and do not see a need for change. The main advantage is probably for liquidity purposes. FI traders expect the Fed to go further out the curve. During QE1, Ben concentrated on the 2-10-year sector and potentially using the new LASP approach will require investing in duration. It’s expected that the FOMC will strengthen their rate commitment language. This will require them to tinker with the expectation language and clarify that such expectations are ‘still unrealistic’. It would be a part of the general strategy to reduce longer-term rate expectations. The masses do not see any required changes to the copy that covers recent economic and inflation developments.

The USD$ is lower against the EUR +0.03%, GBP +0.14% and higher against the CHF -0.08% and JPY -0.01%. The loonie received support from all four corners of the globe yesterday as it begrudgingly heads towards party. The currency has rallied for a fourth consecutive day, the longest winning streak in four-months, as commodities advanced and on speculation that helicopter Ben will step up QE. The loonie, along with other commodity growth sensitive currencies, have enjoyed the strongest gains vs. the dollar over the past five trading days. Speculation that Prime Minister Harper would not block a foreign takeover of Potash (fertilizer producer-by BHP Billiton) has investors keen on buying CAD on any greenback rally, as they bet that the takeover price will be increased. In reality, real money is and has been diversified ahead of the FOMC announcement. Only event risk will reverse some of these positions. Technically, the loonie has been caught in ‘the dollar debasing jet-stream’. Canadian data highlights this week see the Oct. Ivey PMI tomorrow and the employment release on Friday.

The AUD has temporarily come under pressure this morning after a sharp fall in building approvals O/N (-6.6% vs. +0.5%), a day after registering a twenty-seven year high when the RBA surprisingly hiked rates just as Japan and the US consider additional monetary stimulus, which could increase the risk of an influx of capital into both Asian-Pacific countries that might ‘exacerbate inflation’. This was the first hike since May. Governor Stevens communique emphasized both the strength of the domestic economy and signs of recovery in its main trading partner, China. Specifically, the RBA pointed to a combination of higher wages, on the back of strong terms of trade gains, strong employment and improving credit growth in an economy with already limited spare capacity. Stevens believes this will keep domestic demand ‘potent’ medium-term and that inflation is likely to rise in the coming years. Importantly, the RBA said ‘this outlook, which is largely unchanged from the Bank’s earlier forecasts, assumes some tightening in monetary policy’. Analysts now expect the strength of the commodity sector will keep spare capacity tight and the RBA to continue hiking in 2011. They are done for this year. Fundamentals warrant the currency to eventually trade at a premium vs. the dollar in the medium term (0.9983).

Crude is higher in the O/N session ($84.17 +27c). Crude prices have continued their rally, reaching its highest level in three weeks, as the dollar weakens vs. the EUR on speculation that the Fed will need to spend more to boost the US economy. This weeks early gains occurred after stronger manufacturing data in China proved that domestic economic growth is withstanding cooling efforts by the government. The market is betting that a quantitative easing announcement will support that recovery, weaken the dollar again and support commodities. The danger is that speculators may be getting ahead of themselves. 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, 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 the price about.

Gold remains coveted on speculation that steps to support growth through QE and low interest rates will boost demand for precious metals as an alternative to some currencies. A negative move for the dollar was bound to affect the yellow metal’s price. Year-to-date, there has been a strong correlation between the two asset classes. With the greenback under pressure has boosted the appeal of the metal as an alternative investment. It’s the depth of the pull back that has been testing the underlying strength of the commodity. Last month, gold rose +3.7%, printing a new record high of $1,388.10 an ounce, as the dollar fell -2.2%. QE2 chatter dominates the market and there are two trains of thought, some argue that a measured move this afternoon 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. For most of this year speculators have sought an alternative investment strategy to the historical reserve currency. The market has been using the commodity as a proxy for a ‘third reservable currency’, the reason for the record highs. The debasing fears of the dollar, coupled with the sustainable growth issues of the US economy have had investors seeking protection in an asset with a ‘store of value’. All eyes are now on Ben ($1,354 -$2.70).

The Nikkei closed at 9,159 up +5. The DAX index in Europe was at 6,655 up +1; the FTSE (UK) currently is 5,752 -5. The early call for the open of key US indices is lower. US 10-years eased 2bp yesterday (2.59%) and are little changed in the O/N session. Treasury prices remain supported ahead of the FOMC announcement this afternoon. The market certainly is on tender hooks after stronger than expected manufacturing data this week. The PMI expanded faster than forecasted last month and has dampened speculation somewhat that helicopter Ben will step up debt purchases to boost the economy. With the US economy showing signs of stability, the market should expect further position adjustments ahead of the Fed’s announcement this afternoon.

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