Forex Blog

September 30, 2011

EURO Liquidation To Continue

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

The market is trying to get through month and quarter end without giving up too much. Some price action is unexplainable others justifiable, but whatever, liquidity and pricing remains an issue.

Data already this morning has investors reconsidering potential ECB actions next week. Euro flash CPI rose +3% in the 12-months to September, up from +2.5% in August and is well above Trichet’s target of just below +2%. Other reports showed that the number of people unemployed in the Euro region fell-38k last month to +15.739m unemployed. On the face of it, the latest inflation and unemployment numbers would appear to reduce the chance of an imminent ECB rate hike. However, analysts will be telling us this morning that any rise is likely to prove temporary, given the recent signs that the recovery is ending.

The official PMI release this weekend from China could be interesting, especially after the HSBC PMI showed another month below 50. In the US this morning, the market expects US Chicago PMI and core PCE to weigh on risky assets. This will force weak position to clean house ahead of a busy week next week.

Forex heatmap

The EFSF enhancement legislation skipped through the lower house of parliament in Berlin with a strong majority yesterday (523 vs. 85). Merkel did not need to rely on opposition votes. The coalition stood tall, reducing concerns about the ultimate survival of her government. The market concern is that despite ratification, the EFSF will not be adequate in stabilizing a government bond market as large as Italy’s. Europe continues to take baby steps, but at a market cost it seems.

Market surprises came from the US data where both jobless and US GDP beat economic expectations. Initial claims fell-37k from the previous week, to +391k. Technically, the print remains too lofty to suggest that the US job market is beginning to firm. It was the department of Labor who provided the disclaimer for the stronger print. They stated that technical and seasonal adjustment volatility likely distorted the number. The broader outlook for the US economy remains uncertain. The market would require a consistent and similar reading to prove that the trend was improving. Digging deeper, despite falling below that key psychological +400k benchmark, claim’s moving average remains elevated at +417k. Those already receiving benefits and still unemployed also fell -20k to +3.729m. Its moving average saw a drop of -4.5k to +3.743m. The early market estimates for next week’s NFP are looking for job improvement of +80k (a figure that will be revised a few times before release).

There was not much new in yesterday’s US second quarter GDP print. Growth was revised to +1.3% from a previous +1% prints. Consumers (Feds go to variable) are spending more on services. While the growth rate is faster than reported, it is not fast enough to change the outlook for too many people. The inflation category also edged higher, potentially limiting the fed’s latitude to boost the economy. The index for personal consumption ex-food and energy rose at an annual rate of +2.3% outside the Fed’s comfort zone. Not to worry, the third quarter is not looking very strong!

Finally and presently a lost cause, the NAR seasonally adjusted index for pending sales of existing homes decreased -1.2% to 88.6. This was the second consecutive monthly drop with the same excuses of causality, tighter credit conditions and a suspect job’s market with disposable income concerns.

The dollars is higher against the EUR -0.57%, GBP -0.20%, CHF -0.48% and JPY -0.01%. The commodity currencies are weaker this morning, CAD -0.74% and AUD -0.52%.

Albeit brief, the loonie did receive a temporary lift outright from its largest trading partner’s better than expected data yesterday. The releases showed an upward revision in economic growth and fewer claims for jobless benefits, buoying hopes for the US recovery. The market has been trying to grab onto risk, but it has been difficult. In the past two trading sessions the loonie has under performed and lagged against other commodity pairs on the back of BoC Deputy Governor Macklem’s comments, when he said that policy interest rates “can be reasonably expected to remain below normal for some time to come”. The statement has allowed the loonie to drift lower outright as riskier assets remain vulnerable to doubts over the ability of European policy makers to stem a debt crisis that threatens to trigger a global recession.

The CAD current performance is like a low-beta currency that is trading in a well defined range with corporate Canada itching to own some of “it” on top and risk aversion strategist looking to pick up dollars close to the greenback’s breakout level at the beginning of the week. In the last trading day of the month some currency moves will not be explainable. Investors are happy to keep their cards close to their chest until after month and quarter end trading (1.0444).

The AUD is weaken outright and versus the JPY as Asian stocks reversed earlier gains, reducing demand for higher-yielding currencies. Chinese PMI data at 49.9 last night was unchanged from August and confirms that China is showing signs of its longest contraction in two years. China is Australia’s largest trading partner. Fitch and S&P both downgraded New Zealand’s long-term foreign currency credit rating to AA from AA+. This move has supported the AUD against the Kiwi and the market is looking for that cross to breach 1.3000 medium term.

Many analysts believe the downward pressure that has been applied to this growth currency has created a price overshoot as there is too much ‘bearishness priced into the Australian interest-rate curve’. It was one of the worst performing currencies in the pass month, declining -2.4% outright.

Investors remain concerned that European policy makers will struggle to resolve their debt crisis. Despite domestically having all the strong fundamentals, cash-futures are showing that traders are betting the RBA will lower its key rate by at least-75bp by the end of the year. The RBA is expected to keep its benchmark overnight cash rate target at +4.75% at its policy meeting next week. This will allow investors to sell higher yielding assets on rallies with the top side becoming more contained (0.9717).

Crude is higher in the O/N session ($82.37 up+0.23c). Oil prices rallied yesterday following a rebound in broader markets after Germany’s lower house approved new powers for the EFSF program. It managed to pare some of the commodity’s biggest quarterly drop in three-years. The value of the dollar remains the commodity’s biggest nemesis. Crude is down -6.7% this month and -9.2% this year. Prices have dropped-14% since the end of June. Big picture, fundamentals remain very weak as economic growth is worse than expected

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

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

Gold prices continue to rally, similar to other commodities, as German lawmakers approved an expansion of the European bailout fund, easing concern that the debt crisis will escalate. US data has been better than expected. After the past ten day’s price action, investor’s continue to take a cautious approach on entering the gold market.

The eight-month low print this week seems well supported and suggests that the market may have registered its near term overshoot target ($1,530). All the bullish factors for wanting to own the yellow metal, like dollar debasement economic imbalances and sovereign periphery debt, remain. To try to apply supply and demand logic in a panicked market is near impossible. The Fed’s efforts to drive interest rates lower to support lending should, by default, support commodity prices ($1,633 up+$15.70c).

The Nikkei closed at 8,700 down-1. The DAX index in Europe was at 5,535 down-104; the FTSE (UK) currently is 5,147 down-50. The early call for the open of key US indices is lower. The US 10-year eased-4bp yesterday (1.96%) and is little changed in the o/n session.

Product further out the US curve pushed yields temporarily higher yesterday, before temporarily snapping back o/n, as the US economy grew at a faster pace than previously estimated and German lawmakers supported a stronger euro-area rescue fund. Also pressuring prices was the US treasury coming to market with the last of this week’s auctions.

The third and final tranche was the issuing of $29b 7-year notes. The auction was not as strong as the five-year sale, but did get taken down at record low yields (1.4965%). The rebound on optimism about the 7-year sale pushed yields off session year highs. The issue came with a +1bp tail and a bid-to-cover ratio of 3.02, the highest in four-months. Indirect bidders took +41.6% of the supply, above the +42.8% average of the last four issues. However, direct bidders took a record high +13.6%. With supply and placement out of the way investors can get back to some risk aversion and fundamentals!

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September 29, 2011

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

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

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

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

Forex heatmap

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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August 18, 2010

Bank of Japan you are costing us money

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

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

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

Forex heatmap

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

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

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

The AUD came under pressure vs. the JPY on speculation that the BOJ are not ready to intervene on behalf of their currency, this has damped the demand for some of the higher-yielding assets. Government data has also put pressure on the currency’s climb. Reports O/N showed that skilled vacancies declined this month and wage growth slowed in the 2nd Q. Net result traders are adding to their bets that the RBA will leave interest rates unchanged for the next 12-months. Interest rate differential continue to play a big part of the currency’s attractiveness. No currency is immune to this ‘questionable growth’ environment. Risk aversion will likely force the bull’s hand this week, capping rallies, as equities find it difficult to maintain traction at the moment. In reality with the outlook for both the US and Chinese economies becoming uncertain, growth-sensitive currencies like the AUD, CAD and KIWI, are unlikely to continue to draw strong buying interest from speculators (0.9020). Follow the Asian bourses for guidance.

Crude is lower in the O/N session ($75.17 down -60c). Crude prices continue to trade near their one month low as mixed global bourses have ignited concerns that the recovery will not be strong enough to revive fuel demand. The market expects to see ‘side-ways trading in a tight-range’ this week because of the ‘stuttering economies’. Prices have gravitated towards these lows on the back of a bearish EIA report last week and on data showing that economic growth in both China and the US is slowing. The report showed that US inventories of gas and distillates (heating oil and diesel) climbed last week (+400k vs. a flat expectation, while crude stock fell -3m barrels vs. a loss of -1.9m. Distillate stocks rose by +3.5m to +173.1m barrels (the highest weekly inventory level in 27-years). The demand for oil products also fell, as gas demand hit a 2-month low, while demand for distillates is at the lowest level in 10-months. The report re-confirms the IEA conclusion earlier this month that ‘oil demand could take a substantial hit should economic growth continue to falter’. It’s no wonder that the market continues to pressurize commodity prices. Technical analysts believe that $75 a barrel remains a sticky level to penetrate. The recent macro-data flow indicates that the US activity has slowed down and the market should expect further price pull back as US fundamentals continue to show a market that is still overstocked, particularly on the product side. Speculators remain better sellers on up-ticks in the short term. This morning weekly crude report is anticipated to show a sizable draw, largely as a result of an expected additional slide in imports. We have been surprised before!

Gold prices were little changed yesterday, managing to pare some of the day’s earlier rally as global equities on the rise dissuaded investors from demanding the commodity as a safe heaven asset. For most of this week, a weaker dollar has been helping commodity prices. Big picture, the market continues to require safer assets at the expense of equities and other commodities. With a genuine fear for global growth, by default, is boosting the demand for the metal as a protector of wealth in the grand scheme of things. Year-to-date the metal has risen +10.8%. With treasury yields expected to remain low for sometime and with the Fed announcement last week of their intentions to buy bonds, could promote a quickening inflation rate, which would promote pushing commodity prices higher. For most of this year, we have witnessed a gold rally on the back of a weaker EUR ($1,224 -$3.90c). The dollar strength is under scrutiny and the historical negative correlation is not holding true at the moment. It’s about preserving wealth that is driving metal commodity prices big picture.

The Nikkei closed at 9,240 up +79. The DAX index in Europe was at 6,170 down -36; the FTSE (UK) currently is 5,304 down -46. The early call for the open of key US indices is lower. The US 10-year backed up 6bp yesterday (2.62%) and is little changed in the O/N session. Treasuries prices slipped from their 17-month highs after some improved US data yesterday and on the back of global bourses advancing on stronger earning reports in the US. Basically the FI market is taking a breather after the strong run up of late. The underlying sentiment remains positive for treasuries as investors remain extremely nervous about the US. The 2’s/10’s has widened a tad (+212), but, continues to remain in striking distance of analysts predicted +200 target. With the Fed’s intention to resume buying US government debt to bolster a faltering economic recovery will provide further support for a flattening curve bias. The market will be content in owning longer dated product on these deeper pull backs.

July 1, 2010

Has NFP got the strength to surprise?

Filed under: OANDA News — Tags: , , , , , , , , , , , , , — admin @ 10:35 am

With China’s manufacturing growth declining, and deepening budget cuts in Spain and UK, is undermining ‘the faith’ in the recovery process this morning. Now that the second quarter-end transactions have been executed, the market will try and focus on tomorrows NFP details. This month’s payrolls are expected to fall by -125k after the +431k ‘Census’ related jump in May. With no influence from yesterday’s ADP print, private payrolls are projected to increase by +105k. The unemployment rate is estimated to tick up a tad to +9.8%. Hourly earnings will probably decrease by -0.1%, after a +0.3% gain last month, while the average workweek is forecast to remain flat at +34.2 hours. That been said, today is shaping up to be a carbon-copy of yesterday, equities under pressure, FI in demand and growth and safe heaven currencies testing major support and resistance levels.

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

Forex heatmap

Yesterday’s US ADP private payrolls was a disappointment. It revealed an increase of only +13k new jobs this month, down from the +57k the previous month and well below the street consensus of +60k. Despite it being the fifth consecutive monthly gain, it was the weakest print in 4-months, certainly indicating that the private-sector hiring is decelerating heading into the summer. Digging deeper, it was the medium-size companies leading the gain (+11k), while larger companies hired +3k and small enterprises shed -1k positions. Breaking it down into sectors, the services sub-category added +30k positions, while the goods-producing sector reduced their workforce by -17k. A pleasant surprise came from the manufacturing sector, adding +16k new posts. How will this influence Friday’s NFP wagers? Of late the correlation between the two reports has been somewhat weak. The market expects the headline print to be somewhat distorted as Census hiring started to unwind in June. The market expects to see a headline decline because of the Census temp jobs paring -243k positions in opening fortnight of June (NFP reporting window). Ex-census distortions, analyst expects core payrolls to come in around +110k, mostly from the private sector.

The USD$ is lower against the EUR +0.15% and CHF +0.51% and higher against GBP -0.27% and JPY -0.06%. The commodity currencies are weaker this morning, CAD -0.14% and AUD -0.73%. The CAD has plummeted to a three week low as GDP data showed that the Canadian economy unexpectedly stalled in April and below market expectations +0.0% vs. +0.2%. However, bear in mind it’s only one release, hardly evidence of a trend. Analysts have us believing that there should be enough underlying momentum to dismiss the monthly ‘blip’ and not enough evidence to dissuade Governor Carney to give up just yet on normalizing rates. Digging deeper, there was a large decline in retail sales and a relatively smaller decline in manufacturing activity. The utilities were offset by an increase in mining, wholesale trade and, to a lesser extent the public sector and construction. It’s worth noting that a strong base effect contributed to the April decline. The loonie ended up experiencing a volatile intraday range. Initially the currency appreciated on ‘less’ fear European reports and on the back of commodities and equities rallying. With the risk-off trading scenario, the CAD was down -4.2% last quarter, recording its first quarterly decline in a year. On the crosses, CAD is trying to hold its own and in relative terms is seen as a safer way to play a global economic recovery with links to commodities and less banking. Currently, risk does not look attractive and more traditional safe havens are coming to the fore like dollars and JPY. Speculators had been betting that Cbanks will up the ante and use the currency as a safe haven destination for capital. Beware there are many waiting in the wings wanting to own the currency.

Like all commodity and growth linked currencies, their fate has been the same over the past two-trading sessions, sell, sell, sell. The Aussi fell close to its three week low as expansion in China’s manufacturing slowed for a second month (52.1 vs. 53.2) and Australia’s building approvals unexpectedly dropped in May (-6.6%) while its retail sales growth weakened (0.2% vs. 0.3%). Technical analysts are now plotting the currency’s downfall to the 0.8000 support level, assuming further losses are to be expected in equities as there is still an underlying panic in the market and dealers note that ‘the path of least resistance on any disappointing news is to the downside’. Already this week weaker global industrial and confidence data has investors talking of ‘double dips’ which will obviously affect growth and high-yielding currencies. In the last quarter the AUD has dropped just over -5.7% vs. the greenback. Earlier this month, comments from the RBA, who said that Europe’s debt crisis would ‘inevitably weigh’ on global growth, had fueled speculation that the Governor Stevens may keep rates unchanged until at least the end of the year. It seems that the ‘previous rate rises has given them flexibility to leave borrowing costs unchanged at next month’s meeting’. To date, the crisis in Europe has not had a material impact on the Australian economy, but, that’s been called into question. European funding fears has technical analysts wanting to sell the currency on rallies and shifting into more risk adverse currencies like JPY and CHF (0.8383).

Crude is lower in the O/N session ($74.56 down -110c). Crude prices remained close to home yesterday after falling from this weeks 2-month high, capping its first quarterly decline in two years. In the O/N session, the commodity took its cue from weak global bourses and resumed its downward trend. The weekly EIA report showed that gas inventories rallied for the first time in 2-months while crude stocks fell. Gas stocks rose +537k barrels to +218m vs. an expectation of a decline of -400k barrels. On the flipside, crude stockpiles fell -2.01m barrels to +363m vs. an expectation loss of -1m barrels. Supplies of distillate fuel (heating oil and diesel) also managed to climb to a two month high print. Distillate fuel climbed +2.46m barrels to +159.4m. The market had been expecting a +950k barrel gain. This was a bearish report as the build in gas and distillates are offsetting the larger than expected drop in crude. Oil was down -9.4% for the quarter and -4.4% this year. Crude stocks remain well above the five-year average level, and are +3.2% above a year ago, the biggest year-on-year surplus in 6-months. Currently there are too many negative variables that support the bear’s short positions. The fear that a double dip is on the cards has investors wanting to sell. Direction is dictated by demand and with ample supply and global growth worries, speculators continue to sell on rallies.

Bigger picture, Gold continues to be a safe heaven attraction. This week the commodity has managed to retreat from its record highs on technical resistance and profit taking, a healthy purge in the recent one directional trade. With the Fed indicating low rates for an extended period of time had questioned the dollar recent strength and by default the commodity provided an alternative investment vehicle. Technically, pull-backs have been bought. The commodity’s prices, especially vs. EUR and GBP, should remain strong on speculation that European’s Economic woes will be prolonged. With broader risk appetite under pressure, the market is capable of printing new record highs again and again. The upward bias trend remains intact as the ‘yellow metal’ is trading with a greater consideration of its safe haven status. Year-to-date, the commodity has gained +16%. Generally, it has become the benefactor when all other currencies fail. Thus far, Europeans have been content in using the commodity as a hedge against their European holdings, believing that the EUR has not bottomed out just yet. For now, buyers are waiting in the wings to purchase product on pull backs as equities flounder ($1,241 -40c).

The Nikkei closed at 9,191 down -191. The DAX index in Europe was at 5,904 down -61; the FTSE (UK) currently is 4,853 down -63. The early call for the open of key US indices is lower. The US 10-year backed up 1bp yesterday (2.95%) and is little changed in the O/N session. Treasury prices fell ever so slightly on European bank optimism. Technically, the market had entered overbought territory on the back of this week’s strong rally. In the week thus far, FI was in demand across the US curve at quarter end on fears of a slowing global economic recovery. Tuesday’s plummeting US consumer confidence has also provided support for the ‘bulls’ positions. Also helping the ‘safer’ asset class on pull backs is tomorrow’s NFP report, where many analysts expect a much weaker headline print.

June 30, 2010

EU fear of liquidity crunch exaggerated dollar falls

Filed under: OANDA News — Tags: , , , , , , , , , , — admin @ 10:01 am

This week after the G20, the BIS argued that extremely low real rates have altered investment decisions, and is postponing the recognition of losses, increased risk-taking, as investors search for yield and encouraged high levels of borrowing. This is collectively an argument for the second coming of the ‘double-dip’ recession occurring. It’s agreed that various asset classes are facing their financial abyss, however, snippets of good news is providing us with ‘hope’ ahead of employment figures in the US this week. This morning, the EUR has received a shot in the arm as the ECB lent banks, below forecast, EUR131b LTRO at 1%. The market had been expecting EUR250b ahead of banks repaying EUR442b in 12-month funds tomorrow. Fears of a liquidity crunch seem exaggerated. However, certain individual banks might suffer and we shall soon see which ones under the EU stress tests.

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

Forex heatmap

Yesterday’s released data is pushing this already fragile market towards ‘their’ specific abyss. The CB consumer confidence index did not fall, but plunged this month (52.9 vs. 62.8-a three-month low). It was a surprise to the market, as the usual pre-empting indicators gave us no heads up of the outcome. In fact the headline print contradicted the mild improvement reported in the UoM survey. Digging deeper, both the current situation and outlook components of the headline index fell roughly 15%. The other sub-sectors did not fare any better. Just in time for this Friday NFP report. The labor market indicators declined by about a point following three consecutive gains. Finally, the inflation expectations index edged down to 5.2% from 5.3%. This is further proof that the Fed can extend their extended period of low rates. Perhaps the plummeting headline is a delayed response to the sharp drop in equity prices in May.

Other data showed that the S&P/Case-Shiller Home Price Index was much stronger than the market had been expecting. Seasonally adjusted, the index broke a two-month losing streak by rising +0.4% in April. It’s worth noting that prices advanced in 17 of the 20 cities followed. However, analyst’s note that the non-seasonal print is now up +3.8%. What will the price structure be like given the recent decline in demand following the tax credit expiration?

The USD$ is lower against the EUR +0.25% and higher against GBP -0.15%, CHF -0.11% and JPY -0.11%. The commodity currencies are stronger this morning, CAD +0.56% and AUD +0.52%. Canadian data yesterday revealed that the IPPI (Industrial Product Price Index) climbed +0.3% m/m in May (more than expected +0.1%) on the back of a weaker loonie making imports more expensive. However, it’s worth noting that the core three-month moving average (ex-food and energy) continues to trade sideways. On the flip side, the RMPI (Raw Materials Price Index) plunged -7.2%, on lower crude oil prices. Similar to all growth currencies, the loonie fell to its lowest level in three weeks as concern over Europe’s fiscal woes and signs of a global slowdown backed up investors and speculators interests away from equities and commodities. With the risk-off trading scenario, the CAD is down -3.4% this quarter, recording its first quarterly decline in a year. On the crosses, CAD is holding its own and in relative terms is seen as a safer way to play a global economic recovery with links to commodities and less banking. Speculators had been betting that Cbanks will up the ante and use the currency as a safe haven destination for capital. Do not be surprised to see the currency trade beyond parity in the coming months as long as the ‘double-dip debate’ does not take hold.

The AUD happened to rally O/N and reduce its first quarterly loss in nearly two-years as regional bourses trimmed some of this weeks ‘plummeting losses’, on speculation that the purge in higher-yielding assets may have been somewhat overdone. Also lending support to the currency was a release of domestic fundamental reports showing that bank lending had increased and that house prices had advanced. However, that been said, there is still an underlying panic in the market and dealers note that ‘the path of least resistance on any disappointing news is to the downside’. Already this week weaker global industrial and confidence data has investors talking of ‘double dips’ which will obviously affect growth and high-yielding currencies. In this quarter alone the AUD has dropped just over -5.5% vs. the greenback. The initial aftermath of the G20 has not materially changed risk attitude. In fact, it seems that the markets have become more ‘jittery’. Earlier this month, comments from the RBA, who said that Europe’s debt crisis would ‘inevitably weigh’ on global growth, had fueled speculation that the Governor Stevens may keep rates unchanged until at least the end of the year. It seems that that ‘previous rate rises has given them flexibility to leave borrowing costs unchanged at next month’s meeting’. To date, the crisis in Europe has not had a material impact on the Australian economy, but, that’s been called into question. European funding fears has technical analysts wanting to sell the currency on rallies and shifting into more risk adverse currencies like JPY and CHF (0.8542).

Crude is higher in the O/N session ($76.21 up +30c). Crude has aggressively fallen from this weeks 2-month high as the dollar rallies vs. the EUR, thus reducing the appeal of commodities as an inflation hedge and alternative investment. After rallying earlier in yesterday’s session on fears that Alex would disrupt production as it moves towards the Gulf of Mexico, prices fell on a much weaker than anticipated US consumer confidence print (see above). Prices have recorded their first quarterly decline in nearly two-years (-9.9%). The commodity ended last week under pressure after the EIA inventory release reported an unexpected gain in supplies. Oil stockpiles rose +2.02m barrels to +365.1m vs. an unexpected fall of -800k barrels. On the flipside, gas supplies fell -762k barrels to +217.6m vs. an expected market decline of -180k barrels. Imports of crude oil climbed +4.3% to +10.1m barrels a day, the highest level in 18-months. The headline print certainly fly’s in the face of the ‘bulls’ way of thinking. Crude stocks remain well above the five-year average level, and are +3.2% above a year ago, the biggest year-on-year surplus in 6-months. Distillate stocks (diesel and heating oil) rose +297k barrels, less than expected as demand dropped to its lowest level in 7-months. Currently there are too many negative variables that support the bear’s short positions. The fear that a double dip is on the cards has the speculators wanting to sell. Direction is dictated by demand and with ample supply and global growth worries has speculators once again wanting to sell on rallies. Today’s weekly stock report is expected to reveal a small drawdown on inventories this morning.

Bigger picture, Gold continues to be a safe heaven attraction. Over the past two-trading sessions the commodity has retreated from its record highs on technical resistance and profit taking, a healthy purge in the recent one directional trade. With the Fed indicating low rates for an extended period of time had questioned the dollar recent strength in recent trading session’s and by default the commodity provided an alternative investment vehicle. Technically, pull-backs have been bought. The commodity’s prices, especially vs. EUR and GBP, should remain strong on speculation that European’s Economic woes will be prolonged. With broader risk appetite under pressure, the market is capable of printing new record highs again and again. The upward bias trend remains intact as the ‘yellow metal’ is trading with a greater consideration of its safe haven status. Year-to-date, the commodity has gained +16%. Generally, it has become the benefactor when all other currencies fail. Thus far, Europeans have been content in using the commodity as a hedge against their European holdings, believing that the EUR has not bottomed out just yet. For now, buyers are waiting in the wings to purchase product on pull backs as equities flounder ($1,242 +30c).

The Nikkei closed at 9,382 down -188. The DAX index in Europe was at 5,971 up +20; the FTSE (UK) currently is 4,933 up +19. The early call for the open of key US indices is lower. The US 10-year eased 6bp yesterday (2.95%) and is little changed in the O/N session. Treasures remain in demand across the US curve at quarter end on fears of a slowing global economic recovery and an ECB lending facility about to expire. Plummeting consumer confidence yesterday only provided support for the ‘bulls’ positions. Also helping the ‘safer’ asset class is this weeks NFP report where many analysts expect a much weaker headline print. The belief that the US economy’s momentum is ‘not’ being built upon should continue to provide a better bid on deeper pullbacks.

June 28, 2010

Canada’s $1 billion G20 answer

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

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

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

Forex heatmap

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

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

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

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

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

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

Canada $1 billion G20 answer

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

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

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

Forex heatmap

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

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

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

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

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

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

May 27, 2010

Merkel madness may sink EU

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

Is this the ‘real’ beginning of the end of the EU? Germany rattling their own saber and threatening not to wait for EU or international approval before curbing speculation and making financial institutions cough up monies to cover the cost of the ‘crisis’. Merkel is proposing legislation that her government will expand ‘a partial ban on naked short-selling to all German stocks and certain EUR currency derivatives’. Other EU members believe that the Chancellors attempt to re-open the Lisbon and Maastricht treaties are ‘naïve and ill-advised’. Is China again the ‘white knight’ to sooth Merkel’s madness after declaring its allegiance to European investments? At the moment, the key to the EUR’s weakness is been driven by the ongoing asset allocation shift away from the Euro-zone, supported by the recent flow news (CFTC and FI reports). The currency remains contained, however, after last week’s breakout to the topside, the correction has managed to shake out the weaker short positions. The market seems steadfast on testing the EUR lows once again as positions dictate that.

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

Forex heatmap

US data yesterday was very strong and certainly supported ‘growth trading strategies’. New Home sales posted the largest increase in 2-years (+504k vs. +425k), supported once again by tax incentive programs and lower median prices. It was predominately the first-time program that expired at the end of last month that aided the record increase. Of course the question on analyst’s lips is what will happen to sales in both the new and resale market now that the tax credit has expired. With signs of growth in the US, the market will be relying on low borrowing costs and continued improvement in the labor market to support future gains, however the ‘magnitude of gains is expected to decline’. Digging deeper, the months’ supply fell to 5.0 (the lowest level in six-months). With the increase in demand for new homes over the last three-months coupled with this report should provide strong support for further home construction. Interestingly, both the median (-9.7%) and mean price (-4.8%) declined last month.

Not to be outdone, the US durable goods report was also strong (+2.9% vs. +1.1%) and keeps the ‘V’ shape recovery on track, at least for now. Digging deeper, inventories have been expanding at a rapid pace over the past 3-months, and should represent a solid inventory contribution to growth being repeated in the 2nd Q. Business investment (ex-non-defense capital goods) happened to decline last month by -2.4%, while transportation advanced +16.1%, offsetting the decline in the previous month. Shipments also happened to rise for a second consecutive month. Both of the above reports are strong proof, despite the fiscal meltdown in Europe, that the US recovery is still gathering momentum. However, with Europe being a part of their equation, the US economy cannot rely on its exports to sustain its recovery. Domestic demand has to lead growth and that’s down to the consumer and their spending habits.

The USD$ is lower against the EUR +0.71%, GBP +0.56%, CHF +0.30% and higher against JPY -0.35%. The commodity currencies are much stronger this morning, CAD +1.14% and AUD +1.51%. The loonie has drifted away from its six-month lows printed earlier this week after equities plummeted on fear of further weakness appearing in the Spanish banking system. The currency retreated on the back of stronger US fundamentals convincing investors that a ‘V’ shape recovery was very much on the cards. Robust commodity and equity prices are allowing ‘risk on’ trading strategies to be implemented and that includes the CAD. It also helps this growth currency that China has come out in favor of Europe and willing not to change its foreign-exchange reserve diversification. Assuming markets remain somewhat stable or less ‘insane’, dealers will begin focusing their attention on the BOC’s rate decision next week. The recent flight to quality, equity losses and the fear of a multilateral currency intervention has convinced a segment of the market (50%) to price out any rate hike by Governor Carney just yet. If this uncertain environment continues then the market will want to unwind some of the interest premium already priced into the currency. Longer term investors are looking at the 1.08-1.10 level to begin buying the loonie again. If commodities remain true, then intraday traders will be happy buyers of the currency on ‘any’ upticks.

Finally, the AUD found support and managed to print a one week high, as advancing regional bourses is convincing investors that ‘down under’ can withstand the pressures from a European debt fallout. O/N headlines that indicated China would not change its foreign-exchange reserve diversification helped to support the EUR, risk and therefore growth currencies like the AUD. The currency also found favor amongst investors on rumors that the Australian government was contemplating altering the rate at which its proposed mining profit tax would take effect. Up until last night, the currency had been heading for its worst performing month in nearly two-years as investors shied away from growth currencies. Plummeting equity markets in the region and potential war rhetoric apparently from Kim Jong had pushed the currency lower against nearly all its major trading partners. So far this month the AUD has managed to slide -10.1% on declining equity and commodity prices. The fickle investor is now a better buyer on pull backs as longer term support levels remain intact (0.8375).

Crude is higher in the O/N session ($72.55 up +104c). Crude prices have soared since yesterday for a number of reasons. Firstly, the weekly EIA report happened, to aid a rallying equity market, to drag crude prices away from this week’s oversold lows on European fiscal issues. The commodity at one point during the day climbed as much as +4.1% after the US Energy Department reported that total fuel demand gained +0.6% to +19.7m barrels a day and with stronger US data delivered yesterday had the bulls breathing a sigh of relief. Secondly, with durable goods increasing, signals growing manufacturing in the largest energy-consuming country. The weekly EIA report showed a +2.5m barrel increase in oil inventories vs. an expected +100k gain. On the flip side, gas stocks fell -200k barrels vs. an expected no change. Distillate inventories (including heating oil and diesel), fell -300k vs. an expected increase of the same amount. Interestingly, stocks at Cushing fell -300k barrels, the first loss in two months. Refinery utilization was down -0.1% to 87.8% of capacity, matching forecasts. Finally, fundamentals are starting to provide a difference to commodity prices and not just the dollar pricing.

Last week the story line was the EUR appreciating, equity losses mounting and inflationary fears ‘none’ existent had speculators heading for the exits. Now that the EUR has lost some of that firm footing has again revived the demand for the commodity as a ‘safer heaven’ asset class. The commodity has managed to rise to a one week high as the asset alternative of choice amid Europe’s sovereign- debt crisis. Longer term investors have been using the commodity as a ‘currency of last resort’ in addition to their EUR denominated assets. The technical bulls believe that $1,400 is a possible one-year target. For now, the market is a better buyer on deeper pull backs ($1,213). Soon we will have to be using an excuse of inflation if the equity market can remain firm!

The Nikkei closed at 9,639 up +117. The DAX index in Europe was at 5,841 up +83; the FTSE (UK) currently is 5,097 up +60. The early call for the open of key US indices is higher. The US 10-year backed up 3bp yesterday (3.26%) and is little changed in the O/N session. After treasury yields managed to print yearly lows on the back of plummeting global bourses earlier in the week, new found belief in US growth has investors willing to add some risk to their portfolio when treasuries were technically in over-bought territory. Yesterday, Treasury’s five year auction came in at a yield of +2.13%. The bid-to-cover was 2.71, on par with the past four auctions. Overall demand was healthy but trailed market expectations. On a macro level, prices should remain bid as demand for the ‘safer assets’ remains. Today we have the final tranche of this week’s US issues, $31b 7-year notes. Dealers continue to see better buying of product on pull backs.

March 2, 2010

November 27, 2009

Dubai Debacle drives Dollar Higher

Filed under: OANDA News — Tags: , , , , , , , , , , , — admin @ 4:00 am

While giving thanks yesterday, North American consumers watched world equity indices plunge into a ‘sea of red’ as Dubai World’s demand to restructure their debt repayments shook global investor confidence. This morning the rest of North American markets will be playing catch up. Dubai is the emerging markets showpiece. It has been the recipient of a huge global liquidity boom and now is on the cusp of defaulting! Is this the start of something contagious that will spread virally throughout the emerging and global markets? No matter, consumer confidence is rattled, and it makes sense why USD debt auctions have been well received near record low yields.

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

Forex heatmap

The million dollar question is of course will Dubai World’s impending collapse be the impetus to push global equities over the edge? Or will the investor be able to isolate this as just another ‘storm in a tea cup’? Berating the ‘overvalued’ equities lower will lead us down the path towards global protectionism. This will only push the ‘reserve currency’ higher and question the sustainability of the lemming ‘carry-trade strategy’ that has earned various investors close to 20% this year. In reality we are experiencing the unexpected, analysts and dealers are now trying to gage the spill-over effect into other markets, who is owed what, how the knock on effect will affect creditors. British banks are reportedly the largest lender to the region and most of them are on their knees! Crowded trades will be pared back aggressively as we head into the most illiquid of trading times. We have witnessed that this morning with gold plummeting over $30. Dollar bulls will lead the way, but do not mention the un-winding of carry trades, the market cannot handle that just yet!

The USD$ is currently higher against the EUR -0.97%, GBP -0.98%, CHF -1.07% and JPY +0.34%. The commodity currencies are weaker this morning, CAD -1.06% and AUD -1.74%. The loonie is threatening to burst out of it tight trading range as commodity prices collapse on the back of weaker global equities. Earlier this week the CBR (Russia) indicated that they would be adding the CAD to their required reserves and by default liquidating some of the USD exposure supported the currency, but after the Dubai debacle, that is but a distant memory. In theory, the Russian Cbank wants to increase its ‘gold holdings and promote regional currencies in trade and finance to reduce risks posed by the US dollar’s dominance’. Rumors of other Cbanks like India again expressing their willingness to add more gold will eventually provide a bid to growth currencies. However, in this market it’s not the time for it! Dubai World’s desire to re-negotiate their debt payment schedules has pushed risk aversion trading strategies to the fore. The 3c trading range is in danger of being breached. Lack of liquidity, but no lack of direction has caused currency markets to be rather volatile. Dealers and investors can assume more of the same today in this holiday shortened week.

The AUD had its largest loss in over a month in last night’s session, as investors gravitated towards the JPY as Dubai World shakes investor confidence as its proposes to delay debt payments risking triggering the biggest sovereign default ever. Risk aversion trading strategies are dominating the currency market at the moment. Earlier this month, the RBA minutes implied that three straight lending rate increases may not be on the cards had futures traders unwinding some of their bets that Governor Stevens would tighten monetary policy again in two-weeks. He said that the pace of further rate increases ‘remained an open question’. With commodity prices temporarily in trouble, dealers are looking to sell AUD on upticks (0.9012).

Crude is lower in the O/N session ($74.00 down -396c). Finally, someone is taking fundamental crude data into consideration when they are pricing the black-stuff. Oil managed to pare this week’s entire advance. Elevated prices are not supported by the EIA report which showed that inventories managed to advance to a new 4-week high. Demand destruction is alive and kicking, coupled with the Dollar Index advancing on investor risk aversion, crude is on course again to test new lows. Last week’s EIA report met with analysts expectations. Crude stocks rose less than expected as imports gained. Inventories advanced by +1m barrels to +337.8m vs. market expectation of a +1.2m gain. On the face of it, the build up was consistent with Tuesday’s API report, where inventories advanced +3.3m barrels as imports also rose. Analysts said that daily imports added +371k barrels a day as imports and the Gulf of Mexico output rebounded from the disruptions caused by ‘Ida’. Gas inventories advanced +1m barrels to +210.1m, w/w, vs. market expectations of only +300k. Distillates stocks (those that include heating oil and diesel) declined by -500k vs. expectations of -100k. Refinery utilization managed to advance +0.9% to 80.3% of capacity, vs. analyst forecasts of only +0.3%. Repeatedly over the last few weeks the $80 handle remains a stubborn resistance point, again the market attempted and again it has failed. However, demand destruction does not warrant elevated prices, perhaps the $80 a barrels will be the top for the remainder of this year.

There is nothing like a bullish rumor to add spice to the record price saga that the ‘yellow metal’ has been experiencing. It’s no surprise to witness gold jump to new record highs this week on rumors that India may want to add, once again, bullion to their reserves. Year-to-data, the yellow metal has gained +36% as investors and central banks increased their holdings of the commodity to preserve wealth. Also last week, Sri Lanka and Mauritius publicly added the yellow metal to their reserves. However, this morning during the London session the yellow metal has managed to grind out it largest loss in nearly a year as the gain in the dollar has damped demand for the precious metal as an alternative asset. This morning the commodity is testing strong support levels ($1,157).

The Nikkei closed at 9,081 down -301. The DAX index in Europe was at 5,609 down -5; the FTSE (UK) currently is 5,179 down -15. The early call for the open of key US indices is lower. The US 10-year bond eased 8bp yesterday (3.19%) and are little changed in the O/N session. This week’s $118b debt auctions were again well received, despite being issued near new record lows. All three auctions surpassed market expectation of demand as indirect bidders, usually Cbanks, took close to 60% of the entire product. The market remains better bid on Dubai World’s threat of potential default to its creditors. Emerging market stumbling has sent shock waves through all asset classes as investors seek surety of fund investments. Finally, the ‘seasonal’s’ are calling for a flattening rally ahead of ‘month end index extension’ next week. It’s too painful to be the contrarian in this environment!

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