Forex Blog

October 13, 2011

Forex Market Outlook 10/13/11

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

Yesterday’s release of the FOMC meeting minutes was a complete dud and market hopes that the Fed was close to QE3 went unrealized.  Part of that hope came from Bernanke’s speech to the Joint Economic Committee earlier this month, but it seems as though that mention of further easing was intended to keep the markets from falling off a cliff.

Yet they are no closer to QE3 then previously thought, so the “free money trade” will have to wait for another day or for the economy to worsen dramatically, which is not out of the realm of possibility if the EU fails to meet their deadline on the debt crisis resolution.  The clock is ticking.

News out of Europe this morning showed that German CPI was slightly higher than expected though not enough of a gain to cause the ECB concern.  What was more of a concern though was the ECB’s monthly report for October which was largely negative.  Citing “moderate to lower growth”, reduced outlooks, and the like, the ECB essentially confirmed what we already know.  

What was more concerting to the market though was a report out of China that showed that their gains in exports declined more than expected, showing a gain of only 17.4% vs. an expected 20.5%.  While they will cry that the strengthening Yuan is hurting them, no one else will shed a tear as their trade surplus came in at $14.5B, which contrasted with the US trade deficit of 45.6B makes them look silly.  The Senate passed the Bill to impose tariffs on China if they don’t move to revalue their currency, which could ignite a trade war and is likely not going to help the global economy recover.  I’ve discussed an alternate solution to tariffs in this morning’s video.

However there was some good news for those with risk appetite, as Australia added 20.4K jobs to their economy vs. an expected 10K, which helped push their unemployment rate down to 5.2% from the expected and previous 5.3%.  While the Aussie has pulled back on general risk aversion, the slight decline may reverse throughout the day.

Additionally, the Bank of Japan released the minutes from their rate policy meeting which called for additional monetary easing to attempt to weaken the Yen.  Citing problems in Europe to global economic stability, prolonged Yen strength will harm exports though recent economic data in Japan has been better than expected.

Here in the US, initial jobless claims figures came in as expected, with 404K newly unemployed.  400K has been the “norm” which is unfortunate as we are not adding enough jobs to move the needle.  Perhaps the passage of the Free Trade Agreements that have been sitting around for over 4 years will help, but structural reform is more likely needed.

Since the President’s “jobs” bill was rejected by the Senate, we are likely going to have to wait for the debt “super committee” to attempt to reduce our deficit and provide confidence to the markets.  This is a big task and much like the Euro commission that is charged with finding the resolution to the Euro debt crisis, essentially puts us in a holding pattern until then.

So I’m going to focus on corporate earnings here in the US, which if the majority come in better than expected, could revive risk appetite in the markets.  The general mood surrounding the markets seems to positive, though that could be derailed by the Europe failing to resolve by their self-imposed dead-line, or more of the same Washington DC gridlock.

The inverse correlation between the S&P 500 and  the US dollar is still pretty high, so the risk trades are still intact and could be driven by stocks rather than perceived global economic risk in the near-term.

October 6, 2011

Forex Market Outlook 10/06/11

Filed under: Forex News — Tags: , , , , , , , , , — admin @ 7:11 am

So far the news of the morning is that the Bank of England increased the size of its asset purchase program by 75 billion, pushing the total bond buying to 275 billion.  While they kept interest rates unchanged, this sent the Pound plummeting lower 200 pips.  The Central Bank cited severe strains in the funding market and maintained that inflation would undershoot the 2% inflation target in the medium term.

I suppose it would be more helpful if they identified what the medium term is, as inflation has stubbornly remained above 4% much to their chagrin.  So I’m not certain how they think it will subside, and it appears as though they are content to let their citizens suffer through higher prices.

The ECB rate decision also came out and produced no change to official ECB rate policy, so now the market is waiting on the ECB press conference where Jean-Claude Trichet will speak for the last time as head of the ECB.  The markets are hoping that he will offer some sort of hope that EU leaders are nearing a solution for the debt crisis.  The ECB needs to go into “cheerleader mode” between now and when a solution is actually offered, but most think the perpetuation of “can-kicking” will continue.  There is a meeting of EU leaders and a G-20 meeting on tap in the next few weeks.

Other than those two major events, the negative economic data from these two regions had little effect as UK home prices fell more than expected and German factory orders showed a decline vs. an expected no-change.

Initial jobless claims here in the US came in slightly better than expected, but still over 400K.  While it is a good thing that it is not moving in the wrong direction, it is certainly not getting significantly better. 

Tomorrow’s Non-Farm Payrolls report will give us a better idea of where the economy is headed but I think more importantly it will let us know when or if Bernanke will be adding more monetary easing to the economy.

Between now and then, the Bank of Japan will have its rate decision in the overnight session and while they are not expected to change policy, don’t be surprised if they try to jaw-bone the Yen lower as it is above 10-year highs vs. Euro and Pound.

So far Trichet hasn’t said anything to disrupt the markets any further today, and the Dollar strength that we saw earlier on the Pound and Euro sell-off is abating, which is helping equity markets move higher.

There is going to have to a point where the “risk on, risk off” trade decouples and the correlations break down as US dollar strength should not be an automatic sell in risk assets, especially if that strength occurs because of individual currency weakness.

Today’s action reminds us that these correlations are still in effect and the fact that the BOE wants to encourage inflation through a weakening of the Pound should have little effect on US stocks.  Yet the markets have become so entrenched in the risk trade that it has a hard time differentiating between event risk and individual currency risk.

The market is never wrong; however in this case it is.  While we know about the global economic slowdown, stock valuations right now are very compelling, especially those with high dividend yields.  While the Euro debt crisis poses a major threat to global economic stability, an event like the BOE increasing quantitative easing should not.

Yet markets have this “all or nothing” mentality where a rising tide lifts all ships or the baby gets thrown out with the bathwater.  How’s that for coming market metaphors?

But seriously, we may see some further market selling as the US session unfolds, but I believe that it is not warranted (unless Trichet says something dumb) as tomorrow’s NFP is likely to increase the chances that Bernanke will act.

Trichet Exits on a Low Note

Filed under: OANDA News — Tags: , , , , , , , , , , , , , — admin @ 4:26 am

Higher than expected Euro inflation numbers last week should prevent, the departing Trichet from overseeing an ECB rate cut this morning. The market expects policy makers to extend the provision of the unlimited, fixed-rate funding timeframe into next year, providing a further six-month LTRO, with an outside possibility that a one-year LTRO is also announced.

The futures odds are 50% for a rate cut. Despite the bumbling cohesive actions of policy makers since they took ‘real’ ownership of Euro sovereign concerns this week, if the ECB disappoints and leaves rates unchanged, markets are likely to increase their pricing of default risk. The whiplash effect will rid most of this weeks risk earnings and again promote the dollar and yen strength.

An ease would likely support risk currencies more than the EUR itself. An aggressive ECB cut would not directly address the underlying drivers of European stress.The market will be looking further afield for larger returns, their focus will be the periphery of the G10 and emerging markets against both the USD and the EUR.

On the other hand, any easing or strong dovish overtures that promotes risk will provide the ideal opportunity to set oneself up nicely if you expect a disappointing NFP print tomorrow.

Forex heatmap

Forget the EU, IMF and Cbanks rhetoric for the moment and focus on fundamentals. The remainder of the week is about jobs and how the US employment landscape is changing or not. In the US yesterday, private businesses added more than expected jobs this month. Larger enterprises seemed to be cutting jobs as layoff announcements last month jumped to the highest prints in two-years. The ADP report recorded a +91k gain, an increase that had ‘a few’ analysts thinking of changing their NFP call a tad higher. Last month’s release was revised down by-2k to +89k. On the face of it, the report is treading water amongst the private sector category. Any NFP release includes Government helpers. Now that the ex-Verizon strikers are back to work, on the first go around, the market expects the employment report to create about +70k jobs and with this month’s unemployment rate to remain on hold at +9.1%.

The good news is that employment was positive in September, the bad news, the US economy remains incapable of producing enough new jobs, approximately +125k, to offset population growth. The market tends to discount the ‘private jobs number’ as a good precursor to Friday’s jobless report.

Business conditions in the US non-manufacturing sector were little changed month-over-month (53 vs. 53.3). In the sub-components, employment fell and price pressures eased. Digging deeper, last months new-orders index rose to 56.5 and is in stark contrast to ISM-manufacturing report earlier in the week that revealed a contractionary reading of 49.6. The non-manufacturing report shows the business activity index rising to 57.1 while the employment index fell into contractionary territory, easing to 48.7 from 51.6. This print certainly tells a different tale about employment. The pieces for NFP continue to come together. Finally, price pressures eased, with the index decreasing to 51.9.

The dollar is lower against the EUR +0.23%, GBP +0.18% and JPY +0.11% and higher against the CHF -0.02%. The commodity currencies are stronger this morning, CAD +0.27% and AUD +0.87%.

Are USD bulls entering the reload and lock territory? So far this week CAD traders have had little of their own fundamental data to chew on. Nearly all the currency’s move has been at the mercy of its largest trading partner south of the boarder. In a risk aversion trading environment, the loonie, a commodity and interest rate sensitive currency, movements generally become over extended in one direction or another. A better-than-expected US employment report and some progress on the European debt crisis yesterday boosted risk appetite and gave commodities a lift, allowing the loonie to back away from its 13-month lows rather nicely. However, the probability of a Greek default has been able to keep a lid on the CAD rally.

In times of stress it’s normally the commodity interest rate currencies, like the loonie, AUD and NZD that underperform. Due to their high sensitivity to risk appetite, ‘Carry’ was one of the worst-performing strategies in September. In particular, the Carry G10 component lost -5.4% in the month.

With riskier assets remaining vulnerable to doubts over the ability of European policy makers to stem a debt crisis that threatens to trigger a global recession, is capable of pushing the loonie through 2010 low levels. Currently, dealers remain better buyers of dollars on pull backs ahead of North American employment data tomorrow (1.0404).

The AUD has maintained its two day rally outright as Asian stocks extended a worldwide rally, increasing demand for higher-yielding assets. European official’s and policy makers are stumbling about and at long last seem to be stepping up and taking ownership of the European debt crisis. The market is expecting the ‘creation of a new Euro rescue plan that will be positive for risk’. For most of this week, it seems that investors and speculators have been liquidating long Aussie positions at a record pace, as the ‘underlying flow trend among long-term players had turned decidedly negative’ on the back of the Euro crisis.

On Monday, the RBA hinted at rate cuts, despite Governor Stevens leaving key rates unchanged at +4.75%. The Bank communiqué was very cautious on the outlook, leaving the door open for easing. The RBA concluded its policy statement by describing its current policy stance as appropriate, but nonetheless opened the door to an easing policy change stating that “an improved inflation outlook would increase the scope for monetary policy to provide some support to demand, should that prove necessary.” FI dealers increased the pricing for rates cuts at the 1 November meeting by +18bps to +44bps.

It’s not a surprise to understand that the RBA is still being heavily dependent on how the crisis in Europe affects global growth over the next month. An increase in risk and cuts again will be off the table and visa versa. However, similar to other growth and commodity sensitive currencies, the market bias prefers to be better sellers of the AUD on rallies, until the panic flows have abated (0.9727).

Crude is higher in the O/N session ($80.89 up+$1.21c). Oil rose for a second day as shrinking US crude supplies, better-than-expected economic data and signs Europe can control its debt crisis lessened concerns that fuel consumption will suffer.

The weekly EIA report showed that the US commercial crude inventories decreased by -4.7m barrels from the previous week. At +336.3m barrels, oil inventories are above the upper limit of the average range for this time of year. Total motor gas inventories decreased by -1.1m barrels are above their upper limit of the average range. Analysts were expecting crude gain by +2.5m barrels and gas stocks to move up by +1.30m barrels last week. Oil refinery inputs averaged +15.1m barrels per day during the week, which were +73k barrels per day below the previous week’s average as refineries operated at +87.7% of their operable capacity.

The old support levels now become the new key resistance points. 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 technical selling on some of these rallies.

Gold prices did what they had been doing last month when investors required cash for margin purposes and that was trader lower. The commodity surrendered its early gains yesterday as it was caught up in hefty losses across all asset classes from the previous evening due to heightened concerns over the prospect of a Greek default.

After last months rout, investors remain very cautious about this trade. For most of this week, the commodity had risen on safe haven reasons despite the dollar also rising. With asset class’s toing and froing, investors have been deliberating over whether bullion is a shelter from turmoil or a speculative trade that will rise with riskier assets.

In the last two weeks, the yellow metal had one of its “steepest corrections in history, weighed down by a sharp margin increase, the fourth hike this year and heavy liquidation by hedge funds in a technically overbought market”. Demand for ‘physical’ gold is again expected to support the market. Under normal conditions, the Indian festival season helps drive buying from the world’s biggest gold consumer. Retail gold demand traditionally gains pace from August.

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 in theory. With investors requiring margin cash is another phenomenon ($1,652 up+$10.40c).

The Nikkei closed at 8,522 up+139. The DAX index in Europe was at 5,597 up+124; the FTSE (UK) currently is 5,190 up+88. The early call for the open of key US indices is higher. The US 10-year backed up +8bp yesterday (1.92%) and is little changed this morning.

Longer term maturities backed up from their lowest yields in two years after Ben’s testimony in congress stated that the Fed has more ammunition in their arsenal and would implement it if need be to boost the US economy. Investor optimism that European leaders are stepping up efforts to resolve the region’s debt crisis has sapped demand for the safest assets. Even yesterday’s surprisingly strong private US employment report is pressuring treasury products.

Price movements throughout the different asset classes yesterday are proof that a modest amount of risk appetite is beginning to return to the markets. Under Operation Twist, the Fed will purchases long dated securities financed by selling the short end, a program that provides no liquidity, but is expected to lower longer term rates and hopefully kick start growth again in a stagnant US economy.

Investor’s fearing that the US unemployment report could disappoint later this week will attract the buying of treasuries on these pull backs. In a low growth and deflationary environment, coupled with policy maker’s accommodative positions should keep global rates low for years.

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October 4, 2011

August 16, 2011

EURO Weight on Germany too heavy?

Filed under: OANDA News — Tags: , , , , , , , , , , — admin @ 4:36 am

The market has already been forewarned that there will be no political end to the Euro-zone crisis from today’s tete-a-tete between Merkel and Sarkozy. Even with German officials insisting that Eurobonds were not on the agenda, a reluctant Chancellor may have to accept that there is only one way to prevent the Euro collapse and that is with Eurobonds replacing sovereign bonds. This would require members to pool their Eurozone risk to reduce their refinancing costs. This is good for struggling members like Greece and Italy. However, the borrowing costs would also rise for the Germans and the Dutch, maybe costing them their triple-A rating.

Issuing Eurobonds, it is believed would add EUR47b to the Germans bill, a snip if you look at the alternative. Capital markets successfully attacking Italy, then France, the Germans losing their coveted AAA credit rating. This in turn could trigger a global depression and a bill for the Germans three times the cost of issuing Eurobonds. As a politician, Merkel must keep her options open!

This morning, the EUR remains supported by a combination of the short selling ban and growing concerns about outflows from a ‘be-leagued dollar’. The divergence in growth between the core and periphery countries is narrowing as noted from the disappointing German GDP data. Growth in Europe’s largest economy slowed sharply in the second quarter (+0.1%), leaving it below pre-crisis levels and calling into question Trichet’s decision to tighten twice this year. Combined with the French data last week, this is more than just a soft patch for the ‘invincible core’. Perhaps policy makers may have to begin their discussions on reversing this years hikes over the coming months?

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

Forex heatmap

The ECB came off the sidelines, for the first time in nineteen weeks, to shore up market confidence and announced yesterday that they had settled EUR22b in bond sales last week, the highest weekly settlement in thirteen-months since it began buying Euro-zone government bonds in the secondary market. Since it takes a few days for bond transactions to settle, analysts believe that the final monetary intervention value will be close to EUR25-30b. As a term of reference, just after the first Greek bailout package, the ECB bought +16.5b in bonds. It is believed that the bulk of the buying was that of Italian and Spanish bonds. Their direct intervention has helped lower significantly the cost of borrowing for both sovereign entities. To date, the total acquisition under the ECB bond buying program equates to EUR96b. Given the size of the Italian and Spanish bond market, the sum is not particularly high, but it seems to be sufficient to show capital markets that the ECB is serious about containing the sovereign debt crisis.

Yesterday’s US June TIC’s data is notable for a record foreign private sector selling of bonds, notes (-$18.3b) and long-term securities ($23b) compared with the previous record set during the height of the financial crisis in 2008. The increased sales had been influenced by the debt-limit deadline. The market should be prepared to see a further negative overhang in July’s data, as a resolution did not occur until the beginning of this month. The ‘net’ underlying long-term securities transactions (ex-swaps) in June was a positive +$3.7b and down from a weak +$24.2b print in May.

The dollar is higher against the EUR -0.44%, GBP -0.20% and lower against CHF +0.34% and JPY +0.02%. The commodity currencies are weaker this morning, CAD -0.64% and AUD -0.82%.

Over the past three trading sessions, the loonie has managed to advance from almost its lowest level in seven-months as equities stateside rise, reducing the demand for the buck as a refuge. The CAD, despite last week’s turmoil remains one of the better behaved currencies, even with weaker domestic data. Late last week, Canada recorded its biggest trade deficit in nine-months in June (-$1.56b the fifth consecutive), as energy and auto exports fell, adding to evidence the country’s recovery is waning. Governor Carney said last month that export growth will remain modest because of a strong currency and the need for companies to regain competitiveness.

This month, the loonie has dropped -3.1% as global equities tumbled on renewed concern that the Euro-zone’s sovereign-debt crisis is getting worse. The CAD, seen as a barometer of risk, closely tracks oil, equities and macroeconomic data from the US, which consumers about +70% of all the country’s exports. Yesterday’s disappointing Empire State Manufacturing Index had the loonie underperforming against the other major crosses because of the depth of its economic ties with its largest trading partner.

There is a flip-side, because of the yield differential (for now), investors will want to divest away from the EUR and USD. Once the markets absorbs all of last weeks Cbanks actions or lack of, there will be an appetite from investors to own a second tier reserve basket. Most commodity and interest rate sensitive currencies certainly belong to this basket. The focus this week is likely to remain on broader risk aversion, however, there may be a shift back to fundamentals as investor sentiment starts the week on a calmer footing.

Uncertainty around Eurozone’s austerity measures and debt management issues along with overall global growth forecasts will have investors treading lightly. In the O/N market, investors have been better buyers of dollars on pullbacks (0.9835).

The AUD traded under pressure against all its major trading partners last night, after the release of the Cbank’s August minutes which showed policy makers are concerned that turmoil in financial markets could slow global economic growth. It was the first day in four that the currency retreated outright, as investors pared bets of an interest rate hike any time soon.

The RBA’s August minutes were largely in line with the post-policy meeting statement, however, concerns over developments in Europe and the US continue to overshadowed the RBA’s robust medium term domestic outlook. Many now expect Governor Stevens to remain on hold for the remainder of the year, as ‘risks for the RBA have become more evenly balanced and the outlook remains conditional on the strength of the global economy’. If global turmoil continues, it could temper domestic inflation over time and ease pressure on the RBA to raise interest rates. Some futures traders now expect the RBA to reduce its key interest rate by-128bp over the next 12-months. Even with core inflation still running above the RBA’s target range, the policy makers can afford to step aside, unless there a dramatic collapse in global financial markets. That can be said for all other Cbanks. Just like the loonie, the AUD will trade with the swings in global risk appetite. Currently, investors are better sellers of the currency on rallies (1.0438).

Crude is lower in the O/N session ($86.71 down -$1.17c). Crude prices rallied for a third consecutive day yesterday, rebounding from last weeks ten-month low, after M&A activity dragged US bourses higher and on Japanese’s data contracting less than expected in the second quarter at the weekend. This morning’s disappointing European data is providing the excuse for energy prices to take a step back.

Last week’s US inventory numbers had been been bullish for the commodity. The report showed that oil stocks fell -5.2m barrels to +349.7m last week. The market had projected a +1.5m barrel build. Crude imports fell-34k barrels per day to +9.07m. The IEA stated that the US’s SPR saw its stock levels fall -2.5m. Not to be outdone, gas stocks dropped -1.59m barrels to +213.5m, compared with market projections for a +500k barrel build. Average gas demand over the last four-week’s has fallen-3.4%, y/y. Distillates (heating oil and diesel) fell-737k barrels to +151.5m versus an expected rise +1.1m barrels. Refinery utilization increased +0.7% point to +90% of capacity, whereas the market projected a decrease of -0.4%

Crude prices continue to hold just above strong support levels. The Fed’s monetary policy will be bearish for the dollar and so should be bullish for crude in the longer term.

Ever since the CME changed the margin requirements for gold (+22%), the weaker bulls have had their backs against the wall with prices plummeting. Yesterday, the commodity gained for the first time in three sessions as a weaker dollar revived demand for the metal as an alternative investment. Apart from the administration side effects of owning the commodity, the metal continues to be a recipient of safe-haven flows. This morning’s weaker than expected German GDP print is again providing support. Gold’s prices have more than doubled since the recession began in late 2007. The metals climb has accelerated on the back of the European debt crisis threatening to spread to three of its biggest economies, France, Spain and Italy. The Fed’s efforts to drive interest rates lower to support lending are curtailing the dollar’s appeal as a safe haven and by default, support commodities.

Investors have bought more gold in the last month than in the prior six months according to CFTC data last week. The commodity is heading for its eleventh consecutive annual gain. In this trading environment, $2,000 is very much in the realms of possibility over the next six months ($1,779 +$21.20).

The Nikkei closed at 9,107 up+21. The DAX index in Europe was at 5,877 down-145; the FTSE (UK) currently is 5,272 down-78. The early call for the open of key US indices is lower. The US 10-year eased 1bp yesterday (2.26%) and is little changed in the O/N session.

Treasury prices were little changed along most of the yield curve Monday, apart from long-bonds, who happened to have a lousy 30-year auction last week, as global equities found some of their lost ‘mojo’. Investors are looking for any signs of stability after last weeks hyped up volatility sent them scurrying to the exits demanding safe heaven product.

With the short end of the yield curve resigned to trading on top of o/n fed funds, dealers will expect longer-dated product to trade more volatile as investors reach for yield and on speculation that the Fed may extend bond buying away from shorter-dated notes and towards 10-year notes to help stimulate the economy. Month-to-date, treasuries prices have surged, pushing 10-year yields down more than-50bp. For the near term, bond investors are likely to continue to keep a close eye on equities as they dictate Treasuries’ moves.

August 11, 2011

Central Bank’s Battle with Currency’s

Filed under: OANDA News — Tags: , , , , , , , , , , , — admin @ 4:39 am

It has been awhile since Cbanks have made investors so trigger happy. This week, the market did not even get time to digest the magnitude of Bernanke comments before rumor mongering forced risk to ‘go walk about’, pressuring policy makers to be at the ready to defend their currency. This market is constantly trading looking for Cbank activity. There are there.

So far, the SNB has been the most innovative. For political or operational reasons, they seem extremely hesitant to intervene directly in the FX market to weaken an ‘overvalued’ currency. To them, no measure is excluded when it comes to concerns about the CHF. This year, it has appreciated +31% against the EUR. So far, policy makers have boosted liquidity in money market’s and pushed borrowing costs to zero. This has had little effect on the currency value, a value which is choking economic growth and exports.

This morning, they have even been thinking about a ‘temporary’ peg to the EUR. Temporary measures are permissible under their mandate as long as these are consistent with long-term price stability. Global policy makers are desperate to weaken their own currencies. Ben’s statement this week will create the perfect ‘funding‘ currency, weakening the dollar without making it an official policy statement. It’s ‘Battle of the Banks’

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 ‘whippy’ session.

Forex heatmap

The market did not even get a day to digest what the FOMC was doing before we had to deal with further Cbank intervention, rumors of French banks in serious trouble, and speculators ‘hell-bent’ on having a go at France. Most of the EUR’s wild moves yesterday can be attributed to French financials exposure to ‘shaky’ sovereign debt and its possible spillover into US banks. Risk aversion remains the dominant theme in this nervous market.

No one is immune and anyone is being blamed, as policy makers continue to be dragged over the coals. SNB’s Hilderbrand is being branded a speculator. To date, the SNB probably executed the most expensive FX trade in history. In Mar 2009 EUR/CHF was at 1.47. After intervening to weaken the currency, the market traded 1.52 and 1.53, a good average to be short. They have not reversed those positions. The best moves they have done since then was probably not intervening and adding to their reserves. By January 2010 EUR/CHF was at 1.40, Jan 2011 1.30 and Tuesday 1.10. They reported FX loss in 2010 was -$26.5b, the first six months of this year -$9.9b and now that we are threatening parity, they may have doubled this years loss again. Wow! It’s no wonder that the Swiss policy makers are tentative over currency intervention.

The dollar is lower against the EUR +0.48%, GBP +0.25% and JPY +0.46% and higher against -1.58%. The commodity currencies are stronger this morning, CAD +0.53% and AUD +0.96%.

The loonie along with other commodity sensitive currencies is again threatening to revisit this week’s low, for CAD that’s above parity. As the market digests the FOMC communiqué, the CAD has fallen on concern that Canada’s largest trading partner’s growth is flat-lining. The loonie is heading for its third straight weekly loss after climbing to 0.9407 late July, its strongest level in more than three-years, as the outlook for the global economy saps demand for risk assets.

There is a flip-side, because of the stronger Canadian fundamentals and yield differential, investors will want to divest away from the EUR and USD. Once the markets absorb all of this weeks Cbanks actions or lack of, there will be an appetite from investors for a second tier reserve basket. Most commodity and interest rate sensitive currencies certainly belong to this basket.

For now, the loonie remains at the mercy of risk aversion trading strategies and commodity prices. In the O/N market, investors look to be better sellers of dollars on rallies (0.9910).

The wild ride for commodity currencies continues, with the AUD being the prime example. A matter of day’s ago, the market was happily singing its praises, witnessing the currency breach the 1.10 barrier, some weaker global data and a credit downgrade later and this growth and interest rate sensitive currency is bouncing back from the USD trading premium a couple of sessions ago.

In the O/N session, Aussie data was mixed. Full-time employment fell -22.2k in July, while part-time employment gained +22.1k, keeping total employment largely flat. June full-time employment was revised down to +18.2k from +23.4k. The unemployment rate rose to +5.1% from +4.9% in June, with the participation rate unchanged at 65.5%.

On the flip-side, consumer inflation expectation fell to +2.7% in August from +3.4% in July. The weak employment print should keep Governor Stevens rate changes in check, remaining on hold until further notice. Even with core inflation still running above the RBA’s target range, the policy makers can afford to step aside, unless there a dramatic collapse in global financial markets. That can be said for all other Cbanks. Just like the loonie, the AUD will trade with the swings in global risk appetite (1.0250).

Crude is higher in the O/N session ($83.84 up +$0.94c). Crude prices have rallied, rebounding from their ten-month low, after the weekly EIA report revealed an unexpected decline in inventories and on speculation that the Fed will implement a third round of asset buying to bolster the economy.

The bullish report showed that oil stocks fell -5.2m barrels to +349.7m. The market had projected a +1.5m barrel build. Crude imports fell-34k barrels per day to +9.07m. The IEA stated that the US’s SPR saw its stock levels fall -2.5m. Not to be outdone, gas stocks dropped -1.59m barrels to +213.5m, compared with market projections for a +500k barrel build. The average gas demand in the last four-week’s fell -3.4%, y/y. Distillates (heating oil and diesel) fell-737k barrels to +151.5m versus an expected rise +1.1m barrels. Refinery utilization increased +0.7% point to +90% of capacity, whereas the market projected a decrease of -0.4%

Currently, crude is holding just above strong support levels ahead of the psychological $75 barrier. Fed monetary policy will be bearish for the dollar and so should be bullish for crude in the medium term.

Gold has surged to another new record high, breaking through key psychological barriers ($1,800), after a US downgrade and on escalating concerns that global economies are losing momentum. The yellow metal continues to be a recipient of safe-haven flows. The metal’s price has more than doubled since the recession began in late 2007 and has rallied more than +6% so far this week. This summer, its climb has accelerated because of the US Congress inability to stabilize the government’s ‘medium-term debt dynamics’, and on the back of Europe’s debt crisis threatening to spread to three of its biggest economies, France, Spain and Italy. The Fed’s efforts to drive interest rates lower to support lending are curtailing the dollar’s appeal as a safe haven.

With global bourses on the back foot, liquidation of the metal to cover margin calls in other asset classes could pare some of these sharp gains. Investors have bought more gold in the last month than in the prior six months according to CFTC data last week.

Year-to-date, the yellow metal has advanced +24.3%, heading for its eleventh consecutive annual gain. This ‘one directional trade’ is far from over, with speculators continuing to look to buy the metal on pullbacks until proven wrong. There remains a demand for the commodity for insurance purposes as alternative asset class. In this environment $2,000 is very much in the realms of possibility over the next six months ($1,794 +$9.70).

The Nikkei closed at 8,981 down-57. The DAX index in Europe was at 5,758 up+145; the FTSE (UK) currently is 5,104 up+97. The early call for the open of key US indices is lower. The US 10-year backed up 10bp yesterday (2.23%) and is little changed in the O/N session.

Treasuries are rising, pushing 10’s and two-year note yields to an all-time low after Ben promised to keep benchmark rates at record lows for two more years in a bid to revive economic growth. The market is trying to flatten that curve quickly.

Yesterday’s government sale of $24b 10-year notes drew a stronger-than-average demand in the second note sale since their debt rating downgrade despite depressingly low yields. Demand for US debt has surged in the last few sessions, as plummeting global bourses boosted the demand for the safety of US product.

The notes drew a record low yield of +2.14% with a bid-to-cover ratio of 3.22, compared with an average of 3.16 for the past 8 sales. Indirect-bidders took down +35.4%, lowest since March 2010. Direct-bidders surged to +31.7%, the highest level in two-years. Today, Treasury issues the final of this week’s supply, +$16b of 30-year bonds. Yield remains in demand and hard to find.

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August 8, 2011

Market Outlook 8/8/11

Filed under: Forex News — Tags: , , , , , , , , , , , , , — admin @ 7:42 am

This morning the markets are responding reasonably well after Friday’s S&P downgrade of the US.  The beleaguered ratings agency, who some say was largely responsibly for the banking crisis of 2008 dropped the US from AAA to AA as they forewarned if serious deficit reduction wasn’t agreed to in the debt ceiling debate.

While stocks and oil are much lower to start the day, gold has surged to new nominal all-time highs at $1715.  The currency market sees this as “much ado about nothing” as it is trading orderly and looks like just another volatile day.

Because indeed, this much ado about nothing.  There is a 0% chance that the US will default on its obligations as the Fed has the ability to turn on the printing press and print money to satisfy our creditors.  However, this could be a question of valuation as the Dollar would be worth far less in that situation.

And that is one of the issues that some aren’t taking into consideration, that not only is it important that we are able to repay our debts, but that we are able to do so with something of value.  Currency risk and political risk are all factors that need to be considered, and I think this is a great wake-up call for those in Washington DC who wish to continue to do business as usual.

Meanwhile in the Euro zone, the ECB has agreed to step up its purchases of Italian and Spanish debt, essentially trying to keep yields low so that debt can be repaid.  While there is still risk in the marketplace, the global slowdown is a far bigger risk than the US potentially defaulting.With no other news on the docket today, all eyes will be looking toward the FOMC meeting tomorrow which is bound to address this new development.  Many in the market believe that this will lead to another round of quantitative easing (QE3), though its effectiveness at this juncture is uncertain.  Some argue that the temporary kick we got from it was ineffective as the markets right now are back to pre-QE2 levels.

So there is risk aversion in the markets today, with the Dollar strengthening in what some might see as a counter-intuitive move.  However this could become a case of sell the rumor, buy the news as this really is nothing more than egg on the face of Washington DC politicians who are conveniently on vacation until the end of the month.  Get it together people!

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August 5, 2011

July 29, 2011

Three More Strikes against the EURO

Filed under: OANDA News — Tags: , , , , , , , , , , , — admin @ 4:33 am

Euro-sovereign debt fear is again dominating this mornings market. Moody’s has placed Spain’s Aa2 rating on review for a possible downgrade and has threatened to lower the ratings on four Spanish banks. Arguably not in the Greek boat just yet, Spanish 10-year yields have backed up +60bp so far this month. Once the market begins to lose confidence, yields creep much quicker, just look at Italy this week, surging Italian yields on speculation that Tremonti may quit.

Euro-zone inflation rate fell to +2.5% in July, after having climbed +2.7% in June, y/y. It’s still above the ECB’s target of just below +2%. Perhaps this may persuade Trichet and company that further tightening is not warranted over the coming months.

The EUR bulls should be more concerned now that the currency has failed to rally significantly on the back of inept Washington politicking doing everything it can to destroy trust in the dollar. What if the lawmakers finally get’s their act together and increase the debt ceiling?

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

Forex heatmap

US data yesterday was positive for the dollar, certainly encouraging after that soft durable goods print earlier in the week and especially so amongst this political high stakes fiasco being played out in Washington.

US Pending Home Sales surprised to the upside again this month, adding a +2.4% month-over-month increase in June to the +8.2% gain in May. The market will take this as a good omen for existing home sales, which analysts note ‘lagged severely in the previous monthly reporting cycle’. It is not unusual for both reports to move in opposite directions, especially in a one month cycle, but it will be unusual for it to extend into a second consecutive month. Big picture, all the signs point to the future level of sales to ‘remain weak in absolute terms’, however, yesterday’s print may suggest that the market may be overestimating the weakness. Let’s hope so, this sector needs a break!
 
US weekly claims was a pleasant surprise (+398k vs. +422k). The market prefers to buy into last weeks print with some gusto, believing the prior two releases (July 9 and 16) were unnecessarily depressed by ‘seasonal adjustment factors that still look too large’.
This report comes relatively late in the month and should not influence many to readjust their already weak prediction for next weeks NFP report. The market will now be hoping that the ‘new’ trend remains the markets friend, aiding August’s employment tally. However, there are a considerable chunk of new potential claims to be recorded from banks (HSBC, GSNY, Credit Suisse etc). With financial institutions under pressure to cut headcount, the broad market will eventually follow.

The dollar is higher against the EUR -0.40%, GBP -0.59%, CHF -0.01% and lower against JPY +0.08%. The commodity currencies are weaker this morning, CAD -0.16% and AUD -0.55%.

Earlier this week the CAD wore the ‘safer heaven’ hat as investors happily pushed the currency towards its four-year high. The rampant currency has taken a reprieve like most of its trading partners did against dollar. Some of the growth currency moves this week have been too quick, too strong and too far.

Overall, the game plan has not changed for this commodity and interest rate differential driven currency. Technically, there was strong dollar buying by corporates and institutions, acquiring fresh dollar long positions once the buck traded on top of its three and a half year lows. One of the factors pressurizing the loonie was the US durable goods orders for June falling for the second time in three months. Growth and risk currency pairs are very sensitive to these debt ceiling and Euro-contagion headlines of late. However big picture, the currency is still riding Carney’s hawkish coat tail comment from last week that has futures traders pricing in at least one more hike by year-end despite a subdued CPI print. Investors are looking forward to today’s GDP print for further currency bullish confirmation. Currently, the market is in dollar sell up tick mode. Of course, the US political fiasco may throw another spanner into the works before the weekend! (0.9505).

The AUD came under pressure in the O/N session, paring some of this week’s advance, as the US continues to struggle to find a long-term solution to curb its deficit, reduced demand for riskier investments. Moody’s putting Spain’s credit ranking on review for a possible downgrade is also affecting the risk appetite of investors.

Earlier this week, the currency vaulted to a post float record after the market digested a higher than expected second quarter inflation print. Year-to-date, the currency has climbed +23% against the greenback, as a mining-investment boom has driven unemployment to below +5%. Higher inflation data points to a rate hike rather than a cut. With core-CPI advancing by +0.9% on the quarter and +3.6% on the year is a blow for the doves who expected Governor Stevens to perform a rate cut before the year is out, beginning with a 25bp cut in December. US politicians will dictate investors next move. The market continues to wait for Washington.

Crude is lower in the O/N session ($96.88 -0.56c). US fundamentals benefited oil prices yesterday, first time in a while, edging higher after weekly US jobless claims fell to their lowest level in almost four-months. The market took this as a sign that future energy consumption may increase as the weakness in the labor market fades.

Midweek, the commodity came under pressure as weekly inventories unexpectedly increased. The market had been expecting another drawdown on stocks. However, the EIA reported a data gain of +2.3m barrels to +354m last week. The build up should have not been a surprise after the SPR announcement last month. The Energy Department also announced that they will deliver +30.6m barrels of crude oil from the US’s SPR in July and August. Not to be out done, gas inventories rose +1.02m barrels to +213.5m. Stockpiles of distillate fuel (heating oil and diesel) surged +3.39m barrels to +151.8 m, its highest level in three-months. Refineries operated at +88.3% of capacity, down-2% from the prior week and the biggest decline also in three-months.

Until the market can expect some sort of US debt resolution, the oil market should look forward to remaining volatile. Big picture, failing to raise the debt ceiling would mean the US could either default or have to cut spending on a variety of social services, which would have a negative affect on domestic oil demand, translating into lower prices.

Gold prices fell for a second consecutive day yesterday on investor sales after the commodity surged to new record prints this week as the “prolonged” US debt stalemate boosted demand for the yellow metal as a haven. Some investors needed to sell the commodity to cover increased deposits on margin accounts in equity markets.

Year-to-date, the yellow metal has advanced +15.3% and +8.2% this month alone, heading for its eleventh consecutive annual gain. Despite many believing that a deal will be done, “Rational” fear ahead of “the” decision continues to pressurize the dollar, hurting bonds and benefiting commodities. In real terms you are not making any money by just holding cash, so there is a demand for gold as a store of wealth. This ‘one directional trade’ is far from over, with speculators continuing to look to buy the metal on pullbacks until proven wrong ($1,615 -0.40c).

The Nikkei closed at 9,833 down-56. The DAX index in Europe was at 7,136 down-54; the FTSE (UK) currently is 5,839 down-34. The early call for the open of key US indices is lower. The US 10-year eased 4bp yesterday (2.93%) and is little changed in the O/N session.

Treasuries rose, pushing 10-year yields to a one-week low yesterday, on concern that the debt ceiling impasse will end up damaging the US economy even more. By day’s end, yields ended up backing away from their lows as investors worried that lawmakers would not reach a deal and on the back of the seven-year auction. The $29b issue was the last of the week, it did see weaker demand, similar to the five’s, but a ‘no buyers strike’.

The seven’s were sold at a yield of +2.28%, compared to +2.26% just before the sale. Non-dealers took +39.6%, higher than last month, but below the four-auction value of +42.1%. The bid-to-cover was 2.63, compared to the average of 2.82. Now, the market waits on both political US parties to do their magic and buy back some foreign respect. On the flip side, even if Treasuries were downgraded, there’s not a lot out there of alternatives investment strategies now that there is so much cash on the sidelines.

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July 21, 2011

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