Forex Blog

June 16, 2011

Will Greece Default?

Filed under: Forex News — Tags: , , , , , , , , , , , , , , — admin @ 7:10 am

That is the question weighing on the market right now as the in-fighting amongst Euro zone members appears to be dominating discussions. With no resolution in sight, risk aversion is heightened in the marketplace as global markets have sold off and the US dollar has strengthened on the flight to safety trade.

This is clearly the major theme in the markets and all else is taking a backseat until this situation is resolved, for better or worse. Meanwhile, there are riots taking place in Greece, and the Greek PM has changed his government cabinet which may be akin to rearranging the deck chairs on the titanic!

This situation and crisis threatens the global banking system and the consequences of a Greek default are unknown at this time. Whether the Euro can survive remains to be seen, especially if there is contagion to the other indebted nations. What is certain is that markets will be volatile as they hate the uncertainty of the situation.

CPI data came in for the Euro zone slightly lower than expected, though no one at this point can possibly be expecting a rate hike anytime soon at this stage of the game.

In the UK, retail sales figures came in worse than expected, posting monthly declines which sent the YoY figures to near flat.

In Switzerland, the SNB left interest rates unchanged at .25%, as recent franc strength has hurt exports.

So the markets are starting the morning in risk aversion mode, with stocks lower though commodities are slightly higher. Later this morning, the release of data in the US including housing starts, initial jobless claims, and the Philly Fed are unlikely to change sentiment.

In the forex market:

Aussie (AUD): The Aussie is lower as risk aversion has dampened the demand for yield-seeking in favor of the safe-haven play.

Kiwi (NZD): The Kiwi is also lower across the board for the same reasons as the Aussie, even though yesterday’s performance of manufacturing index came in better than expected.

Loonie (CAD): The Loonie is also lower due to risk in the marketplace, and Canada’s close ties to the US may be more of a hindrance to their economy than a help.

Euro (EUR): What more can we say about this Euro situation? Right now it is a game of “wait and see” but the prospects for a resolution look bleak. There are stories being floated that Greece may get the IMF money even if there is no resolution, but that only provides temporary relief and doesn’t fix the problem.  (Click chart to enlarge)

eurusd0616.JPG

Pound (GBP): The Pound is also lower after UK retail sales figures came in worse than expected, showing declines of 1.4% for the month vs. and expectation of a decline of .6%, pushing the YoY number down to .2% from an expected 1.7%. So the economy is definitely contracting, but will this provide inflation relief?

Swissie (CHF): The franc is stronger across the board on the fight to safety trade despite the fact that the SNB did not change monetary policy which was as expected. (Click chart to enlarge)

usdchf0616.JPG

Dollar (USD): The Dollar is showing continued strength on risk aversion and the data so far this morning for the US actually did come in better than expected, though not enough to reverse sentiment at this point. Building permits came in higher than expected, and initial jobless claims were lower than expected, but still above 400K.

Yen (JPY): The Yen is also stronger this morning as the demand for carry trades and risk appetite has been put aside in favor of the safe haven play.

It was only a matter of time before it came time to “pay the piper” and it is very alarming that EU leaders let this situation become this bad. Short-term interest rates in Greece had been rising for some time and they should have known that issuing debt at those levels was not feasible.

Essentially world markets have been hijacked and held for ransom by governments unable to do their jobs. Salutary neglect is not a sound policy and meaningful steps need to be taken to resolve the issues. Not just in the Euro zone, but around the globe. Imbalances exist for a variety of reasons and now we are at such extreme levels that something has to give.

With the global economy slowing as a result of decreased confidence, austerity measures, and bad government, it will be very difficult to return to growth. In the meantime, volatility will persist until the hard choices are made and accepted by the people. There has to be a belief and hope that things will get better, even though no one seems to be doing anything to make that happen.

So try to invest in the areas that seem to be doing the best job to return to prosperity, and avoid those looking to kick the can further down the road. The forex market is one excellent way to do just that!

To learn more about how you can take advantage of world events through the currency market, be sure to check out our currency trading courses!

To follow these events live with a free, real-time practice account, click here! Don’t miss out on the world’s fastest growing market!

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December 15, 2010

Moody’s plays the Grinch, Dollar rally limited

Filed under: OANDA News — Tags: , , , , , , , , , , , , , — admin @ 11:04 am

We might downgrade, we might not downgrade. Moody’s stating that they are considering downgrading Spanish Government debt further is just another example of irresponsible credit management reporting. When Capital Market liquidity is at a premium, the swings tend to be over exaggerated. For most of this month investors have focused on US yields for dollar guidance. Not surprisingly, the dollar has extended its gains this morning after the contagion rating announcement despite slightly lower US yields. Be forewarned, a soft US inflation print again will be supportive for continued QE and help US debt to find their feet after the recent selloff, limiting the dollar gains. Similarly, expect the ongoing Fed purchases to push US yields lower over the holidays, leaving the USD vulnerable as long as Euro periphery news remains subdued.

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

Forex heatmap

Yesterday’s US data was a welcome surprise. US core-retail sales aggressively beat expectations (+1.2% vs. +0.6%),. It was twice the expected pace and its strongest growth in nine months. The headline print also edged higher, managing to record its seventh consecutive monthly gain (+0.8% vs. +0.6%). On the face of it, the uptick in retail sales was most likely volume related and not price. Even the revisions made a strong market affect. The previous months results were revised substantially higher, with the headline print posting a gain of +1.7% (up from the original +1.2%) and core-receipts were up +0.8%, double the original estimate. Digging deeper, the underlying data was equally encouraging. Analyst’s note that retail sales ex-autos, building materials and gas (a component that that feeds directly into GDP) was up +0.92%, the most in nearly a year. Gains were widespread across most of the subcategories, with 8 posting gains and 9 better results. The top performing categories included clothing (+2.3%), sporting (+2.3%) and restaurants (+2.1%). While declines in autos (-0.8%), electronics (-0.6%) and furniture (-0.5%) provided the offset. It seems that consumers are stepping up to the plate and loosening their purse strings and buying discretionary items. It’s worth noting that the discretionary spending subcategory has been increasing over the past five months, also suggesting that the consumer psyche is turning the corner.   

US PPI came in higher than expected, again beating market expectations (+0.8% vs. +0.6%), while core-PPI (ex-food and energy) recorded a +0.3% gain. Year-over-year, both the core and headline advanced +3.5% and +1.2%, respectively. Most of the headline gain was contributed by higher prices of energy goods (+2.1%, index weight of 20%) and consumer foods (+1.0%). Since its lows last December (-0.6%), core-PPI has advanced just under +2%. The usual constraints of household balance sheets, an uneven labor market outlook and excess economic slack, continue to limit pricing power and the knock on to the consumer basket.

The Fed provided us with a ‘modest’ upgrade to the economic outlook yesterday and left policy settings unchanged, as widely expected. In the first paragraph of the communiqué, the committee said the ‘economic recovery is continuing, though at a rate that has been insufficient to bring down unemployment.’ The description of household spending was also upgraded from ‘increasing gradually’ to ‘increasing at a moderate pace’. What happened to retail sales then? Policy makers again have widened their take on the depressed character of housing activity, broadening their scope from ‘starts’ to ‘housing sector’. Finally, despite the somewhat brighter growth situation, ‘measures of underlying inflation continued to trend downward’, a comment that analysts believe is slightly stronger than ‘have trended lower in recent quarters’. It was another boring FOMC meeting ‘to maintain a super-accommodative posture in US monetary policy’.

The USD$ is higher against the EUR -0.56%, GBP -0.45%, JPY -0.42% and CHF -0.17%. The commodity currencies are weaker this morning, CAD -0.25% and AUD -0.83%. Yesterday Canadian labor productivity happened to unexpectedly edge higher (+0.1%) after falling a revised -0.6% in the 2nd Q. The 3rd Q gain reflects modest growth in the Canadian economy (+0.1%) and notably with no changes in the hours worked. To date, in the 4th Q, data is shaping up to repeat a negative decline. This month the loonie has gained +1.8% outright vs. its largest trading partner. Gains in commodities and stocks have been making economic growth currencies more attractive. The CAD has only witnessed modest strength as Governor Carney highlighting the dangers of a persistently strong domestic currency. The loonie continues to struggle within striking distance of parity because of the strong corporate interest to own dollars there. The market expects support for the loonie from the Russian Cbank on dollar rallies on the back of their desire to convert approximately 1-2% of their reserves into loonies. Some of the currencies shine has been taken away with Governor Carney’s comments after the BOC kept rates on hold last week. Carney acknowledged economic growth in the second half of this year is weaker than previously anticipated and expressed concern about the expected recovery in net exports (that’s a strong loonie problem). The market has taken this as a dovish sign for rates. Corporate dollar interest near parity should provide resistance for the loonie until the New-Year.

The AUD fell for the first time this week outright in the O/N session as US Treasury yields climbed, narrowing the yield advantage of assets down-under. The currency has fallen against all its major trading partners on fear that China will act in answer to slow inflation, thus reducing the demand for growth sensitive and higher-yielding assets. Earlier this week, the Aussie had rallied on the back of stronger commodity and equity prices as investors tried to embrace risk. The currency briefly was able to penetrate the parity level, which remains a strong resistance point. The AUD has climbed +9.8% this year (second biggest winner after JPY), on prospects for commodity-driven economic growth and the yield advantage of the nation’s debt compared with other developed markets. Domestic data remains strong, this months employment data blew all analysts expectations out of the water and supports the currency on pullbacks. Not aiding the currency is the concerns for long dated interest rates in the US. Analysts are beginning to agree that the tight labor market will bring the RBA back into the picture, but believe that Governor Stevens is not behind the curve just yet and will not be required to hike rates in February. With consumers boosting their savings significantly in an environment of rising job and wage growth, suggests that the RBA is still ahead of that curve. Governor Stevens has also mentioned that rates are ‘appropriate’ for the economic outlook. Investors remain better buyers on dips, planning an assault on parity again (0.9897).

Crude is lower in the O/N session ($87.54 -74c). Crude prices have fluctuated after the FOMC statement and ahead of today’s weekly inventory report that is expected to reveal another drawdown on stocks. The black-stuff had garnered support from reports over last weekend revealing that China’s refiners increased their processing rate last month. The world’s biggest energy consumer boosted their net imports of the black stuff by +26%, m/m, and increased their processing rates to ease a diesel shortage. Coupled with OPEC announcement to maintain their production quotas and the PBOC refraining from tightening monetary policy is supporting the market, probably to the year end at least. OPEC believes that supply and demand are ‘in balance,’ and expect demand growth will slow as the global economy struggles to recover, amid ample supplies. Recent prices have already been elevated on the back of last week’s large fundamental drawdown of inventories and not on the strength of the dollar. The EIA inventory crude headline fell -3.82m barrels to +355.9m. Supplies were forecasted to drop by -1.4m barrels. Technically, the rise in these categories confirms there is nothing wrong with supply, but the demand picture in the US is not that robust. This is certainly in contrast to the stronger fundamentals that are occurring in Asia. Technically, expect the market to meet resistance again at the $90 high printed earlier this month.

Gold prices have found support from China refraining to hike interest rates over the weekend. The muted response to the PBOC decision to raise banks reserve requirements to +18.5% gave investors the green light to strap on some risk. Market fears that China would tighten monetary policy had eroded the demand for precious metals for most of this month. Bottom feeders have managed to stem the slide, believing that the $60 fall from its highs last week was a good opportunity to own a store of value as an alternative investment. It was only natural to see some profit taking after gold surged to a new record ($1,432.50). The commodity remains supported by the persistent concern over Euro debt levels. To date, debt contagion has driven investors into the third ‘reservable’ currency as they seek a store of value. Despite the fear that China will tighten their monetary policy, most likely in the New-year, a move to curb speculation and dampen inflation, global demand remains robust. Even though the one direction trade feels overdone, investors continue to hold gold as a hedge against currency debasement and long-term inflation. The Euro-zone backdrop is trying to put a floor on metal prices on demand for a haven. Year-to-date, the metal is up + 27.5% and is poised to record its 10th consecutive annual gain ($1,393 -$11.10c). Technical analysts believe that gold will outshine other precious metal in 2011 and peak somewhere above $1,600 in 2012.

The Nikkei closed at 10,309 down-7. The DAX index in Europe was at 6,985 down-42; the FTSE (UK) currently is 5,874 down-17. The early call for the open of key US indices is lower. The US 10-year backed up 18bp yesterday (3.47%) and eased 6bp in the O/N session (3.41%). Treasury prices plunged, pushing yields up to June levels on the back of a retail sales print aggressively beating all market expectations, partly on unconfirmed rumors that China was selling treasuries and with the Fed staying the course and maintaining a $600b program of debt purchases. Fundamentally, the market is benefiting from a drop in risk aversion and an improvement in the economic outlook. With no Government supply coming down the pipe for a couple of weeks, one would expect some support for yields at these levels. Fear of a Spanish downgrade is providing the early support for bonds this morning.

November 23, 2010

Republic downgrade hurts EUR focus shifts to Iberia

Filed under: OANDA News — Tags: , , , , , , , , , , , , , — admin @ 11:00 am

When bringing ‘these’ PIGS to their knees, two out of four is not a bad hit ratio. However, Capital Markets seem intent on the perfect record. Political uncertainty has taken the gloss off the EU/IMF Irish handout, a headline number yet to be determined. Even Moody’s has a nail for the coffin, saying that a rescue package could cause another debt burden that would pose a ‘credit negative’ for Ireland. Contagion concerns are affecting the EUR. To date, the currency’s vulnerability is cushioned by a weak dollar, but, with Euro periphery bonds spreads widening, it will soon rain on any Spanish party. The more ‘punters’ talk about an Irish bail out and the need for private creditors to take a ‘haircut’ on bad debts, the more risk aversion trading strategies will be implemented, with EUR selling the way.

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

Forex heatmap

Finally we get something else to focus on rather than event and contagion risk running amuck. The market has been starved for some fundamental releases of late and today its delivered in this shortened trading week in the US. It most likely will not matter as contagion and event risk fear continue to dominate. The dollar was already sought after before the O/N skirmish in Korea and now it seems well supported as investors turn their attention towards Spain and Portugal. Euro data this morning has been on the positive side despite the issues in Ireland, and softening the fall for the EUR. Growth in the Euro-zone private sector expanded sharply this month, supported by strong performances in France and Germany and this despite the southern periphery concerns. The preliminary composite PMI for the Euro-zone rose to 55.5 from Octobers 53.8. The services PMI also rose more than expected to 55.2 from 53.3 while manufacturing gained to 55.5.

The USD$ is higher against the EUR -0.42%, GBP -0.24%, CHF -0.01% and JPY -0.12%. The commodity currencies are weaker this morning, CAD -0.06% and AUD -0.77%. The loonie has backed down from its highest levels in over a week as a renewal of risk aversion diminished demand for assets tied to growth. With commodities under pressure is bound to act negatively on the CAD. On the crosses, the loonie has held its own, but vs. its largest trading partner, the dollar has taken the broader lead. Contagion and tighter emerging market policies is beginning to have an impact on overall growth positions. Like any commodity and growth sensitive currency, market increased risk-appetite favors the loonie. However, this time risk aversion trading strategies are being implemented. Earlier this week, BOC Governor Carney said that their monetary policy was flexible that he would adjust interest rates to meet inflation targets if the loonie continued to strengthen. The BOC has greater flexibility than the Fed as a result of a more robust recovery. Market waits for this morning’s data for general guidance rather than hearsay.

Like all growth currencies, the AUD is under pressure on concern that Ireland’s debt crisis will cause contagion across other southern European nations, damping demand for higher-yielding assets. With global bourses seeing red and commodities on the back foot is providing little support for the Aussie short term. There is also the little matter of a skirmish in Korea. As the leading commodity currency, the AUD is highly vulnerable to any Chinese monetary actions. Any currency gains have been somewhat capped after China ordered banks to set aside larger reserves for the second time in two weeks, draining cash from the financial system to limit inflation and asset-bubble risks earlier this week. From a fundamental perspective, thus far the decline has been somewhat limited after last weeks minutes indicated that Governor Stevens decision to raise interest rates was ‘finely balanced’. Policy makers said a ‘modest tightening’ was considered prudent when they increased the benchmark rate earlier this month (+4.75%). Market players are viewing corrective rebounds as fresh selling opportunities short term on the back of the Chinese and Euro variable (0.9825).

Crude is lower in the O/N session ($81.45 -29c). Crude again is having problems finding support from any quarter. The commodity is under pressure on speculation that Ireland’s bailout will not slow the spread of Europe’s debt crisis, hindering economic growth. Last week we had the Chinese decisions to rein in inflation. Speculators are beginning to cut their long positions amid the fallout from the Irish debt crisis and the PBOC efforts to curb inflation assuming event risk will sap demand for fuel. Crude stocks falling -7.3m barrels last week, the largest weekly decline in 15-months has done little to lend support. The market had been expecting a small decline of-100k barrels. Even gas inventories were down -2.7m barrels, while distillates (heating oil and diesel) fell by -1.1m. Despite the negative readings, the US continues to experience a ‘large supply glut’, with crude and fuel inventories above five-year average levels. In September, inventory levels happened to print a 27-year high, and have been declining ever since. The ‘big’ dollars value will continue to influence prices despite the fundamentals. Continue to follow the dollar for direction as fundamentals take a back seat.

The euphoria of the Irish bail out is proving short lived and is trying to pressurizing commodity prices as the dollar rallies vs. the EUR. Initially, the yellow metal lost support as investors began to price out the insurance premium once an EU/IMF deal was agreed in principle. The commodity is experiencing its longest losing streak in six months. Last week when the dollar came under pressure it boosted the demand for the commodity as an alternative investment. Investors, for most of this year, have been using the commodity as a hedge against inflation and store of value. The fear that emerging markets are beginning to tighten their monetary policy could curb the demand for the commodity as a safe-haven asset. Speculators are tentatively hoping that European debt concerns to eventually provide stronger support on these pullbacks, anticipating that Capital Markets may shift their focus toward other Euro-zone debt issues. Year-to-date, the metal is up + 21.8% and is poised to record its 10th consecutive annual gain ($1,364 +$6.60).

The Nikkei closed at 10,115 up +93. The DAX index in Europe was at 6,804 down -17; the FTSE (UK) currently is 5,657 down -33. The early call for the open of key US indices is lower. The US 10-years eased 9bp yesterday (2.78%) and are little changed in the O/N session. Treasuries prices continue to climb after Moody’s said it may downgrade Irish debt by more than anticipated yesterday. This has provided the demand to own ‘the relative safety of US debt’ despite the US Government coming to the market with $99b of new product this week ($35b-2’s, $35b-5s and $29b-7’s). Investors are happily reversing some of the upward shift in the yield curve as the Fed’s buyback program, dovish rhetoric and risk-aversion trading strategies finally start to kick in. Yesterday there was $35b 2-year notes sold at a yield of +0.52% vs. +0.527% WI’s. The bid-to-cover ratio was 3.7 compared with the four auction average of 3.42.

November 22, 2010

Irish clarity needed to support EUR

Filed under: OANDA News — Tags: , , , , , , , , , , , , , , — admin @ 11:07 am

It was inevitable. Ireland had no choice but to seek financial help. All the market has ever asked for was clarity. We still wait for the details of the assistance and the conditionality. What will the relief rally be like this morning in North America? Thus far, it has not been that impressive in the O/N session. Maybe investors had expected a clear cut resolution. This toing and froing between the Irish Government and EU/IMF team may persuade investors to shift focus to the fiscal woes of other debt laden peripheries like Spain and Portugal. It was this fear of a looming contagion that prompted officials to press Ireland to accept aid early. At the moment the market seems rather ambivalent to the resolution and more concerned with China’s monetary tightening actions.

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

Forex heatmap

With the lack of fundamental releases over the last two trading sessions it was bound to happen that any relieving news from Dublin would act negatively on the dollar as investors again took back some of their insurance premium. With a holiday shortened trading week in the US, the market has much data to get through. The Irish resolution only ever called for clarity, and again we have to wait for details. Do not be surprised to see focus shifting to other debt laden euro-zone countries as investors try to gauge who will be next to use EU/IMF funds, maybe Spain or Portugal!

The USD$ is lower against the EUR +0.51%, GBP +0.58%, CHF +0.30% and JPY +0.11%. The commodity currencies are stronger this morning, CAD +0.40% and AUD +0.68%. The loonie was battered about on Friday after China’s new reserve requirement for Bank’s were announced, discouraging demand for assets related to economic growth. It was the second consecutive weekly loss for the currency vs. its largest trading partner as commodity prices found it difficult to maintain traction. Like any commodity and growth sensitive currency, market increased risk-appetite favors the loonie. Last week’s net foreign security purchase print and the provincial bond spread’s tightening to Canada’s continue to provide longer term support for the currency. Yesterday, BOC Governor Carney said that their monetary policy was flexible that he would adjust interest rates to meet inflation targets if the loonie continued to strengthen. The BOC has greater flexibility than the Fed as a result of a more robust recovery. At the moment, the market is tentatively happy buying the loonie on any dollar rallies as risk appetite increases and growth sensitive currencies benefit.

The AUD is inching higher, tracking the EUR, as Irelands acceptance of any aid package has revived demand for higher-yielding assets and reduce concern that the European nation’s banking crisis may spread. Even news that S&P’s had put NZD on negative watch prompted only a brief dip for the currency. Commodity and growth sensitive currencies have taken a specific beating over the last week as the Irish debt problems talks intensified. As the leading commodity currency, the AUD is highly vulnerable to any Chinese monetary actions. So, O/N gains have been somewhat capped after China ordered banks to set aside larger reserves for the second time in two weeks, draining cash from the financial system to limit inflation and asset-bubble risks. From a fundamental perspective, the decline have been somewhat limited after last weeks minutes indicated that Governor Stevens decision to raise interest rates was ‘finely balanced’. Policy makers said a ‘modest tightening’ was considered prudent when they increased the benchmark rate earlier this month (+4.75%). Market players are viewing corrective rebounds as fresh selling opportunities short term on the back of the Chinese variable (0.9938).

Crude is higher in the O/N session ($82.54 +56c). Oil prices on Friday solidified the commodity’s biggest weekly loss in three months on the back of China’s decision to raise banks’ reserve ratios. Market anticipates further monetary action to follow. The commodity also ended under pressure despite last week’s surprisingly weak EIA report. Investors remain on tender hooks, fearing that China may also attempt to rein in inflation further, which would also affect demand. Now that the dollar is on the back foot in the O/N session has given commodities a small lift. Crude stocks fell by -7.3m barrels last week, the largest weekly decline in 15-months. The market had been expecting a small decline of-100k barrels. Not to be outdone, the other fuel categories also declined. Gas inventories were down -2.7m barrels, while distillates (heating oil and diesel) fell by -1.1m. The market had expected a decline of-600k and -2.2m barrels respectively. Despite the negative readings, the US continues to experience a ‘large supply glut’, with crude and fuel inventories above five-year average levels. In September, inventory levels happened to print a 27-year high, and have been declining ever since. The ‘big’ dollars value will continue to influence prices despite the fundamentals. The oil market has lost -6.2% during the last five trading sessions. Continue to follow the dollar for direction as fundamentals take a back seat.

Gold prices have again tentatively found their footing after experiencing its longest losing streak in six months earlier last week. With the dollar under pressure has boosted the demand for the commodity as an alternative investment. Investors are back in the saddle using the commodity as a hedge against inflation and store of value. The fear that emerging markets are beginning to tighten their monetary policy could curb the demand for the commodity as a safe-haven asset. For most of last week a stronger greenback had restricted the demand for bullion, with gold usually trading inversely to the dollar. Speculators are expecting European debt concerns to eventually provide more support on these pullbacks, as Capital Markets shift their focus toward sovereign debt issues and away from QE2 debates. Year-to-date, the metal is up + 23.1% and is poised to record its 10th consecutive annual gain. For most of this year, speculators have sought an alternative investment strategy to the weaker dollar and have been using the commodity as a proxy for a ‘third reservable currency’ ($1,357 +$5.50).

The Nikkei closed at 10,115 up +93. The DAX index in Europe was at 6,878 up +35; the FTSE (UK) currently is 5,749 +17. The early call for the open of key US indices is higher. The US 10-years eased 8bp on Friday (2.87%) and is little changed in the O/N session. Over the past two week’s the FI market has witnessed an aggressive upward shift in the yield curve despite the Fed’s buyback program, dovish rhetoric and risk-aversion trading strategies. Stronger US data has increased sentiment that Bernanke and Co. will be successful in boosting economic growth and avoiding deflation. Expect dealers to again cheapen up the curve ahead of this week’s new supply, the treasury will sell $99b of product ($35b-2’s, $35b-5s and $29b-7’s).

September 3, 2010

NFP or Russian Roulette anyone

Filed under: OANDA News — Tags: , , , , , , , , , , , , — admin @ 9:37 am

It’s like attending a bingo session. All eyes will be down waiting for the highly anticipated employment print this morning. Will this week’s ADP report translate into a much weaker jobs number? Will the stubbornly elevated weekly claims push the unemployment rate up two ticks? Will analyst’s consensus of a headline loss of -100k jobs and no growth in the private sector provide us with a non-event as we head into the ‘labor’ weekend? Expect liquidity to be thin as many New Yorkers skip out of town averting the storm ahead of the holiday. It’s another crap-shoot. Spin the wheel, black or red?

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 in the O/N session.

Forex heatmap

We had a plethora of data to digest yesterday ahead of this mornings highly anticipated employment report. It will either be a snooze, non-event heading into this long North American weekend or the results will force traders to react like ‘elephants in a china shop’. In his communiqué yesterday, Trichet met market expectations, again announcing that emergency lending facilities would be extended into next year. Somewhat of a surprise was the EU’s policy maker’s small upward revision to next year’s views. They now expect to come inside a range of +0.5% to +2.3% (up from +0.2% to 2.2%). Could they not have made it any wider! The inflation outlook was also revised up a tad to a range of +1.2-2.2%. It’s worth noting and not surprising that they again identified risks to the downside and flagged renewed tensions in financial markets. Policy makers have no intention ‘to signal any change in rates and remains apart from experiments elsewhere with respect to providing rate guidance’.



The dreaded weekly claims reports potentially points to a downside risk to this morning employment print. Analysts note that initial claims (+472k vs. +475k) remains ‘stubbornly elevated and at a level inconsistent with any expectation for meaningful job growth’ and supportive of renewed private job losses. Digging deeper, continuing claims fell by -23k to +4.456m (2nd consecutive week of declines). Up to date, the average has been hovering around the +4.5m mark as claims push further into extended (+894k) and emergency (+4.1m) categories. Since bottoming at the end of the 1st Q, extended benefits have surged higher by +531.6%. Not to be out done, emergency benefits have seen a similar fate and rallied +50%. With unemployment assistance being extended until the end of Nov. has caused the massive surge in both categories.

And finally, US pending home sales unexpectedly jumped yesterday (+5.2% vs. -1%). Any other day and the market would have paid more heed, but, a day before NFP where market participants try to batten down the hatches, there was no excitement. Technically this is the first ‘bullish’ news we have had to digest in the US housing market for some time. Analysts have been quick to explain the huge monthly jump away, the growth is coming off the lowest base ever (June was all-time record low). On level terms, the July data is only ‘ever so slightly better’ and remains insufficient to counter mounting stockpiles of unsold and shadow inventories. So, it’s back to our doomsday housing scenario. 



The USD$ is lower against the EUR +0.05% and higher against GBP -0.01%, CHF -0.17% and JPY -0.10%. The commodity currencies are weaker this morning, CAD -0.18% and AUD -0.15%. The loonie pared some of its euphoric rise, a day after its largest gain in three-months, on concern that US job losses will stall the global economic recovery. Next week’s BOC call is a spilt vote amongst analysts. Fact, futures are pricing in a +40% chance of the BOC tightening. It’s probably one of the toughest calls over the last decade. A string of disappointing Canadian data and a darkening global outlook have weighed heavily on the market’s conviction for a Sept. hike. Last month, the CAD happened to post one of its worst performing months in over a year, falling -3.5% vs. the dollar. The dollar has now capped a triple top at 1.0675 and will prove a formidable support level for the currency again. Canada is not immune to weaker data reported south of its borders. It is only natural that growth and interest rate sensitive currencies would experience some volatile moves on changing risk attitudes. A shortened holiday week will continue to keep the market on its toes.

The AUD fell in the O/N session vs. all its major trading partners ahead of this mornings NFP report. The market anticipates further job cuts this month which is dampening the demand for higher-yielding growth currencies. Investors continue to speculate that the RBA will keep interest rates unchanged next week. The currency has underperformed against all of its major trading partners and is expected to do so until there is a new Government formed. The commodity rich currency is not isolated, as other growth sensitive currencies are suffering the same fate. Government data has also happened to put a lid on the recent rally. Net result traders are adding to their bets that the RBA will leave interest rates unchanged for the next 12-months. Interest rate differentials play a big part of the currency’s attractiveness (0.9100).

Crude is lower in the O/N session ($74.67 -35c). Crude prices yesterday advanced, paring earlier losses, after a rig in the Gulf of Mexico was struck by an explosion, reinforcing concern that US regulations will reduce output in the region. Stronger economic growth data happened to provide a leg up for the ‘black-stuff’ earlier this week. Aiding the commodity was the weekly EIA report revealing an unexpected decline in supplies of distillate fuels. Distillates (heating oil and diesel), fell -739k barrels to +175.2m. The market had been expecting the inventory to increase by +1.15m barrels. Inventories of crude itself advanced +3.42m barrels to +361.7m Supplies were forecast to climb by +1.2m. On the face of it, the weekly report should have been market bearish, but investors happily ignored the data as they found solace in Chinese and US manufacturing data showing new signs of growth. How long is this sustainable? Perhaps NFP will bring even more surprises? In reality, oil hovers just above this month’s low, on concerns that weaker economic data will push the US into a double-dip recession. The market should be wary that the underlying situation has not changed, the fundamentals remain very weak, demand does not look good and stockpiles of crude and products remain at a record high. Speculators remain better sellers on up-ticks in the short term.

Gold prices continue to advance on its record high print recorded earlier this year as investors seek to protect their wealth. The uncertainty of recent data has had investors contemplating boosting their demand for the commodity as a safe heaven. Last month, bullion appreciated +5.2% alone. The market would not be that surprised to see some sort of technical pull back supported by profit taking selling if investors embraced more risk. Consumers are trying to put there cash somewhere more solid on mounting evidence of a US economic slowdown. Speculators again are supporting the various safe heaven assets on pullbacks, avoiding risky assets due to uncertainties in the markets. With a genuine fear for global growth, by default, should boost the demand for the metal as a protector of wealth in the grand scheme of things. With treasury yields expected to remain close to their lows, could promote a quickening inflation rate, which would promote pushing commodity prices even higher. The opportunity costs of holding gold are low due to falling interest rates ($1,254 +60c).

The Nikkei closed at 9,114 up +51. The DAX index in Europe was at 6,093 up +10; the FTSE (UK) currently is 5,376 up +5. The early call for the open of key US indices is lower. The US 10-year backed up 4bp yesterday (2.61%) and is little changed in the O/N session. Treasuries fell a second consecutive day as a surprise pending home re-sales print coupled with a drop in the initial jobless claims data reduced, temporarily at least, the relative safety of government debt. The curve had become too rich and the overbought asset class was due for some sort of correction. Again the curve 2’s/10’s spread has widened 2bp to +211bp after flattening sub +200bp a matter of days ago. Treasuries also after the government announced the sizes of the $67b three debt sales next week (3’s, 10’s and long bonds). Despite product becoming expensive on the curve, NFP uncertainty has debt better bid on pullbacks.

August 31, 2010

FED and BOJ Losing Investors Focus

Filed under: OANDA News — Tags: , , , , , , , , , — admin @ 10:11 am

Investors continue to test the Fed’s resolve. Is helicopter Ben overly optimistic on his economic outlook? And if so, what is he going to do about it? Yesterday’s equity and bonds reaction is telling us that there is little he can do if policy makers have got it wrong. The Fed, similar to the BOJ is entering ‘no-mans land’. Markets are turning their back on Shirakawa’s emergency lending facility expansion. Even direct yen intervention is futile without the ECB and Fed’s complimentary actions. This week focus on the details. Focus on the Fed’s minutes, focus on ADP report tomorrow and focus and strap yourself in for NFP this Friday. Already this week analysts have revised the private payroll down to zero job growth!

The US$ is weaker 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 US data revealed that consumer spending continues, but, with milder gains. Headline spending happened to beat market expectations (+0.4% vs. +0.3%), with half of gain due to price effects, as real-sales grew at a slower pace than that of nominal-sales. This is definitely stronger proof of a weaker pace of consumer spending. However, with spending representing 2/3rd of the US economy and any gains, be it mild, should alleviate fears of an imminent double-dip occurring. Digging deeper, spending continues to contribute to growth, albeit mildly. Inflation adjusted, it grew at +2% in the 2nd Q. Analysts note that if the rest of the 3rd Q is flat then quarterly consumption will be up +1.3%. The personal savings rate eased 3-ticks to +5.9% in June, while the Fed’s preferred measure of inflation, core-PCE, rose +0.1%, m/m, and is +1.4% higher y/y and is certainly not deflationary from policy makers perspective. Finally, total personal income was up +0.2%, while wages and salaries advanced +0.3%. The data points again to ‘very slow growth’, which is ‘a far cry from a double-dip’ at the moment at least!
 
The USD$ is weaker against the EUR +0.17%, CHF +0.70% and JPY +0.37% and higher against GBP -0.13%. The commodity currencies are mixed this morning, CAD +0.13% and AUD -0.13%. The loonie is trying to solidify its worst monthly performance in three (-2.4%) this month. After earlier printing new monthly highs yesterday, the currency did an about turn as surprisingly weaker economic data added to the evidence the country’s recovery has indeed slowed. The data released showed that Canadian factory product prices rose less than expected (+0.1% vs. +0.5%) and the current account balance widened more than forecasted (-11b vs. -10.2b). All last week the loonie had been feeling the pain and pressure that comes with being a growth, interest rate commodity sensitive currency. With global bourses and commodity prices its two biggest supports back peddling has happened to pressurize the weaker long CAD positions. Canada is not immune to weaker data reported south of its borders. This ‘faltering economic recovery means the chances for a further BOC interest-rate increases this year weakens day over day’. OIS have moved to a 60% chance that Governor Carney goes next week. It is only natural that growth and interest rate sensitive currencies would be dumped even more aggressively. Traders are happy to play the risk-aversion card with longer term CAD bulls looking to pick up cheaper loonies on dollar rallies.

In the O/N session Australia’s current-account deficit narrowed (-5.6b vs. -6.4b) to the least in 8-years, and retail sales (+0.7% vs. +0.4%) and building approvals rebounded (+2.3% vs. -0.6%), signaling the economy is strengthening even as recoveries in Japan and the US show signs of faltering.The AUD has traded under pressure vs. the yen on speculation that the BOJ decision to expand its loan program will fail to halt the currency’s appreciation and pared its advance vs. the dollar as the size of the CBanks step disappointed investors, causing Asian bourses to unwind some of their earlier advances. On the whole, concerns that global growth is slowing has damped investor appetite for higher-yielding assets. The currency has underperformed against all of its major trading partners and is expected to do so until there is a new Government formed. The commodity rich currency is not isolated, as other growth sensitive currencies are suffering the same fate. Australia’s rate moves have helped to add a +6% gain to AUD vs. the dollar in the past year (the fourth-best performer among the world’s 16 most actively traded currencies). Net result traders are adding to their bets that the RBA will leave interest rates unchanged for the next 12-months. Interest rate differentials play a big part of the currency’s attractiveness. Risk aversion will likely force the bull’s hand, capping rallies with better sellers on up-ticks (0.8889).

Crude is lower in the O/N session ($73.51 down -119cc). Crude prices continue to soften as dealers believe that last week’s +2.5% gain from its lows was a tad over optimistic given the outlook for fuel demand in the US over recent weeks. The dollar climbing vs. the EUR has also helped to heap pressure on the commodity. The commodity continues to hover just above this months low on concerns that weaker economic data will push the US into a double-dip recession. The market should be wary that the underlying situation has not changed, the fundamentals remain very weak, demand does not look good and stockpiles of crude and products remain at a record high for a second consecutive week last week. The EIA report showed an unexpected increase for all energy products. US crude stockpiles rose by +4.1m barrels, surprising analysts who had expected a modest decline of -0.1m barrels. Gas inventories grew by +2.3m, while distillates (ex-heating oil and diesel fuel), saw inventories rise by +1.8m barrels. The market had expected gas stocks to fall by -500k and distillates to climb by +900k barrels. The data confirms that the current US supply glut continues unabated, even surpassing record levels reached this month. Analysts note that the ‘commercial supplies of oil and oil products are at the highest level in nearly 27-years, with gas stockpiles well above 5-year averages’. It’s no wonder that crude prices continue to gravitate towards the $70 psychological support level. Speculators remain better sellers on up-ticks in the short term.

Gold prices have been fluctuating in and out of positive territory, to some extent tracking global equities, as investors contemplated boosting their demand for the commodity as a safe heaven. The fact that the dollar may weaken is also aiding the precious metal as an alternative asset. All last week investors had sought sanctuary in the safer heaven asset classes on the back of global bourses. Investors are trying to put there cash somewhere more solid on mounting evidence of a US economic slowdown. Speculators again are supporting the various safe heaven assets on pullbacks, avoiding risky assets due to uncertainties in the markets. With a genuine fear for global growth, by default, should boost the demand for the metal as a protector of wealth in the grand scheme of things. With treasury yields expected to remain close to their lows, could promote a quickening inflation rate, which would promote pushing commodity prices even higher. The opportunity costs of holding gold are low due to falling interest rates ($1,236 -90c).

The Nikkei closed at 8,824 down -324. The DAX index in Europe was at 5,869 down 43; the FTSE (UK) currently is 5,159 down 42. The early call for the open of key US indices is lower. The US 10-year eased 7bp yesterday (2.55%) and another 4bp in the O/N session (2.51%). The market has taken back all and more of the product that was offloaded on Friday after Bernanke’s reassurances in Wyoming temporarily tempered speculation that the Fed will step up debt buying. Helping treasuries to maintain their bid was the BOJ’s comments highlighting uncertainty about the US economy and various analysts cutting their US GDP forecasts. The 2’s/10 spread happened to narrow 5-ticks to +205bp, again flattening the US curve. The market had become oversold on Friday’s violent move. Product again is becoming expensive on the curve, but NFP uncertainty has debt better bid on pullbacks.

August 26, 2010

Bernanke to dig at Jackson

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

Those who can make sense of these markets go to the front of the line! It’s a stab in the dark to find compelling reasons why capital markets are acting this way. Yesterday’s US data was woeful and the demand for US 5-year debt was stronger than expected, yet treasuries fall and equities rally. Go figure! The moves make sense for one reason, assuming that with economic conditions so bad, helicopter Ben has to insist on more fiscal and monetary stimulus at Jackson Hole. Low interest rates alone ain’t cutting it. The housing sector is eroding personal wealth, the job situation remains dire and the savings ratio is higher. Cheaper capital has not been put to work as fear dominates, pushing us towards a double-dip recession. Policy makers can either fill the hole or bury the economy at the symposium.

The US$ is weaker in the O/N trading session. Currently it is lower against 13 of the 16 most actively traded currencies in another ‘whippy’ trading range.

Forex heatmap

US data is certainly not disappointing the ‘double-dip bears’. The durable good headline print disappointed all yesterday (+0.3% vs. +3.0%). The details showed a broad based retreat which happens to tarnish the one bright spot in the US economy, business investment. Using non-defense, ex-transport, as a proxy for business investment, it plummeted -8%, eroding all of last quarter’s gains. With retail sales being a threat to 3rd Q GDP, coupled with ‘the’ housing downturn and a weakening business investment has analysts believing that the possibility of negative real-GDP growth occurring is a real possibility. Perhaps the ‘double-dip’ scenario is within our grasp? Digging deeper, there maybe some positives in the report that have not been captured just yet. Analysts note non-defense orders climbed by only +29% compared to an over 2.5x fold rise in Boeing plane orders for the month (75% of the orders occurred at the end of the month). However, that being said, one should not expect revisions to the core, ex-transport print because of the weaker new-order regional surveys. Inventories happened to advance +0.6% for a seventh consecutive gain. The unfilled orders component was down -0.1%, marking the first month of retreat in four.
All signs of a cooling economy.

Records are to be broken, but, not necessarily in this fashion. US new home sales set another new record in July (+276k vs. +315k). The housing sector has the not so envious distinction of recording an -18% decline in registered volumes from the ‘depths of the 1980’s recession’. With new home sales dropping has pushed supply up to 9.1 months of inventory on hand. Adding this to the resale listings of 12.5 months and one can understand the enormity of the inventory overhang facing the US economy. Worst still, all this data excludes shadow inventories that are largely comprised of foreclosed resale homes held off market. There are little positives to draw from this week’s new and re-sale data. Lack of job growth and erosion of wealth is hardly going to be a positive contributor to the housing sector, in fact it will only add to further price pressure. The median (-6%) and mean price (-6%) declined last month, the median price back to the levels seen in 6-years ago.

The USD$ is lower against the EUR +0.55%, GBP +0.65%, CHF +0.09% and higher against JPY -0.02%. The commodity currencies are stronger this morning, CAD +0.46% and AUD +0.59%. The loonie has been feeling the pain and pressure that comes with being a growth, interest rate commodity sensitive currency. It kept intact its longest losing streak in 19-months yesterday as risk aversion drove bourses lower and tarnished the outlook for currencies tied to growth. In the O/N session, some of the currency losses were recouped as the market was believed to have been oversold. Canada is not immune to weaker data reported south of its borders. Over +70% of its trade is conducted there. This ‘faltering economic recovery means the chances for a further BOC interest-rate increases this year weakens day over day’ and diminishes further the appeal of the currency. Over the past two trading sessions, weaker CAD long positions have been squeezed out as fear of a double-dip occurring has investors seeking sanctuary in risk aversion trading strategies. It is only natural that growth and interest rate sensitive currencies would be dumped even more aggressively. Traders are happy to play the risk-aversion card with longer term CAD bulls looking to pick up cheaper loonies north of 1.0650.

The AUD has ended two downward days on speculation that Japanese policy makers may consider intervening in the markets and dampen the demand for JPY. Comments from Japanese officials have squeezed their currency lower across the board again in the in the O/N session. Global bourses under pressure have been capable of pushing the AUD to test its one month lows earlier this week. However, in the O/N session with Asian bourses finding its legs has given some life to the growth and interest rated sensitive AUD. On the whole, concerns that global growth is slowing has damped investor appetite for higher-yielding assets. The currency has underperformed against all of its major trading partners and is expected to do so until there is a new Government formed. The commodity rich currency is not isolated, as other growth sensitive currencies are suffering the same fate. Government data has also happened to put a lid on the recent rally. Net result traders are adding to their bets that the RBA will leave interest rates unchanged for the next 12-months. Interest rate differentials play a big part of the currency’s attractiveness. Risk aversion will likely force the bull’s hand, capping rallies with better sellers on upticks (0.8868).

Crude is higher in the O/N session ($73.11 up +60c). Yesterday, crude prices fell after the weekly EIA report showed an unexpected increase for all energy products. Not helping matters was US economic data giving little evidence of an upsurge in future demand to make an impression in this stock saga. US crude stockpiles rose by +4.1m barrels last week, surprising analysts who had expected a modest decline of -0.1m barrels. Gas inventories grew by +2.3m, while distillates (ex-heating oil and diesel fuel), saw inventories rise by +1.8m barrels. The market had expected gas stocks to fall by -500k and distillates to climb by +900k barrels. The data confirms that the current US supply glut continues unabated, even surpassing record levels reached last week. Analysts note that the ‘commercial supplies of oil and oil products are at the highest level in nearly 27-years, with gas stockpiles well above 5-year averages’. It’s no wonder that crude prices continue to gravitate towards the $70 psychological support level. The report re-confirms the IEA conclusion earlier this month that ‘oil demand could take a substantial hit should economic growth continue to falter’. Speculators remain better sellers on up-ticks in the short term as crude rallies somewhat in this oversold market.

Gold has climbed to a seven week high and continues to stay the course this morning as investors seek sanctuary in the safer heaven asset classes on the back of weaker equity markets. With global bourses under pressure, investors are trying to put there cash somewhere more solid on mounting evidence of an economic slowdown. Speculators again are supporting the various safe heaven assets on pullbacks, avoiding risky assets due to uncertainties in the markets. With a genuine fear for global growth, by default, should boost the demand for the metal as a protector of wealth in the grand scheme of things. Year-to-date the metal has risen +12.1%. With treasury yields expected to remain low, could promote a quickening inflation rate, which would promote pushing commodity prices even higher. The opportunity costs of holding gold are low due to falling interest rates ($1,243 +$2.50c).

The Nikkei closed at 8,906 up +61. The DAX index in Europe was at 5,910 up +11; the FTSE (UK) currently is 5,133 up +24. The early call for the open of key US indices is higher. The US 10-year eased 1bp yesterday (2.50%) and is little changed in the O/N session. At one point treasuries happened to advance, pushing the yield on the 10-year note to the lowest level in 19-months, as new home sales unexpectedly dropped last month to a record low and orders for durable goods rose less than economists forecasted. The curve flattened enough to trigger analyst’s 2’s/10’s +200bp short term objective. Treasuries 5-year note sale came in with a record low yield of 1.374%. The bid-to-cover ratio was 2.83, compared with a 4-auction average of 2.65. The indirect bid (foreign buyers) was 51% (v-strong), compared to the average of 41%. The direct bid was 9% vs. 12.7%. In total, the US plans to sell $102b of debt this week. Today we get the final allotment, 7-year notes (+$29b). This will be the smallest monthly offering of ‘the’ combination thus far. Longer term buyers continue to control the market, that being said, product does look rich on the curve.

August 23, 2010

EUR on verge of tipping

Filed under: OANDA News — Tags: , , , , , , , , — admin @ 10:40 am

Global uncertainty continues to dominate this lackluster forex market this morning. At least the soap operas in the Asian-Pacific region have been keeping us awake. Gillard and Abbot have been scrambling, seeking the ‘winning support’, to lead their country and take the currency higher. Japanese officials have show little appetite to halt their currency’s advance, allowing the dollar to suffer. All last week, speculators have been squeezed out of their weak short JPY positions. Picking the Yen’s top has been an expensive exercise. Sellers beware as the dollar vs. the yen’s technical’s head further south. Not many want to accumulate EUR’s at these levels, it feels uncomfortable. The technicals are giving the dollar a leg up, short term at least. The EUR’s highs are getting lower!

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

Forex heatmap

No data again had most traders grasping for straws on Friday. North America will have to follow the unenthusiastic lead of Europe this morning, as we again lack any data of ‘conviction’.
This morning’s Aug. fall in the euro-zone PMI is a sign that the recovery might be starting to slow, although the index points to growth for now. The decline in the headline composite manufacturing and service sector index, from 56.7 to 56.1, was a tad more than expected and nearly reversed all of last month’s gain. The data continues to point to a quarterly GDP growth of about +0.7% vs. the +1.0% gain in the 2nd Q. However, the decline ‘mirrors earlier falls in sentiment in other major economies and suggests that the euro-zone’s economic cycle might simply be lagging behind those elsewhere’. The fall was driven mainly by a decline in the manufacturing index, particularly in Germany.
This will provide traders with some proof to sell the EUR on rallies in the short term.

The USD$ is higher against the EUR -0.07% and lower against GBP +0.38%, CHF +0.11% and JPY +0.21%. The commodity currencies are stronger this morning, CAD +0.06% and AUD +0.47%. The loonie ended a 2nd consecutive week on the losing side, printing its weakest print in over a month on Friday, as fundamental data trumped the potential of any large M&A activity. July inflation data rose less than expected (core +1.6% vs. +1.9%), prompting traders to trim their bets that the BOC will entertain another rate hike next month. BHP Billiton hostile takeover bid for Potash had supported the loonie for most of the week. In fact, technically, the currency should have had a much more disappointing week only for the $40b speculation bet. The loonie is not immune to the weaker data out of the US. North America was sold as a unit across the board on the back of the region as a whole could be losing steam. With risk being pared, it was only natural that growth and interest rate sensitive currencies would be dumped. Canada happens to be the US’s largest trading partner, with 70% of all exports heading south. Sloppy trading and lack of interest because of the summer doldrums has meant that many believed that they had missed the buying boat opportunity that they had hoped to witness on the last ‘risk aversion’ go-around. Traders are happy to play the risk-aversion card. It has to be averaging up their already long CAD positions from M&A activity!

Investors hate uncertainty and the outcome of the Aussi election is well documented. The result of a hung government initially pressurized the AUD in the O/N session. The currency has underperformed against all of its major trading partners and is expected to do so until there is a new Government formed. Last week, there has been quite a bit of AUD/CAD cross selling, front running M&A speculation that has pinned down the currency on rallies. The fear that the global recovery is losing momentum has also somewhat diluted the demand for Australia’s higher-yielding assets. The commodity rich currency is not isolated, as other growth sensitive currencies are suffering the same fate. Over the past 2-trading sessions the AUD has come under pressure vs. the JPY on speculation that the BOJ are not ready to intervene on behalf of their currency, dampening the demand for riskier assets. Government data has also happened to put a lid on the recent rally. Reports, earlier last week, 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 differentials play a big part of the currency’s attractiveness. Risk aversion will likely force the bull’s hand, capping rallies with better sellers on upticks (0.8926).

Crude is higher in the O/N session ($74.01 up +19cc). Crude prices hovers close to its 6-week lows as a rising US jobless claims and a contraction in manufacturing added to concern growth in the worlds biggest oil-consuming nation is slowing. Last weeks EIA report continues to provide fodder for the ‘bears’. Oil stockpiles declined -0.8m bpd vs. a market expectation of a -1m barrel print. Inventories fell to +354.2m barrels w/w. Not to be left out, gas stocks dropped -39k barrels to +223.3m. On the flip side, distillate supplies (heating and diesel) climbed +1.07m barrels to +174.2m. With this bearish report successfully penetrating the $75 support opens up the way to test the $72 surroundings. Prices have also gravitated towards these lows on the back of data showing that economic growth in both China and the US is slowing. The demand for oil products also fell, as gas demand hit a 2-month low, while demand for distillates is close to its 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. Speculators remain better sellers on up-ticks in the short term.

Gold pared some of their recent gains on Friday as investors cashed in to raise capital. With equities under pressure, investors retained cash on mounting evidence of an economic slowdown. In the O/N session investor again supported the various safer heaven assets, avoiding risky assets due to uncertainties in the markets. With a genuine fear for global growth, by default, should boost the demand for the metal as a protector of wealth in the grand scheme of things. Year-to-date the metal has risen +11.3%. With treasury yields expected to remain low for sometime and with the Fed announcement earlier this month 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 ($1,230 +$1). Even with the dollar strengthening, 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 9,116 down -63. The DAX index in Europe was at 6,026 up +22; the FTSE (UK) currently is 5,223 up +28. The early call for the open of key US indices is higher. The US 10-year eased 1bp on Friday (2.60%) and is little changed in the O/N session. US Treasuries prices have rallied hard after disappointing US data last week. Investors remain concerned for the strength of the global recovery. If the Fed does expand its balance sheet then the curve should flatten to analysts medium term projection of +200bp 2’s/10’s (+209bp). The market seems content in owning longer dated product on these deeper pull backs. This week, the US plans to sell $102b of 2’s (+$37b), 5’s (+$36b) and 7-year notes (+$29b). This will be the smallest monthly offering of the combination thus far. Longer term buyers control the market.

August 19, 2010

Bring back the EUR conviction or the Eureka light bulb

Filed under: OANDA News — Tags: , , , , , , , , , , , — admin @ 10:09 am

What happened to the well received German and Portuguese debt auctions? Were they not supposed to instill ‘positive confidence’ into this market? Subdued interest, backed up by-illiquid pockets has the forex enthusiast’s seeking hibernation this mid-Aug. We go around in circles when we have no data to play with. That’s because we lack conviction. Today, at least we get something to chew on and probably moan about, but, will it have us testing new found ranges? It probably won’t, but let’s hope so. For dealers it seems to be containment with minimum fuss until the Eureka light bulb glows again.

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

Forex heatmap

With the EUR testing session lows, there is chatter that the currency is losing its momentum to the topside, what else can one say? And that through the 1.2785 all bets are off. Remarkably, the currency is swaying on such little volume. In the big picture, the impact of the ‘fiscal adjustment in Europe is real and will be felt for years’ should hinder the EUR’s climb. Its highs are beginning to be dragged lower and lower. Now, with the belief that the Euro-zones economic recovery is waning should dampen further the demand for the single currency. Sellers are beginning to line up top-side. Maybe today’s data will bring some much needed volatility.

The USD$ is higher against the EUR -0.51%, GBP -0.50% and JPY -0.34% and lower against the CHF +0.06%. The commodity currencies are weaker this morning, CAD -0.08% and AUD -0.25%. The loonie is a funny animal, or perhaps I should say, the dealers are a breed apart. It seems that the forex spot market is pricing in the BHP Billiton/Potash deal and the herd is following them. Equities and commodity prices would have you wanting to lighten your CAD long load, not in this case, dollar rallies are been sold and dealers are content to keep the currency in the limelight until they get the green light to ‘execute’ any such deal. This is in contrast to other growth and commodity sensitive currencies paring most of this weeks gain. Stronger manufacturing shipments data this week (+0.1% and +0.7% in real-terms) is also providing some distant support. 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. 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. BHP Billiton hostile bid takeover of Potash in Canada will keep the loonie firm, no debt involved. Perhaps parity is on the cards again, aided by Carneys ‘normalizing’ rates next month.

There has been quite a bit of AUD/CAD cross selling, front running M&A speculation that has pinned down the AUD for the time being. Over the past 2-trading sessions the AUD came under pressure vs. the JPY on speculation that the BOJ are not ready to intervene on behalf of their currency, thus dampening the demand for some of the higher-yielding assets. Government data has also happened to put a lid on the recent rally. Reports, earlier this week, 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 (0.9002). Follow the Asian bourses for guidance or wait and see what China’s diversification plan is made off. Perhaps the outcome of the Aussi election will push the currency to test new highs by weekend.

Crude is higher in the O/N session ($75.81 up +39c). 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. Even yesterday’s weekly EIA report provided fodder for the ‘bears’, aided by some ‘dubious’ hefty predictions for increased supplies in various categories for the week. Oil stockpiles declined -0.8m bpd vs. a market expectation of a -1m barrel print. Inventories fell to +354.2m barrels w/w. Not to be left out, gas stocks dropped -39k barrels to +223.3m. On the flip side, distillate supplies (heating and diesel) climbed +1.07m barrels to +174.2m. With this bearish report successfully penetrating the $75 support opens up the way to test the $72 surroundings. Prices have also gravitated towards these lows on the back of data showing that economic growth in both China and the US is slowing. The demand for oil products also fell, as gas demand hit a 2-month low, while demand for distillates is close to its 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. Speculators remain better sellers on up-ticks in the short term.

Gold prices are little changed in the O/N session, managing to pare some of the yesterday’s earlier declines as weaker global equities boosted investor support for various safer heaven assets. With a lack of meaningful direction in the dollar, gold prices remain in the ‘relative pause mode’ or tight trading range. 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 +11.5%. 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 ($1,231 +50c). 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 9,362 up +122. The DAX index in Europe was at 6,171 down -15; the FTSE (UK) currently is 5,294 down -8. The early call for the open of key US indices is lower. The US 10-year eased 3bp yesterday (2.59%) and has backed up 5bp in the O/N session (2.64%). Treasuries prices had rallied Wednesday, clawing back all of the previous day losses as equities came under renewed pressure. Also providing support was St. Louis Fed Bullard stating that the Fed may need to purchase more bonds if inflation happens to remain low. Investors are still concerned on the strength of the recovery. If the Fed does expand its balance sheet then the curve should flatten to analysts medium term projections of +200bp 2’s/10’s. The market seems content in owning longer dated product on these deeper pull backs. Perhaps this morning Philly Fed will cause another manufacturing stir!

August 17, 2010

Japan China and the EU bully the dollar

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

The dollar has been getting it from all angles this morning. If it’s not Japan, it is China, and if it’s not them its Europe. One minute the planet is buying dollars for surety purposes because of our global growth concerns. Next, its forget protection, dump dollar positions because yields are too low. Make your mind up. The Irish bond auction went well, good for the Irish and good for EUR. China is publicly shying away from US treasuries as yields are not attractive, good for EUR. This mornings disappointing German ZEW index (14 vs. 21.2) will dent hopes that the strong recovery seen in the 2nd Q could continue. Did the index happen to miss the ‘favorable’ Bank stress tests shenanigans? Drown out the white noise, put on your blinkers and keep to your convictions. It is a tight range after all.

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

Forex heatmap

Yesterday was not a good start for data in the US this week. The headline print for the Empire manufacturing index was poor (7.1) and the details were worse despite the reading pushing higher from the previous month, which was the lowest print in 9-months. Digging deeper, new orders and shipments fell for the first time in a year. The knock on effect of weaker orders will lead to weaker shipments in the months ahead. Worse still is the unfilled order category falling for the fifth consecutive month, which will lead to no order backlog as new orders softens. The circle is broken. Analysts never seem to put much emphasis on this release mostly because of the small sample size. However, it’s an indicator for the overall US manufacturing sector and if relied on, it does not bode well for positive surprises in the factory data out of the US this week. The forward looking sub-category expects new orders and shipments to be higher six months from now. This will be difficult to achieve with a ‘broken’ order cycle. On a positive note, employment growth remained positive, doubling the previous month and the margin pressures are moderating, as prices paid continue to rise, but at a slower pace than earlier in the year.

The USD$ is lower against the EUR +0.38%, CHF +0.17% and JPY +0.08% and higher against GBP -0.10%. The commodity currencies are stronger this morning, CAD +0.39% and AUD +0.50%. Higher yielding, growth sensitive currencies are not immune when we discuss global growth concerns. The loonie yesterday happened to print it lowest reading against its largest trading partner, the US, in just under a month. With Canadian bi-lateral trade amounting to 70% of total trade, it’s impossible not to feel a knock on effect from world’s largest economy. Being long CAD outright is not paying ‘extra premium’ as the world coverts dollars in times of risk aversion. The intraday liquidity is squeezing the weaker long CAD positions out of a tight trading range. 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. With Bernanke stating that the pace of economic recovery is more likely to be modest has many bulls reassessing the depth of their loonie convictions. Investors have been strapping on some risk aversion trading strategies as equities and commodities retreat. Watch the crosses. It will be a good indicator for the loonie buyers running out of ammo!

The AUD has extended its gains this morning as Asian bourses advanced, boosting the demand for higher-yielding assets. The currency snapped this weeks losing streak against the yen after the RBA minutes indicated that policy maker’s outlook for a stronger economic growth ‘has not changed’. Interest rate differential continue to play a big part of the currency’s attractiveness. The minutes said prices for Australia’s major commodity exports remained at ‘very high levels’ despite a ‘moderation’ in Chinese growth. The market is leaning towards another hike, not now, perhaps later in the year as policy makers seems comfortable remaining on hold. 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 (0.9028). Follow the Asian bourses for guidance.

Crude is higher in the O/N session ($76.01 up +77c). 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 weekly supply 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.

Gold prices found firmer footing yesterday after weaker Empire manufacturing data had investors increase their demand for the metal as an alternative investment. A weaker dollar is also helping most commodity prices. 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. Year-to-date the metal has risen +11%. 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 ($1,229 +$3). Now that the dollar has entered the technical ‘bull’ trading range as a safer heaven investment, will the EUR’s weakness support higher ‘yellow metal’ prices for much longer?

The Nikkei closed at 9,161 down -35. The DAX index in Europe was at 6,161 up +51; the FTSE (UK) currently is 5,318 up +42. The early call for the open of key US indices is higher. The US 10-year eased 10bp yesterday (2.56%) and backed up 4bp this morning (2.60%). The 2’s/10’s spread continue to flatten (+211), heading towards analysts predicted +200 target. This is certainly making it cheaper for the Obama administration to fund its deficits. Longer dated product’s yields remain coveted, with 10’s happening to print a 16-month low yesterday after US manufacturing data disappointed. 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 deeper pull backs.

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