Forex Blog

March 7, 2011

A EURO short is born

Filed under: OANDA News — Tags: , , , , , , , — admin @ 11:21 am

Technical analysts will tell you that with the EUR breaching its four-month high this morning, long term Fibonacci levels are capable of being reached (2008 high 1.4315).

For that to occur, the market has much fat to chew. The currency is supported by a hawkish ECB that views higher commodity prices as inflationary. Year-to-date, the EUR has rallied +9% against the dollar and the Fed’s deflationary oil stance.

Now that Moody’s has entered the fray, the focus shifts back to the Euro-periphery funding requirements. EUR shorts have being squeezed out many times this month, but the bears should feel comfortable with the Moody’s multi-notch cut weeks before EU leaders are set to decide on new bailout measures, especially with the German resistance to the proposals.

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

Forex heatmap

Historically, the Monday after NFP tends to be the quietest trading day of the month. This morning, one gets the feeling we will get to experience ‘the move’ that did not happen on Friday.

With Moody’s preemptive move on Greek debt, citing the rising risk of default, has the market again focusing on Portuguese and Spanish bonds. On the run up to the weekend EU Summit, investors will be looking for evidence that policy makers are making good on reaching the ‘grand bargain’ they have promised for later in the month. Markets are likely to be increasingly sensitive to any indications of discord or difficulty in reaching consensus. Portugal auctions up to EUR1b in 2-year bonds on Wednesday, and this will be a key test of the sovereign’s ability to continue to tap markets at reasonable yields. Euro-sovereign financial stress issues will put the EUR under pressure after its two month rally against the dollar.

The USD$ is lower against the EUR +0.28%, GBP +0.35% and JPY +0.28% and higher against CHF -0.27%. The commodity currencies are stronger this morning, CAD +0.25% and AUD +0.25%.

The loonie is hanging tough despite Governor Carny’s views on an elevated currency price. The support comes mainly from the commodity sector, now that oil, its largest export , is trading at three-year highs. Last week, the BoC held rates steady at +1%. The event risk was that the Governor would try to talk down the currency’s rise. The operative word is he ‘tried’. In their communiqué, the BoC expressed its concern about the strength of the loonie ‘the export sector continues to face considerable challenges from the effects of the persistent strength in the Canadian dollar and Canada’s poor relative productivity performance’. The new reality is a Canadian dollar at or close to parity as the economy adjusts to this paradigm.

The market has preferred been long this currency for both risk averse and commodity supporting reasons. Governor Carney is in no rush to raise interest rates, stressing as before that ‘any further reduction in monetary policy stimulus would need to be considered carefully’. If the Bank really was contemplating an early rate hike, would we not expect the forward looking guidance to be altered? The currency rise remains orderly. Dollar rallies provide an opportunity to want to own some of the commodity and growth sensitive currency (0.9707).

Data out down-under was weaker than expected last night. Australian job adverts growth fell to +1.2%, m/m, last month from an upwardly revised +3.0% in January. Analysts do note that the correlation between adverts and jobs growth has been weak, but the release suggests that employment may be taking a breather.

The currency has fallen to a six-week low vs. the EUR on fear that Trichet and Co. will raise interest rates faster than the RBA this year. However, Australian fundamentals continue to support a higher policy rate environment, and a currency appreciating medium term. The futures market is pricing in further modest tightening starting in third quarter as the data strengthens and the threat to inflation rises along with commodity prices and higher wage growth. Commodity prices continue to provide support on pull backs.

Crude is higher again in the O/N session ($105.95 +$1.53c). Crude prices this morning have advanced to the highest levels in two and half years on speculation that the turmoil in Libya will spread to other energy exporters in NA and the ME, affecting global supplies. The black-stuff rallied +6.7% last week.

Prices remain elevated despite the Saudis offering to make up for supplies lost. Contagion fears continue to price in a substantial risk premium. ‘The IEA’s chief economist said that ‘higher oil prices pose a danger for a global economic recovery’ and at $110 a barrel the world is concerned.

Last week’s EIA report again has provided some support for the US crude market on pull backs. The report showed a smaller-than-expected increase in supplies. Crude inventories fell by-364k barrels to +346.4m vs. an expected increase of +750k. Even worse was the gas inventory headline declining, stocks plummeted -3.59m barrels to +234.7m, greatly exceeding market expectations for a-400k draw. Inventories at Cushing rose by +1.13m barrels to a record +38.57m.

This rise is partly responsible for the wide discount of WTI to Brent crude in recent weeks. Distillate stocks (heating oil and gas) fell-751k barrels to +159.1m, less than analyst expectations for a decline of -1.2m barrels. Refinery utilization rose +1.5% to 80.9% of capacity. The Oil market is beginning to show signs of ‘demand destruction’ as high prices erode consumption. With supply the number one concern, the commodity will remain bid because of the contagion concerns.

Gold remains in demand as mounting tensions in Libya continues to boost the appeal of the precious metal as an investment haven. The yellow metal continues to be supported by geopolitical factors and inflation threats. Prices have rallied more than +7% this month, as investors grown increasingly uneasy that the crisis could spread.

Even hawkish global rhetoric has managed to give the yellow metal a leg up in March. Consumer prices are also boosting the demand for the precious metal as a hedge against global inflation. Recent data reveals that Chinese’s inflation has accelerated the most in six years, and UK consumer prices the most in two years. Even US data is showing that their inflation numbers are edging higher. Last week’s European PPI accelerated more than forecasted in January. China is supporting the commodity’s outright, purchases in the country climbed to 200 metric-tons in the first two months of this year. With the commodity being used as a store of value the asset class is expected to remain better bid on deep pullbacks, at least until there is peace ($1,439 +$11.10).

The Nikkei closed at 10,505 down-189. The DAX index in Europe was at 7,184 up+5; the FTSE (UK) currently is 6,005 up+15. The early call for the open of key US indices is higher. The US 10-year eased 4bp on Friday (3.50%) and has backed up 4bp in the o/n session (3.54%).

Last week, treasury prices fell, with 10-year notes halting a three-week rally, as signs of faster job growth and more inflation added to speculation the economic recovery is building momentum, damping demand for fixed-income assets. The tens/TIPS spread is at +253bps. Geopolitical and event risk in the Middle-East continues to limit FI losses despite the stronger economic data. Product remains better bid on these pull backs.

January 31, 2011

January 6, 2011

Still No EURO Buyers

Filed under: OANDA News — Tags: , , , , , , , , , , , , — admin @ 11:20 am

This EUR consolidation will not last that long. Once the market has gotten this weeks employment data out of the way, Capital Markets will be expected to refocus their energy on the Euro-periphery stress issues. Next week we have a Spanish bond auction, investors can anticipate the Government to pay up according to the recent Euro funding theme. This morning’s US jobless claims will have no bearing on tomorrow now revised NFP estimates. So far, mixed Euro-zone data this morning has had little affect on the currency. November retail sales disappointed at -0.8%, December economic sentiment improved to 106.2 while consumer sentiment fell to-11 and inflation printed above expectation. Paring of riskier positions ahead of any surprise tomorrow should be the order of today as the dollar dominates.

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

Forex heatmap

Yesterday’s ADP print ( +270k vs. +100k) has most analysts revising their NFP expectations for tomorrow (+135k and +9.7%). Ordinarily, the market tends to discount ADP release because of its poor tracking capabilities. However, other employment indicators are supporting the upward employment trend and if we included the US tax extension announcement last month, it’s capable of providing substance to the report. It’s worth remembering that an ADP print excludes the government sector. Collectively over the last five months, the government sub-sector has lost approximately-220k jobs. Digging deeper, the hiring surge was focused on the small and medium sized sectors. Further proof that the corporate sector remains content in hoarding its cash and holding back on hiring. Other data showed that the US non-manufacturing sector continues to accelerate. The ISM December non-manufacturing index again beat market expectations (57 vs. 55.7) and posted its strongest growth in nearly five-years. The headline gain was driven by an acceleration in new orders (63 vs. 57.7), the strongest reading in five years. A note of caution, the employment index contracted on the month (50.2 vs. 52.7) and is in stark contrast with the ADP print. We can probably take comfort in the fact that the ISM employment gauges does not have a strong predicting track record. The service sector prices also accelerated, with the price index soaring to 70.0 from a 63.2 prior reading. The manufacturing and services readings suggest accelerating momentum in the US economy and fodder for the dollar bulls.

The USD$ is higher against the EUR -0.29%, GBP -0.26%, CHF -0.05% and JPY -0.25%. The commodity currencies are mixed this morning, CAD +0.17% and AUD -0.20%. Canadian consumer prices were up more than expected yesterday (RMPI +3.5% and IRRP +0.5% m/m) and their impact was limited. The market is focusing on today’s Ivey print and tomorrows North American employment reports rather than on yesterdays backward looking data (November release). The passthrough effects of producer prices into the Canadian CPI basket have been somewhat limited to date. It’s worth noting that ex-petroleum, the gain in IPPI would have been a uninspiring +0.2%. The loonie has taking flight on the back of its largest trading partners expected ‘re-acceleration in activity in the first few trading sessions of the New-Year. This week’s US data, PMI, factory orders and private employment reports, reinforces many analysts views that the US economy is beginning the year in upward momentum and reason enough for short term chartists to be eying 0.9750 CAD in the first quarter. This mornings Canadian Ivey PMI and employment data tomorrow is expected to surprise to the upside, coupled with Euro peripheral stress should further support Canadian government debt as an alternative to the dollar and the EUR. On the flip side, Governor Carney continues to highlights the dangers of a persistently strong domestic currency. Offers to sell dollars are beginning to gather above 1.0030 (0.9944).

The AUD is back below parity after Australian building approvals fell -4.2% m/m in November, in line with market expectations. The print came on the back of a downwardly revised +8.3% jump the previous month. Analysts expect property data to remain weak this quarter in response to Governor Stevens hikes late last year. Expect this weaker data to slow the pace of tightening, but unlikely to end the hike cycle as employment growth remains so strong. Policy members statements this week believe that the government’s stimulus measures will pressurize Governor Stevens to hike rates (4.75%) and that the flood in Queensland ‘may exacerbate already constrained supply conditions and lead to inflationary pressures’. These are good reasons supporting the currency on deeper pullbacks as investors seek to cross the currency vs. the EUR. Last year the currency rose +14% against the dollar which drove down the cost of imports and eroding exporters’ competitiveness. The currency has been trading under pressure outright as US Treasury yields climb, narrowing the yield advantage of assets down-under. Short term offers again appear above parity (0.9976).

Crude is lower in the O/N session ($90.27 -3c). Crude has reversed most of this weeks earlier losses as a surprising gain in the ADP report and growth in the services sector bolstered optimism that the US economy’s recovery is gathering sustainable momentum. With crude depreciating just over-2% from Monday’s 27-month high brought speculative demand. They believe the sell off was over done. The weekly EIA inventory report revealed that oil stocks fell -4.16m barrels last week, three times more than expected. At +335.3m barrels, inventories are above the upper limit of the average range for this time of year. Gas inventories increased by +3.3m barrels and are in the upper half of the average range, while distillates increased by +1.1m barrels. Again, there are too many hurdles to overcome ahead of the psychological $100 barrier crude. Technically, the market is not showing a tighter supply or demand balance. 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. The market expects to meet price resistance above $90 as there is far more oil in storage, more fuel capacity and more idle oil wells to limit a stronger market rally in theory.

Gold prices fell yesterday, capping the biggest two-day loss in a year, on speculation that an economic recovery will curb demand for the metal as a haven. In the O/N session, prices are little changed. Fast money and the reducing of flight to quality positioning has been pressurizing the yellow metal, as equities, being used as an alternative, is providing more of an appeal in the first week of the New-Year. On deeper pullbacks, the commodity should remains better bid on speculation that currency volatility will boost demand for a safe heaven investment once the Euro contagion fears raise its ugly head again over the coming weeks. The commodity last year completed its tenth annual advance with bullion rallying +30%, it’s largest rally in three years. Even though the one direction trade feels overdone, investors continue to hold gold as a hedge against long-term inflation and have some strong technical support levels to breach before the markets witnesses a mass exodus. The Euro-zone contagion issues continue to put a floor on metal prices on demand for a haven. Technical analysts believe that gold ($1,373 +$5.40c) will outshine other precious metal in 2011 and peak somewhere above $1,600 in 2012.

The Nikkei closed at 10,529 up+149. The DAX index in Europe was at 6,989 up+42; the +FTSE (UK) currently is 6,069 up+25. The early call for the open of key US indices is higher. The US 10-year backed up 14bp yesterday (3.45%) and is little changed in the O/N session. Stronger private employment data in the US has the FI market on the back foot as we wait for tomorrows NFP release. Accommodative fiscal stimulus continues to pressurize the bond market and again give support to risk assets despite the Fed’s attempt to lower yields with their purchase program. Stronger fundamentals has the market believing that the Fed may ease up on QE2-let’s see what the employment reports are capable of bringing us.

November 17, 2010

Chinese fears curb EURO demand

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

All eyes have been on the Euro-zone finance ministers, who along with the ECB and IMF will continue the discussions in Dublin tomorrow, debating the scope for support of Ireland’s banking sector, if need be. The Irish will only take ‘the hand out’ if the banking crisis is too big to fix on their own. Providing fodder for market uncertainty is the Irish refusing to set a deadline for the end of talks in the markets opinion. Investors always welcome additional clarity, it will give them time to focus on the Spanish banking problems. Rising speculation that China will hike rates as early as this Friday and is prepared to implement price controls is again undermining global risk sentiment despite the EUR’s favorable bounce.

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

Forex heatmap

There was a mixed bag of US data yesterday. US core-PPI came in unexpectedly lower last month (-0.6%), the first decline in twelve months and the sharpest drop in four-years. The y/y core producer prices advanced at a slower pace of +1.5%, down from +2.1 the previous month. The headline gain for finished goods (+0.4%) was mostly on the back of higher energy prices (+3.7%). It’s worth noting that the energy subcategory accounts for +20% of the index. Unlike the ‘core’ details, declines were widespread, led mostly by the vehicle sector. Analyst’s note that in the earlier stages of processing, prices received by manufacturers of intermediate goods advanced +1.2% (the third consecutive month of growth). Again the pace of growth for core prices has moderated of late, mostly due to the household balance sheets, the employment outlook and global softness. Today’s CPI is expected to report a similar scenario, stronger reasons for the Fed continuing its QE2 program

The US industrial production disappointed last month. The headline reported a flat print vs. market expectations of +0.3% gain. Excluding the volatile components (vehicles,
+1.6% and technology +0.0%), the core-industrial production fell -0.1%, m/m, and the second consecutive month to retreat. The losses were concentrated in utilities, electricity (-3.3%) and gas (-4%) and a modest decline in mining (-0.1%). On the flip side, manufacturing experienced broad based growth (+0.5%), led by autos (+1.6%) and machinery (+1.4%).

The important indicator for Fed watchers is the Capacity Utilization rate. Yesterday’s headline advanced a tick to 74.8% vs. the Sept print of 74.7%. Analysts believe the print is close to peaking if new-orders remain subdued. If this is the case, coupled with the soft employment situation, would lead one to believe that the Fed is expected to be on hold for most of next year. 

On the surprising side was the US homebuilders index edging higher this month (16 vs. 15). The market will take any good news. However, confidence remains depressed, well below the psychological 50-point break even level. The market is expected to continue to weaken through the remainder of this year. The underlying details were mixed, but of interest was their outlook for the housing market improved (2-pts to 25), adding to the gain registered in the previous report (5-pt).  Analyst’s also note that the prints are well below the highs recorded in the first six-months. The number of prospective home buyers inched up 1-pt to 12 (second consecutive gain and highest print in five-months). Overall, the housing markets remain depressed, with supplies of distressed and shadow inventories, weaker consumer demand, and a fragile employment situation continuing to blight the housing situation.

The USD$ is lower against the EUR +0.18%, GBP +0.25%, CHF +0.15% and higher against JPY -0.17%. The commodity currencies are STRONGER this morning, CAD +0.06% and AUD +0.02%. Weaker Canadian data yesterday, coupled with emerging market monetary tightening, commodities plummeting, global bourses seeing red had the loonie lovers seeking shelter. Canadian manufacturing sales declined in Sep. (-0.6%, m/m, vs. -0.9%), with sales ‘volumes’ (-1.4%) responsible for most of the retreat. This certainly does not bode well for the Sept. GDP print. Digging deeper, 13 of 21 sectors registered contractions, with the top decliners being railroads (-24.7%), autos (-10.4%) and textile (-3.6%). The biggest winners were leather (+15.7%) and petroleum products (+6.2%) and excluding autos, shipments were up +0.6%.The backlog of orders fell -1.9% and new orders dropped -4.9% on the month. The market is back to embracing the event risk factor, the Euro-peripheral debt problems. It’s interesting that the currency has not received any aftershock from the BHP railroad takeover of Potash by the Federal Govt. Expect the dollar index and commodities to continue to pressurize the CAD short term, unless growth sensitive currencies become in vogue rapidly.

The AUD has established a new two week low in the O/N session. As the leading commodity currency, the AUD is highly vulnerable to growing speculation that China will hike rates as early as Friday. The contagion fears from the fallout of the Irish banking crisis has been curbing demand for higher yielding currencies. Declines have been somewhat limited after a government revealed that wages rose in the third quarter by the most in almost two years (+1.1%). The RBA minutes earlier this week indicated that Governor Stevens decision to raise interest rates was ‘finely balanced’ damping prospects for further increases. Policy makers said a ‘modest tightening’ was considered prudent when they increased the benchmark rate earlier this month (+4.75%). The market now expects the RBA to sit on its hands until next Feb. The slump in commodities and the general strength of the dollar has impeded the advance of growth sensitive currencies. Last week’s softer jobs numbers down-under has also justified the unwinding of profitable Aussie positions. The unemployment rate jumped to +5.4% from +5.1%, a six-month high as job seekers swelled to a record. Market players are viewing corrective rebounds as fresh selling opportunities short term on the back of the Chinese variable (0.9779).

Crude is lower in the O/N session ($81.80 -54c). Oil prices tried earlier this week to creep higher after stronger economic indicators out of US and Japan could signal increased fuel demand. However, and instead the commodity has declined for a fourth day to trade at a two-week low, on fears that a Euro-zone’s deepening debt crisis coupled with emerging markets Cbanks tightening monetary policy would reduce demand for the asset class. The market remains on tender hooks, fearing that China may also attempt to rein in inflation, further reducing demand. Last week’s inventory numbers provided little support despite the unexpected decrease in stocks, as imports declined and refineries bolstered fuel production. The supplies of weekly crude fell -3.27m barrels to +364.9m. The market had anticipated inventories to climb +1.5m barrels. Aiding prices was the inventories of gas and distillate fuel (heating oil and diesel) posting bigger-than-projected declines. Gas stocks dropped -1.9m barrels, while distillates fell -5m barrels. Total oil and fuel inventories are now at their lowest levels in six-months after retreating in four of the last five weeks. Refineries operated at 82.4% of capacity, up +0.6%, w/w. Crude-oil imports tumbled -5.7% to +8.09m a day, the lowest level in eleven months. The ‘big’ dollars value will continue to influence prices despite fundamentals.

Gold continues to see profit taking on upticks. The yellow metals prices remain under pressure after South Korea beat China to the punch and hiked rates. Investors to date have been aggressively using the commodity as a hedge against inflation. Now that the emerging markets are beginning to tighten their monetary policy could curb the demand for the commodity as a safe-haven asset. A stronger greenback has also restricted the demand for bullion as gold usually trades inversely to the dollar. Speculators are expecting European debt concerns to eventually provide 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 + 21.2% 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’ ($1,335 -$3).

The Nikkei closed at 9,811 up +15. The DAX index in Europe was at 6,691 up +27; the FTSE (UK) currently is 5,682 +1. The early call for the open of key US indices is higher. The US 10-years eased 10bp yesterday (2.83%) and are little changed in the O/N market. After two days of plummeting prices and higher yields Fed rhetoric has stemmed the bleeding. Comments from NY Fed Dudley and the Fed’s Vice-Chair Yellen stating that they are not trying to weaken the dollar or push the inflation rate higher than 2% provided the market bid. Policy makers have come under a fair amount of criticism for their buyback policy and the market was pricing in the possibility of the Fed backing off. Today’s CPI data is expected to show inflation is slowing, proof that longer term yields should be lower.

August 4, 2010

QE2 is sinking the dollar

Filed under: OANDA News — Tags: , , , , , , , , , , , , , , — admin @ 10:04 am

The world it seems is waiting for the Fed to cut rates. There is nothing yet carved in stone. Policy makers have indicated that they will most likely pass on next week’s Fed announcement. But, have hinted that they may ease should the economy falter if a high jobless rate persists. What have they got to play with? They have a few options which they could use immediately. Firstly, again they can be much more vocal and provide a stronger commitment to keep ‘interest rates at or around zero’ for an extended period of time. Secondly, they could cut the ‘rate the Fed pays on excess bank reserves, or buy more Treasuries or mortgage bonds’. Consensus on the street believes we need to witness a ‘significant downward revision to the Fed’s forecast into next year’ or a much worse than expected employment report this Fri (-60k, +70k Private) before anything will be put in place. The dollar still wants to sink like a lead weight.

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

Forex heatmap

The speculation that the Fed needs to take some action continues to weigh on the dollar. Yesterday’s disappointing US data fed into the talk that the Fed could consider pumping ‘additional funds into a slowing US economy’. The softer than anticipated factory orders and plummeting pending home sales is pushing the dollar towards its 8-month low ahead of NFP later this week. Digging deeper, US pending home sales disappointed across the board (-2.6% vs. +4.0%). Even worse, there were no revisions to last month’s horrid collapse (-30%). The end of the government’s homebuyers’ tax credit continues to impede future growth prospects. Analysts expect this trend to continue over the coming months, backed by the NABH survey of homebuilder sentiment, stating that the ‘traffic of prospective buyers continues to drop’. In reality, pending home sales take two-months for the paperwork to be completed, before potentially showing up in the re-sale housing numbers (re-sales are recorded once the paperwork is done). Analysts note that the extent to which housing incentives have brought forward demand is one reason why the US is facing renewed housing downsides. The second is the ‘enormous amount of sidelined shadow housing inventories that more than doubles the true months’ supply metric compared to the fictitious measure that only includes listed product’. Expect the shadow inventory to come to the fore, as financial institutions face intense pressure to ‘conform to higher standards for capital adequacy and liquidity’.

The USD$ is higher against the EUR -0.24%, GBP -0.14%, CHF -0.26% and lower against JPY +0.35%. The commodity currencies are mixed this morning, CAD -0.16% and AUD +0.00%. It was impossible for the loonie not to react negatively to market concerns over the future growth prospects of its largest trading partner. The currency happened to decline for the first time in four trading sessions as signs of weakening growth in the US ’point to diminished economic prospects’. The currency happened to depreciate against most of its major trading partners after its early advance to its best level in 6-weeks vs. the dollar on Monday. Last month the BOC tightened rates 25bp. The interest rate differential scenario seems to be the currency’s biggest support for now, despite it being a ‘dovish hike’. Some will argue that with signs of a significant slowdown underway in the US, it’s possible that the BOC may be persuaded to move back to the sidelines on the Sept. go-around. Carney has given himself the latitude to step back and assess global growth for the 3rd Q. Medium term momentum points to a stronger loonie. Currently, the currency seems guilty by association with its largest trading partner. That been said, on dollar rallies there are CAD buyers about.

It seems that the JPY has dominated all trading sessions thus far and the higher yielding commodity currencies have managed to be included. The AUD happened to pare more of this weeks gain on future reports expected to show that China’s growth is slowing and as Asian bourses declined, damping investor appetite for the nations’ assets. The AUD fall was tempered after their trade surplus unexpectedly advanced to a record last month (+$3.54b) as Chinese demand boosted exports of coal and iron ore. China is Australia’s largest trading partner. Overall, there is still a sign of concerns that the world economy is in a fragile recovery phase. It’s widely expected that the that the Fed may go into a new phase of asset buying, which will keep US interest rates low, equities higher and risk appetite supported’. Because of the equity actions, the market is a cautious buyer on pullbacks, wary that the recent strong rally technically may be overdone (0.9123).

Crude is lower in the O/N session ($81.92 down -63c). Crude prices happened to move higher from the positive momentum of global bourses and on the back of the EUR strength yesterday. At one point in time, the black-stuff made a print above the $82 mark, on speculation that the Fed will require further monetary stimulus to prevent the US economy from taking ‘a step backwards’. Once the commodity broke through that technical psychological level of $80, the market temporarily required even more of the asset class. However, the recent macro-data flow indicates that the US activity has slowed down and the market should expect some price pull back as the ‘one directional’ move may be overdone. All this bullish move has occurred despite last week’s bearish EIA report. The inventory data stumped all market expectations with its surprising increase. The headline print had stocks increasing +7.3m barrels vs. a market expectation of +1.7m. Couple this with previous weeks +3.1m gain and we have a market flushed with the ‘black-stuff’. Digging deeper and somewhat of a surprise was the lower than expected fuel inventory gains. Gas stockpiles rose by +100k barrels, below expectations for a build of +500k, while distillate fuels advanced by +900k barrels. Analysts had been expecting an increase of +2.1m barrels. The refinery utilization rate also happened to fall to 90.6%, below the expected 91%. The build in inventories, even with potential weather related production shut downs, continue to paint a bearish fundamental picture for the energy sector. The ‘historical’ US summer driving season is over, coupled with a lack of tropical activity in the Gulf are ingredients for justifiable weaker energy prices. That been said, the market expects this weeks report to show a drawdown on weekly stocks later this morning.

Rebounding after some very strong technical support levels last week, the ‘yellow’ metal has advanced for a fifth consecutive day, its longest winning streak in 4-months. Gold has found traction on speculation that prices near a 4-month low will spur increased physical and investment demand. Technically some believe that last week’s decline has been somewhat overdone. Mind you, a weakening dollar will always increase the demand for the commodity. For most of this year, we have witnessed gold rally on the back of a weaker EUR, for the past 6-months investors have been buying commodity as a safe heaven, but now a weaker dollar is the factor supporting commodities again. Since the record highs witnessed on June 21st ($1,266), the commodity has plummeted just over -6.1%. With equities performing so well, investors have been caught wanting higher risk and seeking higher returns, and owning gold is currently not the answer. If the EUR continues to stabilize against most of its trading partner, by default, the market will end up selling the commodity asset class. Bigger picture, technically, the bullish sentiment had been on hiatus with profit taking testing the medium term support levels. Fundamentally, in the short term the metal will find it difficult to rally as this is the ‘slowest’ season for physical demand. The current problem is that the market has built in a large insurance premium over the past few months and with some market stability, nervous investors will want to lighten their positions even more. Year-to-date, the commodity has gained +6.3% and is in danger of further losses ($1,198 +$10.60c). Mind you with China relaxing its rules on trading the metal will help to increase investor demand.

The Nikkei closed at 9,489 down -205. The DAX index in Europe was at 6,275 down -32; the FTSE (UK) currently is 5,535 down -61. The early call for the open of key US indices is lower. The US 10-year eased 5bp yesterday (2.89%) and is little changed in the O/N session. US 2-year product continues to print record low yields as the market speculates that the Fed will be pushed into a corner and resume bond buying to keep the economic recovery on track. Weaker US government reports yesterday, pending home sales surprisingly falling last month and again personal incomes stagnating, has managed to push 10-years to print their lowest yields in 2-weeks. The market seems to be second guessing what the Fed will do with the proceeds from its maturing maturities. It’s widely rumored that on Aug 10th the Fed will announce if it’s to buy more mortgage and treasury bonds. Perhaps this Friday’s employment report will finally push them over the edge, towards a commitment in buying product. For now, the market is content in owning product on pull backs.

May 31, 2010

EURO going nowhere fast

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

With the US and UK holiday weekend, illiquid trading and month end-rebalancing has dominated this jaded market, who is acclimatizing itself to a Spanish credit downgrade and the potential of France to follow. The French budget minister admitted that it would be a ‘stretch’ for France to keep its AAA rating without some tough budget decisions, while German finance minister hinted at further tax hikes to address its deficit. With many of the EU countries trying to implement ‘austerity measures’ does not bode well for growth prospects in the region. The futures reports continue to show that record EUR shorts remain in place while commodity currency positions have been aggressively reduced over the past week. The market will try and focus on NFP for most of this week, however, surprises and rumors and not fundamentals are expected to remain the ‘new norm’.

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

Forex heatmap

US data on Friday was a ‘hit and a miss’ for most of the reports. Because of the month end re-balancing requirements, they managed to have a limited direct impact on Capital Markets. US consumer’s data actually disappointed. Spending was unexpectedly flat last month (0.0% vs. +0.6%) in nominal dollar terms, as the real volume terms adjusted for price swings. The print was on the heels of two consecutive months of healthy gains. Perhaps the high base effect led to the flat monthly print. Digging deeper, the headline price deflator for consumer expenditure showed no change last month. It seems that pricing powers remain absent in the US consumer sector as core-consumer prices (ex-food and energy) were only up +0.1% for a second consecutive month. In reality, retailers are dependant on volume, as margins remain tight because of the weak purchasing power effect going on. It was non-durables that mostly dragged the headline print down as durable items managed to hang in. Personal income rose (+0.4% m/m) on the back of wages and salaries improving and on government social insurance packages continuing to contribute. Digging deeper, private industry wages and salaries managed to advance (+0.5%). However, it was the dividend income print that accounted for most of the headline gain, especially after three months of declines. Combining the other sub-sectors with the net government social insurance effect managed to give us a stronger disposable income print, the strongest print in three months. Now if we combined the plus income side with the flat spending rate then we have a US savings rate jumping to +3.6% and well off the recent lows of +0.8%. Optimistically, we should be looking at increased consumption down the road.

Other data saw the US Michigan Consumer Sentiment index rise to 73.6 vs. 72.2 this month. Stronger evidence that the consumer, who accounts for 70% of the US economy, will help strengthen the recovery. Thus far, it seems that the European woes are having a limited effect on confidence. The US job growth that we have witnessed this year seems to be boosting consumer spending and allowing the recovery to broaden and become more sustainable. Capital markets expect another strong NFP print this Friday.

The USD$ is lower against the EUR +0.41%, GBP +0.57%, CHF +0.26% and higher against JPY -0.65%. The commodity currencies are stronger this morning, CAD +0.26% and AUD +0.54%. This is a big week for the loonie, BOC and Governor Carney. Will they be the first of the G7 members to break ranks and hike rates tomorrow? The CAD has aggressively backed up from its six-month lows printed earlier last week as concern eased that Europe’s debt turmoil will worsen. On a macro level, Canada’s economy is now growing strongly, driven by both domestic and US demand. With policy makers concerned about a potential bubble occurring in the housing market and a rising core-inflation only supports the case for normalizing rates. Will the BOC prefer to be cautious and wait until its July meeting to hike, because of the market turmoil? Currently, the futures market is pricing in an 85% chance that Carney will pull the trigger. On the other hand, if there is no hike, the market should expect some ‘hawkish’ rhetoric from policy makers. If this uncertain environment continues then the market will want to unwind some of the interest premium already priced into the currency, but, if commodities remain true, then intraday traders will be happy buyers of the currency on ‘any’ upticks.

The AUD rose in the O/N session, paring its biggest monthly drop in 12-months as Asian equities extended a global rally, boosting demand for higher-yielding growth assets. The AUD’s new found support has managed to print a one week high, as advancing regional bourses is convincing investors that ‘down under’ can withstand the pressures from a European debt fallout. Up until now, the currency had been heading for its worst performing month in nearly two-years as investors shied away from growth currencies. Plummeting equity markets in the region and potential war rhetoric from North Korea had pushed the currency lower against nearly all its major trading partners. So far this month the AUD has managed to slide -6.1%. AUD has also found favor vs. JPY, as investors sold the JPY against most of its trading partners after the SDP left a three-way coalition government over the weekend. Expect AUD gains to be limited as the market believes the RBA will remain on hold tomorrow (4.5%), as higher rates have slashed retail sales and mortgages. Speculators are better buyer on pull backs as longer term support levels remain intact (0.8574).

Crude is little changed in the O/N session ($74.45 up +48c). Crude prices happened to give up their earlier gains on Friday and ended the day little changed entering the long weekend. With reports showing that consumer spending stalled this month, a Spanish downgrade and heightened tensions in Korea are all ingredients that effect global growth and by default oil prices. Over the past three trading sessions oil has appreciated +5.5%, the most in nine month. On the flip side, the black stuff has fallen -16.5% from its month high print on May 3. Last week’s weekly EIA report had helped the ‘brief’ rallying equity market to drag crude prices away from the oversold lows on European fiscal issues. A report released from the US Energy Department showed that the total fuel demand gained +0.6% to +19.7m barrels a day and with stronger US data has the bulls breathing a sigh of relief. The weekly EIA report revealed a +2.5m barrel increase in oil inventories vs. an expected +100k gain. On the flip side, gas stocks fell -200k barrels vs. an expected no change. Distillate inventories (including heating oil and diesel), fell -300k vs. an expected increase of the same amount. Interestingly, stocks at Cushing fell -300k barrels, the first loss in two months. Refinery utilization was down -0.1% to 87.8% of capacity, matching forecasts. Finally fundamentals are starting to provide a difference to commodity prices and not just the dollar pricing. Lets see what these downgrades in Europe happen to shake out.

Gold again traded under pressure on Friday, falling the most in a week as investors raised cash to cover ‘this month’s slump in other markets’. With continued currency concerns and a market that on ‘pins and needles’ will probably boost a case for owning gold. Longer term investors have been using the commodity as a ‘currency of last resort’ in addition to their EUR denominated assets. The technical bulls believe that $1,400 is a possible one-year target. For now, the market is a better buyer on deeper pull backs ($1,2165).

The Nikkei closed at 9,768 up +6. The DAX index in Europe was at 5,969 up +23; the FTSE (UK) currently is 5,188 down -7 (closed). The early call for the open of key US indices is higher (closed). The US 10-year eased 6bp on Friday (3.29%) and is little changed in the O/N session. Treasury yield continue to fall this month, pushing the benchmark 10’s to its lowest print in 18-months on speculation that the EU efforts to contain Europe’s debt crisis will slow the global economic recovery. Again, the 2/10’s spread happened to narrow (+252bp) as equities continued their ‘plunging’ on Friday and with a stagnant consumer price report (see above) may shift the trading philosophy from inflation to deflation. Now that the market has absorbed all of last weeks issue’s with ease and that rates have backed up aggressively from the lows (+3.08%), dealers expect 10-year support at 3.35% to hold.

April 16, 2010

Canadian Manufacturing Sales Weaker Than Expected

Filed under: OANDA News — Tags: , , , , , , , , , , , , — admin @ 7:27 am

Statistics Canada said today that manufacturing sales increased 0.1 percent in February over January due mostly to weaknesses in the energy and auto sectors. Analysts had expected an increase of 0.8 percent.

Source: Reuters

US March Housing Starts Increase 1.6%

Filed under: OANDA News — Tags: , , , , , , , , , , , , , , — admin @ 7:20 am

As has been mentioned many times already, a true US recovery is not possible until the housing sector improves. On that front, some good news was released this morning, as the Commerce Department announced that housing starts rose to a 16-month high based on an increase of 1.6 percent following the strong growth of 5.7 percent in February.

Of note however, is that most of the increase can be attributed to the building of multi-family homes a single-family dwellings actually fell by 0.9 percent.

Source: Associated Press

April 5, 2010

Oil Prices Climb After Long Weekend

Filed under: OANDA News — Tags: , , , , , , , , , , , , , — admin @ 7:15 am

After taking a long weekend away from the oil markets, investors jumped aboard the oil band wagon with a vengeance, pushing prices to the brink of $86 a barrel.

“The market was positive before but now it’s been confirmed,” said Clarence Chu, a trader with market maker Hudson Capital Energy in Singapore. “If the job growth can be sustained for several months, we’ll definitely see crude demand pick up.”

Despite oil’s rapid ascension of late, there are those that point out recent history as a cause for concern. After all, the last time we saw oil approaching $100 a barrel, the global economy went into its worst period since the Great Depression and the rising cost of energy was deemed by many to be a contributing factor.

“The last time we had oil prices at current levels, what followed was the worse recession ever and we will worry about what the combination of what is still high unemployment and higher fuel expenditure does to the economic recovery,” said Olivier Jakob of Petromatrix in Switzerland. “On a fundamental basis we still do not see the indicators that would justify crude oil to trade at $90 a barrel.”

Source: Associated Press

Canadian Dollar Half a Cent from Parity

Filed under: OANDA News — Tags: , , , , , , , , , , , , — admin @ 7:05 am

A rally in commodities and has helped push the Canadian dollar to just over half a cent from parity with its US counterpart. At one point on Monday, the Canadian dollar reached CA$1.0051 US dollars or 99.49 US cents. Most currency analysts predict that the Canadian buck will reach parity with the US dollar before the end of the week.

“I think parity is imminent. I would expect to see it today, tomorrow. We really do have all the factors lining up for us here,” said Camilla Sutton, a currency strategist at Scotia Capital.

“We have strong domestic data, we have a very strong fiscal sovereign position and there is an economic global recovery and that is good for Canada.”

Source: Reuters

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