Forex Blog

November 16, 2010

Nothing To Worry About!

Filed under: Forex News — Tags: , , , , , , , , , , , , , , — admin @ 2:47 pm

Um, yeah….about that inflation.  BOE Chief King had to write a fourth letter of explanation to the Treasury in the UK explaining why inflation has surpassed the 3% limit.  This initially sent the Pound higher as the immediate reaction was that the BOE may need to consider raising rates.  However, the Pound then sold off as the reality trumped the perception that this could be a negative for the UK economy in general, disrupting the UK economic recovery.  The minutes from the rate policy meeting will be released tomorrow which will show what, if anything, the BOE is prepared to do about inflation which

The Euro is getting a respite today from selling despite the risk aversion in the marketplace.  Euro zone and German economic sentiment figures came in much better than expected, and various CPI data was slightly higher than expected.  In addition, Ireland is supposedly in talks to receive bailout funding from the EU and IMF, though nothing formal has been agreed upon.

The release of the RBA rate policy meeting minutes in Australia showed that the RBA’s decision to raise rates was “finely balanced”, which has decreased the chance of further rate hikes well into next year.  The threat of a potential Chinese slowdown has also sent commodities lower and has contributed to Aussie weakness.

In the US, PPI figures came in much lower than expected showing that deflation in the US is still the bigger problem than inflation, although some are starting to wonder if the Fed’s meddling in economic forces is leading us toward a Japan-lite situation akin to the Lost Decade.

In the forex market:

Aussie (AUD):  The Aussie is lower as the RBA minutes indicate a pause in rate hikes for a while.  In addition, risk aversion and lower commodity prices have put pressure on the Aussie.  (Click chart to enlarge)

audusd1116.JPG

Kiwi (NZD):  The Kiwi is also lower on risk aversion though trading slightly better than the Aussie and Loonie as recent retail sales figures in NZ came in better than expected.

Loonie (CAD):   The Loonie is lower across board despite manufacturing shipments figures that fell less than expected.  Nevertheless, the Loonie’s tight correlation with oil is responsible for today’s decline, as oil traded down to 83.50, a two-week low.

Euro (EUR):  The Euro is holding positive despite the US PPI figures as CPI data and confidence figures came in higher than expected.  Euro zone CPI figures bested expectations by .1%, and the ZEW Survey of economic sentiment came in at 13.8 (vs. an expected 2), German current situation figures at 81.5 (vs. an expected 75), and German economic sentiment at 1.8 (vs. an expected -6).

Pound (GBP):   The Pound is mostly lower despite higher than expected CPI data, coming in at 3.2%, vs. a 3.1% expectation.  Anything over 3 requires the BOE to write the letter of explanation to the UK Treasury.  Tomorrow will bring the release of the BOE rate policy meeting minutes where we will see if the BOE intends to do anything about their inflation.  The UK jobless claims change is also due out tomorrow which could provide insight into the current health of the UK economy.  (Click chart to enlarge)

gbpusd1116.JPG

Dollar (USD):   The Dollar is higher against all but the Euro as risk aversion is driving stocks and commodities lower.  Fears of a Chinese slowdown coupled with the Euro debt situation have the markets on high alert.  PPI data in the US came in lower than expected, showing .4% vs. an expected .8%.  Strip out food and energy and the numbers are even worse.

Yen (JPY):  The Yen is mostly higher as the Nikkei fell overnight, and the unwind of carry trades due to risk aversion is providing a bid.

Inflation or deflation.  That is the question.  And it is also one that is not likely to be answered anything soon.  Well, OK, we’re actually going to get US CPI figures tomorrow which will give us a better idea of where we fall in the spectrum of flations.

My guess is that we’re going to see similar figure to today’s PPI figures which will justify Bernanke’s move on QE2.  However, this is likely to continue to weigh on the markets as the signs of recovery look weaker and weaker.

One of the major reasons why the US isn’t seeing inflation is because banks are not lending here in the US, there is no demand for loans as the business climate is still uncertain, and we continue to export our inflation abroad as hot money flows into emerging and better-performing economies.

So Bernanke can continue to flood the market with Dollars and it won’t do one bit of good until business-friendly tax and regulatory policy allow companies to hire again, put people back to work so that they can consume, thereby increasing demand and allowing businesses to expand and hire again.

However, if Bernanke himself doesn’t believe this is possible, then I have a doubly hard time believing as well.

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!

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Bernanke you have got it wrong

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

Why monetize debt and debase the currency now of all times? The decision is turning into an ‘abysmal failure’. Even before the Fed made their QE2 announcement, data was strengthening and yesterday’s US retail sales even beat market expectations. Albeit slow, the US economy is on the mend. Europe, Japan and the US have all posted solid third quarter growth numbers, where is the collapse in growth? Global yields are aggressively rising. It seems that investors are buying into the growth data while the Fed continues to print money. Their attempt to keep yields low by buybacks is failing, and the dollar is appreciating. Even this mornings stronger than expected German ZEW current conditions print (81.5 vs. 72.6) will pressurize Bunds and Treasuries. That being said, stronger European data is doing little to distract the market from broader matters as we wait on the EU Finance Ministers meeting and US PPI.

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 ‘subdued’ trading range.

Forex heatmap

Yesterday’s US Retail Sales beat market expectations, with headline sales growing +1.2% last month, the most in several months. The market had been expecting a more modest +0.7% gain. Digging deeper, the bulk of the support was found in autos (+5%), building materials (+1.9%) and gas (+0.8%). Core-sales (excluding the three subcategories) were more in line with expectations at +0.2%. It’s this number that the market will focus on, as it will feed consumer distribution directly into GDP. The ‘core’ print caps off the second-consecutive month of decelerating growth. Looking at all the subcategories, gains were widespread, with 9-posted wins and 7-sub-sectors revealing better results than the previous month. Of note, the biggest losers were electronics and furniture. Perhaps this may be seen as stronger proof that consumers are becoming more cautious with their discretionary spending.

In contrast to US Sales, but just as big a surprise, was this months negative Empire Manufacturing Index (-11.4 vs. +15.73). It’s hot on the heels of the previous reports sharp improvement and happens to be the first negative dip in twelve months. All the 9-subcategories deteriorated, with 7-posting negative prints. It’s also worth noting that contractions occurred in prices received, new orders (down -37pts), shipments (-26pts), delivery time, unfilled orders and the average work week. On the bright side, the employment index was the only component to continue to expand, despite it being at a slower pace.

The USD$ is lower against the EUR +0.15%, GBP +0.02%, CHF +0.00% and higher against JPY -0.19%. The commodity currencies are weaker this morning, CAD -0.10% and AUD -0.49%. Yesterday’s session saw the CAD rally for the first time in three days, kicked off by model traders buying the loonie on the crosses and later supported by stronger commodity prices and global bourses in the black. Despite the currency’s attractiveness, it still remains range bound as market sentiment continues to be influenced by European event risk. Even with recent upbeat US data, Governor Carney is expected to keep rates on hold well into the second quarter next year. He said that there are limits in how far Canada rates could diverge from the US. Obviously his decision is based on Bernanke’s QE2 plan to try to keep longer term yields lower to boost growth and eventually inflation. For a commodity supportive currency, the loonie has only appreciated +1.5%, y/d, underperforming other growth currencies. The market is back to embracing the event risk factor and with 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. Parity is shaping up to be good dollar support first time around.

The AUD trades near its two week low after the RBA minutes for this months meeting. This morning’s report 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. and the futures market is beginning to price this in. Again in the O/N session, Asian bourses declined on speculation that the Euro-zone will struggle to raise funds and regional risk aversion is evident on the back of China’s pending rate hike. 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, easing concern that a labor shortage will drive up wages. With Chinese authorities demanding higher bank reserves, again will restrict the flow of ‘hot’ money, indirectly and negatively affecting regional bourses and growth currencies. Market players are viewing corrective rebounds as fresh selling opportunities short term (0.9807).

Crude is lower in the O/N session ($84.08 -78c). Oil prices have tried to creep higher after stronger economic indicators out of US and Japan could signal increased fuel demand. Over the past few sessions’ commodities have found it difficult to maintain positive traction on fears that China may attempt to rein in inflation by raising interest rates and curb the commodity demand. The market continues to question the fundamental strength of other economies once the Chinese’s variable is erased from the global growth equation. 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 prices temporarily stopped the bleeding in the morning session yesterday, but, by day’s end happened to reverse any of its earlier gains. When the immediate tightening fear by the PBOC was unfounded and concerns that mounting sovereign debt could erode currencies, boosted demand for the precious metal as an alternative asset. Friday’s price action was the biggest loss the market has incurred in four months. With the one-directional lemming trade, a healthy purge is generally required to eliminate the weak long positions. To a certain extent, the stronger dollar has also curbed the demand for bullion. Speculators should expect European debt concerns to eventually provide support on these pullbacks. With Capital Markets shifting their focus toward sovereign debt issues and away from QE2 debates, should continue to provide support for the asset class on these deep pullbacks. Year-to-date, the metal is up + 23.8% 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’ ($1,361 -$6.60).

The Nikkei closed at 9,797 down -30. The DAX index in Europe was at 6,756 down -33; the FTSE (UK) currently is 5,751 -69. The early call for the open of key US indices is lower. The US 10-years backed up 16bp yesterday (2.95%) and eased 6bp in the O/N market (2.89%). Treasury prices plummeted yesterday after a surprisingly strong US Retail Sales headline. It temporarily increased market optimism that consumer spending may be improving and adding to the economic recovery. Also aiding higher yields was Richmond’s Fed Lacker stating that they ‘may need to tighten monetary policy even with an elevated unemployment rate to avoid a surge in inflation’. Increased criticism of the Fed’s plan to stimulate growth and concern that a swelling federal deficit has also dragged the curve higher. The market is expecting the Fed to slow down the rapid rise in yields as they implement some of their buy-back in piecemeal everyday this week. Expect more rhetoric from the Fed supporting their plan and stem the rise in yields as yesterday’s $8b longer-term buys seem to have no affect. Market actions continue to see more of the QE2 event risk unwinding the insurance premium we have been pricing in since Aug.

October 21, 2010

EUR held hostage by dollar

Filed under: OANDA News — Tags: , , , , , , , , , , , , — admin @ 9:46 am

We have witnessed a zero-sum game after five sessions of extreme volatility for the EUR. In effect it’s been a seven-cent swing for the currency since last Fridays high recorded after helicopter Ben’s remarks. Chancellor Merkel’s comment that the EUR is ‘shielded by rescue packages’ and the fact that she is bullish on German growth negated all the PBOC tightening monetary policy effect on Tuesday. That was surely a pre-G20 placation move on their part. The maddening currency swings have been driven by the lack of detail on the QE2 front. A Medley report yesterday seems to have appeased the market somewhat. It’s anticipated that the FOMC is ‘converging upon a decision to buy Treasuries of about $500b over the next three-to-six months with an open-ended commitment to buy more assets over the following year, depending on economic developments’. The dollar is expected to be subjected to further market pressures until after the FOMC meeting and the mid-term elections.

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

Forex heatmap

The market held its gains after waiting most of the day yesterday for the muted Beige book release. The Fed’s economic survey brought nothing new to the table, again stating that economic growth continues to be modest with a weak housing market and tame inflation. The surprising nugget was that the districts believe that consumers are ‘slowly regaining confidence’. Across all districts it’s more of the same. Consensus has us believing that there is nothing in the report to dissuade the Fed from their expected course of action. Earlier this month helicopter Ben stated that there was a case for additional stimulus because ‘inflation is too low and unemployment is too high’. Since his remark the market has been pricing in aggressive QE2 somewhat on the lines of the yesterday’s Medley report highlighted above.

The USD$ is lower against the EUR +0.41% and JPY +0.05% and higher against GBP -0.36% and CHF -0.09%. The commodity currencies are mixed this morning, CAD +0.15% and AUD -0.05%. Yesterday, Canadian wholesale trade shot by all market expectations. The headline (nominal) wholesale print climbed +1.2%, m/m, the biggest gain in nine-months. In volume terms, wholesale trade was up +0.9%. Digging deeper, all the sub-sectors, with exception for food, drink and tobacco, managed to report gains. It’s worth noting that the machinery and equipment segment was the key contributor to growth (+3.2%). This data took a back seat to the MPR report, which reiterated what the BOC told us earlier in the week regarding a softer outlook. However, the one bright spot may be the fact that while Carney downgraded the inflation projections, policy makers still see the risk to the inflation outlook as being balanced. On Tuesday the BOC kept rates on hold (+1%). Policy makers downgraded growth (+3% vs. +3.5%, 2010) and the inflation outlook (CPI and core inflation are now expected to converge to 2% at the end of 2012). There are a number of ‘factors’ in the way for another rate hike at present. The BOC said that the ‘more modest growth profile reflects a more gradual global recovery and a more subdued profile for household spending’. They did not go all out neutral on future rate hikes, but noted that certain factors stand in the way. A broadly softer dollar on QE2 pressures will prevent the loonie from losing too much ground, until at least after the FOMC meeting in Nov.

The AUD had a bumpy ride in the O/N session, finding it difficult to maintain traction, as reports out of China pressurized regional bourses and by default curb the demand for growth currencies. Reports show that China’s rate of GDP growth coupled with record inflation acceleration justifies a tighter monetary policy from the PBOC. The AUD fell against the greenback and the yen as Asian shares declined. This weeks RBA minutes showed that policy maker’s decision to keep interest rates unchanged this month had been ‘finely balanced’. On the other hand they did indicate that rates would have to ‘rise at some point’. From a fundamental perspective the minutes reinforced the argument that there could be another hike coming in Nov. or Dec. given that the RBA seems very comfortable with where the currency is currently. Month-to-date, the AUD has climbed +5.9% vs. the buck as data fueled bets that the RBA will raise interest rates before the year ends. Investors are better buyers on deeper pullbacks as the interest rate differential continues to be of appeal for alternative investments (0.9867).

Crude is lower in the O/N session ($82.20 -34c). Crude prices climbed as the dollar tumbled across the board yesterday, erasing most of the previous day’s losses, and on the weekly inventory report showing a smaller than forecasted gain in stockpiles. The EIA report rose +667k barrels last week, less than half what was expected. That being said, the market continues to focus on the dollar’s weakness and its inverse relationship with commodity prices. Investors anticipate the currency to struggle until after the FOMC meeting and the mid-term elections in Nov. Total crude stockpiles were expected to increase by +1.5m barrels. The market is also focusing on the drawdown at Cushing (the delivery point for New York futures). Supplies dropped -1.1m barrels to +34m, the biggest one-week drop in nine-months. Gas stockpiles rose by +1.2m barrels to +219.3m vs. a -1.3m drop. In contrast, distillate stocks (heating oil and diesel) fell by -2.2m to +170.1m barrels. Analysts had expected only a -600k barrel shortfall. The refining capacity utilization rose by +0.6% to +82.5%. Analysts expected a 0.1-percentage point increase. Despite all this, inventories for crude and refined products remain at unusually high levels. Crude analysts note ‘this is currently a shoulder season for product demand ahead of the winter heating season’. Technically, we should see inventories gravitate towards their highs. The market remains wary that the underlying fundamentals have not changed. It’s the dollars value that is pushing prices about.

What a difference a day makes. Gold rebounded from its biggest loss in three months as the dollar tumbled on QE2 rumors yesterday. Investors continue to seek an alternative investment strategy to the historical reserve currency. Interest rates play an important role to the commodities advance. Rising interest rates pressurize gold prices, just look at the markets reaction earlier in the week to China tightening their monetary policy. Year-to-date it has been a commodity in demand for alternative investment purposes. Last week, the market traded with a distrust of currencies and gold seemed to be the only solution as investors used it as a proxy for a ‘third reservable currency’, pushing the metal to record new record highs. With market confidence wavering in currency prices, and with cheap money, has made commodities look attractive on pull backs. To date, gold has outperformed global equities and treasuries (+22.3%), prompting record investment in gold-backed exchange-traded products. The debasing issues of the dollar, coupled with the sustainable growth issues of the US economy have had investors generally seeking protection in an asset with a ‘store of value’. With the Fed on the verge of implementing further QE programs ‘tend to be supportive of asset prices and is fueling concerns about the potential longer-term inflationary affect of such measures’. The opportunity costs of holding gold are low due to low interest rates ($1,345 +$1.50c).

The Nikkei closed at 9,376 down -5. The DAX index in Europe was at 6,547 up +23; the FTSE (UK) currently is 5,754 +25. The early call for the open of key US indices is higher. The US 10-year eased 1bp yesterday (2.48%) and is little changed in the O/N session. Longer dated securities prices remain close to home as several Fed officials express the need for more policy easing. They have also indicated that it’s going to take ‘quite something to derail a second round of QE’. The open ended question remains what form will QE2 take? It’s the unknown that is keeping yields within a tight range. They market is trying to anticipate how much the Fed will buy or even whether they will give an explicit target. Never ending rumors continue to provide support on pull backs.

March 31, 2010

EUR head-fake to unnerve weak dollar longs

Filed under: OANDA News — Tags: , , , , , , , , , , — admin @ 4:18 am

For awhile yesterday, it seemed that ‘riga-mortis’ had hit set in as Capital Markets sat patiently for the first wrong move in their opinion to occur. It’s not a finely balanced market. Investors have piled into the one directional long dollar trade and that includes growth currency dollars. Let’s be fair, the markets have not felt confident, especially after how the ‘freshly printed Greek bonds’ trade in the secondary market. Thus far, this has caused both EUR/JPY and EUR/USD to fail at an attempt to the topside. However, today could unnerve these ‘weaker’ long dollar positions. Because of the strong performances by the indexes, managers will require to hedge more dollars today. Month-end models suggest that there will be a lot of dollars needed to be sold around the ‘fixes’. Technically, this could be the ‘week’s purge that we have been expecting before NFP on Friday. Otherwise we will be back to twiddling our thumbs.

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

Forex heatmap

Yesterday was full of surprises. Firstly, US house prices posted an unexpected gain in Jan. (-0.7% vs. -3.1%, y/y). Capital market had expected another decline, but house prices have now recorded their seventh consecutive monthly gain (+0.32%, m/m-seasonally adjusted). Since the lows recorded 12-months ago, prices have advanced +3.57%. Certainly positive signs, however, some analysts believe that prices will again come under renewed pressure following the expiry of the first-time home buyer’s tax credit next month. Other factors are also expected to pressurize prices for the remainder of the year and next. Fixed income is pointing to higher borrowing costs and the release of ‘shadow’ inventories in reaction to the current advancement in prices will no doubt hurt sellers. The S&P/Case-Shiller index shows disconnect to other monthly house price indicators. This can be attributed to the seasonal adjustment element playing a larger role. The non-seasonally adjust print would show a decline of -0.39%. In the other sub-categories, there were no surprises.

Secondly, US consumer confidence climbed this month (+52.5 vs. +46.4), as consumers perceived the employment situation is about to improve. The trend is moving in the right direction. However, we are still a long’s way from the decade average, which is roughly 40pts higher. This morning we get to peek at some private employment reports. Will the market consume the data as a strong indicator for Friday’s NFP? A percentage will certainly do, while many will be able to explain away, either good or bad, the headline print.

This morning, German unemployment numbers provided the market a healthy surprise and ‘hope of a modest consumer revival’. But there remains a risk of renewed job cuts to come. The fall of -31k was the sharpest pullback in 12-months, managing to push the unemployment rate down unexpectedly to +8.0% vs. +8.1%. Even healthier, last month’s data was revised to show that unemployment was little changed, rather than rising as previously estimated. The important sub-category of hiring intentions points to a ‘continued improvement to come’.

The USD$ is lower against the EUR +0.15%, GBP +0.19%, CHF +0.15 % and higher against JPY -0.52%. The commodity currencies are mixed this morning, CAD +0.24% and AUD -0.30%. Yesterday, we witnessed some pipeline inflationary pressures in Canadian industrial product prices last month. Despite the headline print being flat m/m, core-prices advanced +0.2%. Not to be out done, the raw materials price index also advanced +0.4% in Feb. (the fourth monthly gain in five-months). Much of the reasoning for industrial prices can be attributed to the loonies’ depreciation vs. the dollar in Feb. over Jan. While raw materials can be explained by the rising costs of fuels. The market can expect the CAD to reverse this month’s print, as the currency to date has appreciated north of +3%. This week we have seen the ‘one directional oversaturated’ CAD trade weeding out some of the ‘weaker domestic longs’. Even with all the other global ‘noise’ the currency is outperforming many of its G7 members. The loonie remains a good news story with strong fundamentals. To date the USD rallies have been shallow and are met with strong resistance. The trend remains your friend.

There was a slight turn up for the books in the O/N session. The AUD fell for the first day in three after retail sales (-1.4% vs. +0.3%) and home-building approvals (-3.3% vs. -2.1%) unexpectedly declined last month, easing pressure on the RBA to raise rates next week (+4.0%). It seems that the Cbank is getting the job done as the interest-rate increases are cooling domestic demand. Many bets were taken that Governor Stevens would again tighten as stronger fundamentals added to speculation that they needed to increase borrowing costs. Policy maker’s rhetoric had provided further market support. They reiterated that the benchmark borrowing costs need to climb toward ‘normal levels’ to contain inflation. On the face of it, last night numbers were woeful for position relying on further tightening soon. The market should expect the AUD to remain under pressure, especially after the currency outperforming in the last week in anticipation of ‘this’ hike (0.9162).

Crude is little changed in the O/N session ($82.82 up +40c). Why upset the ‘applecart’ before the reports? Crude price have not strayed too far, as investors wait for this morning weekly inventory report. The market again expects a build up in crude and a drawdown in gas supplies, but, by how much? That’s the key to get this market moving. Investors are trying to decide if we are witnessing a tightening market with a stronger job situation that will lead to an improving global economy. If that’s the scenario then the ‘bears’ may have to bite the bullet. After ending last week ‘down and out’, oil prices have advanced. This week, thus far, we have seen the Euro-zone economic sentiment increasing and the US consumer spending rising, factors that are trying to dissuade the bears from their course of action, especially after last week’s EIA report showing a bigger than forecasted increase in inventories. Crude stocks increased four-fold, rising +7.25m barrels. On the flip side, gas stocks fell -2.72m vs. an estimated drop of only -1.5m barrels. Not to be outdone, distillate fuel (heating oil and diesel) declined -2.42m barrels to +145.7m. Technically the market remains somewhat optimistic, while fundamentally, weak demand has us not so. Hence, this is the reason why we are confined to a ‘tight trading range’.

Despite gold prices remaining contained in a tight trading range, albeit somewhat volatile, a strong greenback has curbed demand for the metal as an alternative asset. The intraday trading has certainly caused some traders to suffer from price ‘whiplash’. The yellow metal was driven lower as Greece’s 7-year notes fell during the first day of trading on concern that the country will struggle to contain its deficit. Analysts believe that from a macro perspective ‘the underlying problems of the heavily indebted euro-zone economies are overshadowing everything at the moment’ and have investors both gun shy and trigger happy when coming to execution. Fundamentally, it’s been expected that the ‘yellow metal’ would find stronger traction as investors seek an alternative to an ‘on going weakening’ of the EUR and low interest rates. However, the market is seeing little evidence of that demand appearing just yet. There remains strong support at $1,075-80 level. What about the IMF? Will they require selling gold to finance a Greek bailout? The commodities highs are getting lower and suggest that further weakness is warranted in the short term. The dollar’s direction remains the strongest indicator to wanting the metal or not ($1,109).

The Nikkei closed at 11,089 down -7. The DAX index in Europe was at 6,157 up +15; the FTSE (UK) currently is 5,694 up +22. The early call for the open of key US indices is lower. The US 10-year backed up eased 1bp yesterday (3.86%) and is little changed in the O/N session. Treasury prices stayed close to home despite reports showing that house prices unexpectedly rose in Jan. and consumer confidence increased this month more than forecasted. Losses were somewhat curtailed as equities found it difficult to maintain any traction. Technically and fundamentally, supply and the realization that there are more issues to come are starting to continuously weigh on Treasuries. With an expectation of a strong NFP print this Friday could reduce further the relative demand of government debt.

February 16, 2010

EU’s stoic stance is a market positive for the EUR

Filed under: OANDA News — Tags: , , , , , , , , — admin @ 4:10 am

We are back. With Chinese New Year and US president’s day out of the way, North America is prepared to take a swing at Europe’s attempts of sugar coating ‘their situation’. Demanding Greece to make deeper cuts while imposing ‘murky’ financial restrictions is helping no one. Is the EU trying to set Greece adrift? Tensions between the two entities are strained. The Greek finance minister said that they ‘are trying to change the course of the Titanic, and it cannot be done in a day. Greece is being pushed over the edge. We are in a terrible mess’. Is seems that the EU has had enough of Athens creative accounting reporting. Their stoic stance should be viewed as a market positive for the EUR. By day’s end, this mess will require a temporary direct payment from other members, coupled with the suspension of several of the Maastricht criteria’s. How much has the EUR priced all this in? Or is it overpriced? Perhaps we are dealing with a house of cards, where we move from Greece to Iberia?

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

First day back after a long w/d one always seems discombobulated. Some price movements make sense while others we give up trying to understand. However, in the next 24-hours we will not feel as alienated. Forgot the micro-movements, the big picture remains the same. In Europe we have Greece, who is next? Australasia, strong Aussi fundamentals bring rate hikes back on the table. Japan continues to be fixated with deflation. China implementing slower growth measures and commodities finds footing with stronger corporate earnings. Now, two minutes later, one is less disorientated. Let the week begin!

The USD$ is currently lower against the EUR +0.48%, GBP +0.31%, CHF +0.40% and the JPY +0.08%. The commodity currencies are stronger this morning, CAD +0.18% and AUD +0.61%. For a third consecutive day and the longest winning streak in 5-week’s yesterday, the loonie experienced ‘one way traffic’ as speculators coveted growth currencies on the tentative support by EU officials for Greece. Technically any positive news from Europe had risk appetite returning to the market. On a cross related basis, the currency has certainly outperformed most of its other G7 members. One gets the feeling that the domestic currency may be overbought, despite commodities also advancing. On Friday, it was the strongest performing currency and the intraday technical charts indicate that there is strong support for the greenback at we approach ‘parity’. Despite some of the European uncertainty being lifted, a definitive proposal for Greece will probably endorse some domestic currency profit taking. The old adage of ‘buy the rumor sell the fact’ tends to be a good percentage bet. For now being a contrarian costs.

The AUD rallied to its strongest point this month O/N after the RBA said that further ‘increases to the benchmark interest rate are likely if the economy improves’ (3.75%). The currency happened to gain for a second consecutive day after Governor Stevens said in last meeting that ‘their decision to keep borrowing costs on hold was finely balanced as they needed time to monitor events overseas’. The rhetoric looks like its giving the green light to Capital Markets to expect another hike as early as next month. So far, the futures market is pricing in a 40% chance of a hike during the Mar. meeting. Also aiding the currency last night was the NAB confidence index rising 7 points to 15, the industry report showed business confidence rebounded following the RBA decision to keep rates on hold. On pull backs, expect better buying of the currency (0.8947).

Crude is higher in the O/N session ($74.85 up +72c). Crude prices remain little changed after last weeks larger than expected weekly EIA headline print and reports that China has taken further steps to cool its economy continue to support demand destruction. On Friday, China ordered banks to increase their reserve requirements for the second time this month. Despite signs that Japans economic growth is accelerating, European’s weaker GDP numbers last week will offset Japanese gains in the short term. The EIA report was delayed for two days due to the adverse winter conditions along the US eastern sea board. Finally introduced, the report showed crude supplies climbing +2.42m barrels to +331.4m (the highest level in 2-months) vs. an anticipated inventory rise of +1.6m barrels. The gas sub-category increased +2.32m barrels to +230.4m, w/w. In contrast, distillate stockpiles (heating oil and diesel fuel) lost -356k barrels to +156.2m vs. an expected drop of -1.55m barrels that was forecasted. With industrial demand remaining weak, it continues not to have any impact on excess crude supplies. For the time being, expect speculators to be better sellers on upticks.

Yesterday, the yellow metal found another gear, climbing the most in over a week as concern about Greece’s debt burden fueled speculation that the global economic recovery might falter. Investors continue to seek an alternative to holding EUR’s on concerns that the Greek budget deficits woes may widen. Last week we saw that stronger fundamentals out of both Australia and China gave commodities a leg up from just above the month’s low, while a brokered European accord, short on details, has had nervous investors seeking security in the asset class. Where too from here? That depends on the convictions of one’s own risk tolerance. With the positive Australasian outlook and the remaining sovereign debt questions, one should expect better buying on dips to remain in play for the time being ($1,114).

The Nikkei closed at 10,034 up +21. The DAX index in Europe was at 5,575 up +64; the FTSE (UK) currently is 5,223 up +56. The early call for the open of key US indices is higher. The US 10-year note eased up 1bp on Friday (3.69) and are little changed in the O/N session. Last week was the first losing week this year for 10-year notes as a record tying $81b’s worth of product coupled with Europe’s semi-pledge to help Greece dissuaded investors from seeking the safe heaven nature of US’s FI. A tad confusing really, as the European stance in respect to Greece seems somewhat unnerving for capital markets. Traders certainly had the best of excuses to cheapen up the curve, the US long bond or 30-year treasuries touched a four-week high as a record-tying $16b auction on Thursday yielded lower-than-average demand. All three of last week’s issues came with a ‘larger than expected tail’. With the lack of ‘specificity about the true nature of the determined and coordinated action pledged’ should be a good enough reason to want to own some of the safe heaven product on these deeper pull backs.

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