Governor-carney | Forex Blog

December 6, 2011

AUD and CAD take different routes

Filed under: OANDA News — Tags: a-carry-gain-, aud, australia, chf, currency, data, dean's fx, gbp, governor-carney, loonie, market, other dollars, past, unemployment — admin @ 11:58 am

Governor Carney did what was expected and kept Canadian rates on hold (+1%) this morning. The accompanying statement was a tad surprising, less dovish than expected. The fact that the Bank mentioned that there was “considerable monetary policy stimuli” in place, coupled with policy makers noting that CPI would run a tad higher than forecast and that they see US growth “slightly more robust than foreseen’ has helped the CAD to outperform most of the other major currencies today.

Fixed Income traders have trimmed future rate expectations. They had almost fully priced in a -25bps rate cut by next June, but this has been pared to +80% after the Bank stood pat and sounded less dovish than expected. Another reason for the firmer tone for the currency is the underlying story of the CAD in demand for safe-haven flows in light of AAA rated countries elsewhere under pressure from S&P. Canada is seen as an investor’s refuge from the Euro crisis without the risk of US budget deficit and political deadlock. The loonie has been the best performer in the past month outright amongst the most-traded currencies. It’s expected that Carney will be the only central bank leader in the G10 to raise interest rates next year. This is on the back of inflation having exceeded the Bank’s+2% target for eleven-months as the economy grows at double the pace of the G-7 nations.

Other data handily beat market expectations. Canadian Ivey PMI was at 59.9 seasonally adjusted last month vs. 54.4, indicating that purchasing activity has again expanded. Disappointing however was the sub-category employment index print of 49.4, indicating that employment was lower than in the previous month. Last week, Canada reported losing -18.6k jobs in October and the unemployment rate ticking up to +7.4%.

Over the past few sessions the loonie remains handcuffed to EUR headlines, tightly trading in its own range. Currently, the currency seems well supported above 1.0220 and with resistance below 1.0100. Expect the currency to trade close to this range until the market gets a clearer picture of Euro intention by weeks end.

Loonie

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November 3, 2011

Growth Dollars under pressure

Filed under: OANDA News — Tags: a-better-seller, a-market-easing, a-more-neutral, a-strong-trade, against-the-yen, along-the-curve, aud, governor-carney, higher-at-speed, other dollars, risk — admin @ 8:25 am

Like a phoenix, the CAD has risen from its lowest level in almost two weeks outright on increased demand for this particular higher-yielding growth currency. The Fed acknowledged that US economic growth “strengthened somewhat” in the third-quarter, giving global equities and commodities a boost. This is always favorable for growth sensitive currencies, especially one that have such a strong trade association with the US. Strong private employment numbers down south suggests that the US may skate a recession. Tomorrow, the market gets the privilege to trade last months NFP and Canadian employment reports. What’s good for the US tends to always be good for its largest trading partner.

The Canadian Finance Minister stated earlier this week that the BoC’s mandate will remain unchanged, allowing Governor Carney to rule the roost the same as before. The CAD, when under duress this week, certainly outperformed other risk sensitive currencies. The BoJ’s intervening actions indirectly dragged the dollar higher and at the same time the loonie was reluctant to fall.

Carney’s comments last week were very transparent. He is concerned about sustainable growth and the market will have to be cautious in trying to push the currency higher at speed. Corporate buyers remain below as dealers focus on the risk reward of owning the loonie at these levels (1.0159)

Loonie

Growth sensitive currencies are not going to hack it through this trading environment. The AUD fell against the yen and pared its outright advance versus the dollar after the referendum pledge from the Greeks and after the Fed refrained from taking additional steps to ease monetary policy. The chances of a disorderly default has raised the stakes that global growth is unsustainable. Earlier in the week the RBA cut rates (-25bp to +4.50%) and has moved to a more neutral policy stance. In Governor Stevens communiqué, the RBA concluded that a more neutral monetary policy stance would be appropriate to maintain growth now that inflation is likely to stay within its 2-3% target over the next two years. The RBA noted that while financial conditions have eased, overall conditions remain tighter than normal and the AUD is still at historically high levels.

The market is now estimating and pricing a neutral policy rate at around +4.0-4.5% and that the RBA is likely to cut by another-25bp in Q1 of next year. Futures dealers have priced in a market easing of about-88bp in total along the curve throughout this cycle. Currently that looks a tad rich, but hindsight is another matter. These cuts are likely to constrain and cap the Aussie. However, on the flip-side, better than expected data out of the US coupled with resilient growth from the Chinese economy will be supporting antipodean currencies. In this current environment, the market remains a better seller of the currency on rallies (1.0277).

Aussie

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ECB Surprises and sideswipes market with Rate Cut

Filed under: OANDA News, Uncategorized — Tags: a-market-easing, benchmark, borrowing-costs, france, governor-carney, greece, monetary-union-, risk — admin @ 7:05 am

The European Central Bank unexpectedly cut interest rates as Italian and Spanish borrowing costs soared after euro-area leaders raised the prospect of Greece exiting the monetary union.

ECB officials, meeting under the presidency of Mario Draghi for the first time, cut the benchmark interest rate by 25 basis points to 1.25 percent, wrong-footing 51 of 55 economists in a Bloomberg News survey. Four predicted a quarter-point move and two expected a half-point cut.

European leaders last night raised the prospect of the 17- member area splintering, with France and Germany saying they would treat Greece’s surprise referendum on a second bailout as a vote on its euro membership. With the region’s economic slowdown deepening and investors growing increasingly concerned, the ECB was under pressure to reverse this year’s two rate increases.

“The economy is weakening, possibly even already shrinking,” said Silvio Peruzzo, an economist at Royal Bank of Scotland Plc in London, who predicted a 25 basis-point cut today. “It’s about survival for the euro zone, certainly for some countries. The support of the ECB is very important.”

Bloomberg

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September 22, 2011

FED’s Desperation Sees Red

Filed under: OANDA News — Tags: chf, europe, european, fomc, governor, governor-carney, greece, jpy, price, time, usd, water, week, yielding — admin @ 4:35 am

Desperate times call for desperate actions. The Fed did was expected of them. They have introduced something innovative. Bernanke and company have reverted to “operation twist”, a program that has not been implemented in nearly half-a-century. The problem, is that yesterday’s announcement doe not provide new liquidity to a financial system where the market already sees European liquidity crunch intensifying. Policy makers did however surprise dealers with the size and targeted maturities to be bought in the program, but, basic growth concerns remain.

The market does not have a handle on what these asset purchases really mean and its the reason risky assets have performed so poorly. It may be month’s before key uncertainties on Europe and US growth dynamics have been addressed sufficiently to see the market exit from this “panic”.

Until then, pro-dollar and yen momentum trades likely have further to run. Especially now that Soros is marketing the ‘double-dip’ experience and this morning’s fall in the euro-zone composite PMI. Falling below the theoretical 50 “no-change” barrier provides the strongest sign yet that the region is on the cusp of recession.

US data did little for the dollar ahead of the FOMC announcement and this despite providing the market with a huge positive. US existing home sales blew analysts estimates out of the water by rising +7.7% to +5.03m units, m/m, from +4.71m and in stark contrast from the MBA and NAHB surveys. Analysts attribute some of the rise to a easing of restrictions on foreclosures, with distressed sales up +31% and to the recent declines in mortgage rates as longer bond yields fall. Regionally and as expected, Hurricane Irene had a negative impact on sales figures for the eastern part of the country. The y/y print looks somewhat distorted at +18.6%, inflated by the weak year ago data starting point shortly after a buyer’s tax credit had expired. On the positive side, inventory of unsold homes fell to +8.5 months from +9.5. Again disappointing was the price data weakening, partially due to the increased tally of foreclosures. The median price fell to +$168.3k from +$171.2k and is now only down -5.1% y/y compared to-6% before the release. The mean price fell to +$216.8k from +$220.4k in July.

Bernanke and company did what was expected of them. The Fed announced a new plan yesterday to stimulate growth by purchasing +$400b long-term securities with funds from the sale of short-term government debt, and in the process defied Republican demands ‘to refrain from new actions’.

The FOMC directed the Open Market Trading Desk to purchase, by the end of June 2012, +$400b in par value of Treasury securities with remaining maturities of 6 years to 30 years and to sell, over the same period, an equal par value of Treasury securities with remaining maturities of 3 years or less. The FOMC also directed the Desk to reinvest principal payments from its holdings of agency debt and agency mortgage-backed securities in agency MBS.

The Fed said that it was responding to evidence that there was a need for help, ‘growth remains slow with recent indicators pointing to continuing weakness in overall labor market conditions and the unemployment rate remains elevated’ . Their indicated that ‘household spending has been increasing at only a modest pace in recent months’. The program is aimed at reducing the cost of borrowing for businesses and consumers, including the cost of mortgages. The vote was 7-3 in favor for the new initiative. The innovative effort is an ‘experiment without a direct precedent’.

The dollars is higher against the EUR -0.73%, GBP -0.44%, CHF -1.33% and JPY -0.02%. The commodity currencies are weaker this morning, CAD -1.39% and AUD -1.44%.

The loonie completed its short term primary objective and printed parity before the FOMC announcement. It was here that it ran into large domestic corporate selling on the back of order books being tilted towards sellers. Post FOMC decision, short term US yields backed up and it was this that proved dollar positive and bad for carry and commodity sensitive currencies.

Yesterday’s data showed that inflation in Canada rose above the BoC comfort level last month as higher prices for gas and food pushed the rate up four notches to +3.1%, y/y. In times gone by, Governor Carney would have had his finger posed over the rate hike button. Not this time. Core-inflation also saw a sizable increase to +1.9% from +1.6%, pushing close to the BoC’s two-per-cent target. Earlier this week, Carney said he was not concerned about inflation and would not raise interest rates to deal with the issue. The bank’s mandate is to keep consumer prices within a range of +1% and +3%, and as close to +2% as possible. With the IMF stating that the global economy is entering a new “dangerous phase’, investors should expect inflation to moderate as demand diminishes. Presently Canada is experiencing the twin evils of a slowing economy and higher inflation. The Canadian economy remains at the mercy of ‘external headwinds’.

Governor Carney continues to apply the expected ‘dovish’ tone on the Canadian economy, explicitly noting ‘the need to withdraw monetary stimulus has diminished’. The Governor is becoming more concerned about global growth, especially now that the IMF has revised their growth forecasts. Investors are better buyers of dollars on dips (1.0273).

For the first time in six-weeks the AUD trades below parity as all commodity and interest rate sensitive currencies suffer outright. Data from Australia’s largest trading partner, China, indicates that manufacturing may contract for a third month in September as measures of export orders and output decline. A preliminary reading of 49.4 for a manufacturing index released earlier today compares with final readings of 49.9 for August and 49.3 for July. A reading below 50 indicates a contraction. China is Australia’s largest trading partner.

Despite Euro policy makers indicating that they are making some good progress with Greece, periphery yields remain elevated, heightening debt default uncertainty and requiring the paring of higher yielding risk portfolios. Other negative data has also pressured the currency this week. One of Australia’s mortgage insurers reported the percentage of mortgagees experiencing stress rose to +25% in July from +21% in June even as rental vacancies fell. Now that the domestic data is coming out a bit negative, there will be some questions ahead on what will happen to the Aussie economy. If anything, the RBA is likely to be on hold for an extended time, allowing investors to sell higher yielding assets on rallies. Liquidation of AUD may have be overextended in the short term as some investors currently look for opportunities to own the currency (0.9880).

Crude is lower in the O/N session ($82.86 down-$3.06c). Pre-FOMC, oil prices climbed after the weekly EIA report showed that US stockpiles declined to an eight-month low as refineries unexpectedly increased operating rates. Post-FOMC, crude prices plummeted as the Fed indicated that there were ‘significant downside risks’ to the US economic outlook.

This week’s EIA report showed that the US commercial crude oil inventories decreased by -7.3m barrels from the previous week. Analysts expected a-700k barrel decline. At +339m barrels, oil supply’s are above the upper limit of the average range for this time of year. This drawdown has left stocks at the lowest level in nine-months and was the biggest drop since December. Refineries operated at +88.3% of capacity, up +1.3% points from the prior week. On the flip side, gas inventories increased by +3.3m barrels last week and are upper limit of the average range.

Overall, the report was bullish, giving the sense that conditions are tight in the market place. Analysts note that there are a couple of variables that should keep oil prices in check, preventing them from running away on the top side, for instance, there’s set to be weaker growth as shown by the IMF, which points to lower oil demand, and production in Libya is coming on stream faster than expected. The market can expect to run into technically selling on rallies.

The yellow metal midweek rally was on the back of further European debt concerns. Risk-aversion investors were looking at gold as a safe haven prospect. Year-to-date, the commodity had risen +25% and is in the midst of completing its eleventh bull year. However, yesterday’s Fed announcement put a stop to the current bull run. Gold prices slumped just after the Fed’s introduction of more stimulus measures disappointed investors who previously bought, expecting a still-larger package, sold to exit from their contracts. Had there been even more stimulus measures, this would have raised the prospects for inflation even further.

In reality, the continued concerns over euro-zone sovereign debt are likely to drive gold higher before policy makers are forced to take more effective action. Some analysts believe that $2,000 a once is possible before year-end. The Fed’s efforts to drive interest rates lower to support lending should, by default, eventually support commodity prices. For now, liquidation for margin requirements take precedence ($1,765-$42.60c).

The Nikkei closed at 8,560 down-181. The DAX index in Europe was at 5,206 down-226; the FTSE (UK) currently is 5,065 down-222. The early call for the open of key US indices is higher. The US 10-year eased-13bp yesterday (1.80%) and is little changed in the o/n session.

US long-bond prices have surged, pushing the yields to the lowest level in two-years, after the Fed said it will purchase longer-term debt and sell shorter maturities to sustain the economic recovery. Yields on two-year notes rose after Bernanke said it will replace much of its short-term debt in its portfolio (Operation Twist). This was expected, but it has been seen as an aggressive move by the Fed. Their communique indicated that there were ‘significant downside risks’ to the US economic outlook, which should provide further support for treasuries and flatten the curve even further. The Fed is ‘firing another magic bullet’ and dealers intend to keep ahead of ‘that’ curve.

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July 28, 2011

Swiss Franc the New Reserve Currency?

Filed under: OANDA News — Tags: a-deal-before, antipodean, aud, australia, cad, central, currency, governor-carney, the-currency-, usd, week — admin @ 5:43 pm

In times of uncertainty, nervous investors historically tend to gravitate towards the CHF and JPY. Today, the CHF printed an all time high against the dollar (0.7990) on the back of Euro-contagion concerns and the US debt ceiling impasse.

From a portfolio perspective, it’s expensive to have all your ‘eggs in one basket’. The Swiss fundamentally have their own issues. This week’s KOF Economic Barometer or leading indicators, came in softer than expected, which should have been negative for the currency, however, with the market being so nervous, the currency is unlikely to see much near term relief.

The market is also propping up the currency as the Swiss government is finding it difficult to recycle their current account surplus. The SNB are not even comfortable with the idea of being a reserve currency. They have proven that intervention has not worked.

There is no single currency that can be considered as a reserve currency. Preferably, it would be better to be looking at a bucket of currencies for reserve purposes. This bucket should be composed of the antipodean pair, AUD and KIWI, as well as the CHF and CAD. Apart from the CHF, all the others are growth and commodity sensitive currencies whose Central Banks are leaning towards a tightening environment or widening rate differentials.

Yesterday, the Reserve Bank of New Zealand kept rates on hold as widely expected (2.50%), but the policy statement signaled that the central bank stands ready to remove March’s-50bp cut post Christchurch earthquake. Futures traders are beginning to price in a +50bp hike in September rather than October.

The CAD is heading for a second straight monthly gain as the market is predicting that tomorrow’s GDP print will show that output expanded in May. The loonie is wearing the ‘safer heaven’ hat as investors push the currency towards its four-year high. There is good appetite from reserve managers to diversify away from the USD and the EUR, providing support for the CAD. Currently, there is interest in buying the loonie on any US dollar rally, which is a spillover from the somewhat hawkish tone from Governor Carney last week.

Also this week, the AUD vaulted to a post-float high (1983) after the market digested a higher than expected second-quarter inflation print midweek (core-CPI rose by +0.9% on the quarter and +3.6% on the year). With Australia inflation surprised higher, it points to a rate hike (4.75%), rather than a cut that had previously been priced in, and a blow to the doves.

Coupled with ongoing dollar negativity, around US politicians’ inability to strike a deal before next Tuesday and the stronger than expected inflation figures means, Aussie buying dip theory remains in vogue.

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June 30, 2011

EUR following the Script?

Filed under: OANDA News — Tags: a-hedge-against, cad, eur, europe, governor-carney, greece, greek, house, market, morning, week, year — admin @ 4:15 am

Papandreou clinched enough votes to pass the first part of an austerity plan aimed at meeting EU aid requirements and staving off a default. The EUR did what most anticipated, rally up towards 1.45 as residual speculative shorts are closed. Now what?

According to the script, upside momentum is expected to stall around these levels as markets turn their focus to this morning’s Greek vote on implementation of the various fiscal measures, weekend discussions on private sector participation in the 2012 bailout, and risks around key US PMI data due out tomorrow.

On the flip side, the EUR is certainly looking prettier than GBP and the USD this morning, proving to be market resilient. Certainly strong proof how fundamentally flawed the markets treatment of the dollar and sterling is!

The US$ is a weaker in the O/N trading session. Currently, it is lower against 13 of the 16 most actively traded currencies in a ‘whippy’ session ahead of the second of Greece’s votes.

Finally, a pleasant surprise or is it? May’s US pending home sales index rose +8.2%, well above the market expectation of +3.2%. Analysts note that we should be appreciating the rise in the context of the -11.3% decline that was registered in April. It’s this print that verifies the unimpressive trend in existing home sales. Last month’s spike looks like a correction from the April release. Housing data reported of late does not point to any correction. Yesterday’s pending numbers are consistent with existing sales data, while mortgage information from NAHB and MBA points to further market weakness. The +13.4%, y/y, pending home sales figure is caused by the May 2010 tax credit expiry, which pushed the numbers to move below the underlying trend from the ‘previously inflated levels’. The future trend remains flat at best.

The dollar is lower against the EUR +0.31%, CHF +0.03% and JPY +0.47% and higher against GBP -0.28%. The commodity currencies are stronger this morning, CAD +0.40% and AUD +0.47%.

The Canadian headline inflation number yesterday can be seen as a total ‘head-fake’ (+0.7% vs. +0.3%). Analyst’s noted that the spike can be explained away by seasonal adjustments, gas clothing and footwear. The surprise print does not speak to a ‘fanning out of inflationary pressures’. While headline (+3.7%, y/y) and core-CPI came in higher than expected in unadjusted terms, adjusting for seasonality, inflation still remains well contained with both headline and core-CPI up +0.2% m/m, one-tenth below that registered in the prior month, a scenario that Governor Carney has already alluded to. On an unadjusted basis, both food and gas prices continued to move up in May. However, next months report will likely show ‘modest’ headline gains as gas and energy prices decline.

Investors liked the data, pricing in a BoC hike for October and pushed the currency to a monthly high outright, aided by rising oil prices. Any fear about rate hikes after yesterday’s print may be tempered by this morning’s GDP data. It’s expected to be weak and underscore the headwinds facing the economy, again backing up Governor Carney’s recent rhetoric.

Will the second leg of Greek voting today have investors looking to pare some of their recent risk appetite? With the Fed cutting its growth objective for the remainder of the year should have higher yielding growth sensitive currencies trading under pressure. Expect the Canadian dollar to be subjected to the pull of either risk or risk aversion trading strategies. CAD is vulnerable now with US data likely to continue to print weak into mid-July (0.9662).

The AUD has ignored the slew of mixed domestic data and traded higher in the O/N session. Job vacancies in the three-months to May fell -4.5% from the previous period. Rismark House prices continued to decline last month and fell -0.3%. Private sector credit growth remained a subdued +0.3% in May and personal and business credit growth softened, while housing credit increased +0.5%, following an increase of +0.4%in April.

The currency advanced for a third consecutive day against the dollar as traders pared bets on a cut in interest rate by the RBA. Investors have been buying equities, pulling markets higher as a relief buying spilled into another session after Greece moved closer to receiving more aid to avoid a sovereign default.

Gains have been capped on fear that that a Greek austerity plan will not resolve Europe’s sovereign-debt crisis. Technically, the market is waiting for funding schedule clarity. Currently, the market is pricing a no hike in August unless inflation and employment surprised on the upside and the situation in Greece clears up sufficiently for a powerful rebound in risk appetite. Global data needs to improve before we can embrace any rate hike policy thinking. Investors remain better sellers on rallies (1.0724).

Crude is lower in the O/N session ($94.50 -0.27c). Crude extended this week’s gains after the weekly EIA report showed a larger-than-expected decline in inventories and as more Americans signed contracts last month to buy previously owned homes, a sign that the real estate market may be rebounding from its lows. Also aiding prices was a market concern that the Saudis would cut production in response to the IEA dumping move last week. Tropical Storm Arlene seems to be causing a stir in the Gulf of Mexico.

The market is concerned that the ‘tightness’ in the oil market will continue to undermine the fragile global economic recovery and the reason why the IEA and its members agreed to release crude from their SPR’s to ease some of this market tension. According to analysts, this supply move is significant, as it ‘represents a reach by member countries for the remedy of last resort to high oil prices’.

Oil inventory fell much more than expected last week as imports declined and gas stocks recorded a surprise fall. Crude stockpiles dropped for the fourth-consecutive week by -4.38m barrels to +359.47m. The market had been expecting a drawdown of -1.4m barrels. Weekly crude imports fell-271k barrels per day to +8.84m. A surprise was gas stocks unexpectedly falling -1.43m barrels to +213.1m. Analysts had projected a build of +600k barrels. Distillates (heating oil and diesel), rose +258k to +142.2m. Refinery utilization came off its 10-month high, falling -1.1% to +88.1%.

This year’s energy spike is being cited ‘as the reason for the global economic slowdown. Analyst’s note, that from its peak, crude is off-20%.The technicals see strong support first appearing at around $87.

Gold rallied for a second consecutive day after dropping to a five-week low, encouraging some investors to buy the precious metal as a protection of wealth and alternative to currencies. Last week, the commodity fell -4.4% and is up +6% this year.

After a positive Greek vote, the market had been wishing to see more of a pull back as people reduced their safe heaven position taking. This has not occurred because too many speculators have had the same thought.

Gold is viewed by some investors as a hedge against inflation, and the surprise release of crude oil stockpiles last week from developed nations’ reserves has dampened sentiment amongst investors for rising prices. However, commodities dependency on the buck and the outlook for US rates is likely to remain intact for now. This ‘one directional trade’ is far from over, with speculators continuing to look to buy the metal on these deep pullbacks ($1,509 -0.90c). Technical analyst’s see $1,485 as the first level of real support.

The Nikkei closed at 9,816 up+19. The DAX index in Europe was at 7,302 up+9; the FTSE (UK) currently is 5,895 up+39. The early call for the open of key US indices is lower. The US 10-year backed up 5bp yesterday (3.09%) and are little changed in the O/N session.

The US yield curve rose from almost a record low ahead of this week’s three-treasury auctions ($99b-2’s, 5’s and 7’s), on bets that the Greek Socialist Party will get parliamentary approval for its austerity measures needed to secure a troika bailout. So far, they are two-thirds of the way there.

The US 10-year benchmark was able to back up for a third consecutive day as Greece’s lawmakers passed the first part of an austerity plan needed to assure further bailout funds, damping demand for a refuge in US government paper. Today, they get to vote for implementation of austerity. Ten-year yields have gained +21 basis points over the past three days, a volatile market or what?

This week’s five-year auction was not well received and drew the lowest demand in a year as the sharp drop in yields has turned off investors. Dealers were able to create a small concession for yesterday’s 7-year auction, however, the concession was not deep enough, as it too was a horrible auction with dealers having to take down over half of the issue (+56.1% vs. +45%).

After the auction, bond prices hit new session lows. The issue tailed a whopping +3.25bp at a record low yield of +2.43%. The tranche had a 2.62 bid-to-cover ratio (smallest since July 2010) compared to an average cover of 2.87 in the six-prior auctions. Indirect bidders took +32.2% of the issue (the smallest take down in two-years) versus an average of +50.5%.

The jump in yield spreads between 2-year US and Japanese bonds (17 basis points to 30) had been partially responsible for pushing USD/JPY up into the large resting offers of 81, temporarily at least.

OANDA Top 100 Trader Statistics OANDA Order Book

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April 18, 2011

Dollar gains by Default

Filed under: OANDA News — Tags: aud, cad, chinese, commodity, gbp, global, government, governor, governor-carney, greece, ireland, portugal, price, usd, week — admin @ 10:10 am

Until now it was easy, the market was trading FX on monetary policy. Nothing is that simple when you are dealing with a group of individual countries that created the EUR. In this holiday shortened week, Greece is resurfacing as a default risk.

Complicating matters, the True Finn’s Party’s elections gains is creating the possibility that Portugal’s EFSF program may need to find a way to exclude participation by Finland.

All of this has occurred on the back of a surprise Chinese hike in its reserve requirements over the weekend. Cutting risk seems to be a prerequisite before Easter, but, to be long the dollar just because the Euro-region is in trouble, do not think so.

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

Forex heatmap

In the run-up to the Easter holidays, markets will focus on US earnings and key leading indicators in Euro-zone and the Spanish bond-auction midweek.

The USD is higher against the EUR -0.68%, GBP -0.41%, CHF -0.31% and lower against JPY +0.47%. The commodity currencies are weaker this morning, CAD -0.18% and AUD -0.20%.

The loonie remains contained in a tight directionless range as traders look for reasons to buy-and-sell. The currency has underperformed on fears that Europe’s most indebted nations may be forced to reorganize debt payments to bondholders, damping demand for currencies linked to growth. Commodities have helped the CAD to pare some of these losses as oil prices get a boost.

Last week, Governor Carney kept rates on hold at +1%. The BoC’s MPR showed that policy makers expect to gradually hike interest rates through 2013, while warning that the strong CAD could hurt exports and act as a drag on growth, as well as put added downward pressure on inflation through cheaper imports. Their new forecast for the loonie is 0.9700.

Overall, the BoC is less concerned about global and US risk as it focuses on the strong dollar. Governor Carney has been trying to talk the CAD down. The BoC statement was less hawkish than it could have been, and suggests the strong potential for policy neutrality for an extended ‘period-of-time’. It’s worth noting that with only 10% of Canadian exports going to emerging markets, Canada is not likely to benefit from the current commodity boom (0.9635).

Despite leading the G10 rally this month, the AUD fell for a third day against the yen on renewed concern Greece’s fiscal crisis will worsen and on speculation that the PBoC will raise rates again to combat inflation after reports showed inflation (+5.4% March) accelerated to the fastest pace in more than two years.

The market weakness in commodities and emerging market equities certainly is not supporting growth sensitive currencies. Depending on how risk appetite pans out, these pull backs may end up being a good buying opportunity. Big picture, with Japan’s loose monetary policy, the yen is expected to weaken with Japan lagging any significant recovery.

Australian yields are still the highest in the G10 and continue to attract regional investor’s en masse. The expected mix of trade surpluses and rising capital inflows should provide support for the currency on these pullbacks (1.0537).

Crude is lower in the O/N session ($108.72 -90c). Oil prices rallied on Friday after better than expected confidence and industrial headline prints lifted consumer optimism. There is growing expectation among investors that the Fed will lag other Cbanks in tightening monetary policy is creating a supportive backdrop for commodities.

Over the weekend, Saudi Arabia’s Oil Minister al-Naimi said that the global ‘market is oversupplied’ with crude, and this after they personally cut output in March by more than +800k barrels a day.

The EIA report showed crude stocks climbed +1.60m barrels to +359.3m, remaining above the upper limit of the average range for this time of year. On the flip side, gas supplies plummeted-7m barrels and are near the lower limit of the average range. Oil refinery inputs averaged +14.0m barrels per day during the week, which were-354k barrels per day below the previous week’s average as refineries operated at +81.4% of capacity.

Earlier in the week the IEA said it maintains its 2011 global oil demand growth forecast but noted that the high oil prices are beginning to dent demand growth based on its preliminary data for January and February. Both the IEA and IMF have said that prices above the $100 watermark are beginning to hurt the global economy. Even Goldman is recommending to investors to take profit on the one directional commodity trades.

Gold raced to another record on Friday, on speculation that the sovereign-debt crisis in Europe will worsen, boosting the appeal of the yellow metal as an alternative to currencies. Prices are well supported on speculation that record-low interest rates will encourage demand for an inflation hedge amid expectations that the Fed will maintain its accommodative monetary policy in the medium term. Gold, as a non-yielding asset, has a higher opportunity cost when interest rates rise.

The precious metal has become the currency of choice despite Goldman recommending last week that if one owned commodities, the risks outweigh any further potential gain. Regardless of event and geopolitical risk, the general dollar malaise against its major G7 trading partners is supporting commodities. The dollar tends to trade inversely with the price of the commodity. The metal has jumped +29% in the past year.

The metals bull-run is far from over with investors continuing to look to buy the commodity on dips. Any price pullbacks are viewed as favorable opportunities for investors to continue to diversify into safe-haven assets, especially metal being used as a store of value ($1,485 -90c).

The Nikkei closed at 9,556 down-35. The DAX index in Europe was at 7,126 down-52; the FTSE (UK) currently is 5,965 down-31. The early call for the open of key US indices is lower. The US 10-year eased 6bp on Friday (3.41%) and another 3bp (3.38%) in the O/N session.

Treasuries have rallied, pushing the benchmark 10-year yields down the most in 11-months, after data revealed that US inflation has cooled and as speculation rises that Europe’s debt crisis is worsening. Together, this is forcing a loss of risk appetite.

Last week, FI rose for the first week in a month as Obama pledged to cut the deficit and Ireland’s debt rating was lowered by Moody’s, boosting demand for relative safety. The US Government sold successfully $66b in notes and bonds, and this week the Fed will buy as much as $11.5b of Treasuries to keep rates low and spur growth as part of their QE2 mandate.

The fear of having to restructure Greece’s debt burden will keep rates depressed as speculators become better buyers on pull backs. Investors are beginning to realizing that the global recovery is not necessarily a ‘one-way move up, but will remain inconsistent’.

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April 15, 2011

Dollar Junk not EURO

Filed under: OANDA News — Tags: against, chf, currency, data, dean's fx, eur, global, governor-carney, japan, week — admin @ 10:13 am

We are stuck in a range being thrown around by flows while the market digs deep to justify owning their positions. The dollar has had every opportunity to outperform this week with risk subsiding. Instead, with the Fed trailing in the tightening race, has put the currency near the bottom of the G10 carry trade league. The EURO remains resilient despite the downgrades, potential debt restructuring and fears of default. It’s the hawkish nature and actions that is driving the currency forward.

A record monthly jump in Euro-zone inflation this morning unexpectedly pushed up the annual rate of inflation to a fresh 29-month high last month (+2.7%), a move that will support the ECB to tighten monetary policy even further. The market is currently pricing in a +104bp of ECB hikes over the next 12-months. Expect the EURO to grid higher.

The US$ is mixed in the O/N trading session. Currently, it is higher against 11 of the 16 most actively traded currencies in an ‘orderly’ session.

Forex heatmap

Yesterday’s US data did the dollar no favors. The US reported disappointing claims and a mixed PPI report. The number of people filing for unemployment jumped +27k, w/w, to +412k, closer to the beginning of the year reporting when seasonal volatility impaired readings.

Analysts are explaining the unexpected rise away to the effects of adjusting to a new quarter. The four-week average remains below the +400k psychological benchmark at +396k. Continuing claims on the other hand fell further (+3.68m vs. +3.72m), although, remember that this data-set is lagged by one week. Nonetheless, the recent downward trend in continuing claims highlights continued improvements in the US labor market.

US producer prices grew at a slower pace in March (+0.7% vs. +1.6%), even the growth in core-producer prices remains relatively subdued at +0.3%, m/m, reducing upward pressure on inflation. Digging deeper, some of the major sub-components were also softer, food prices fell (-0.2%) for the first time in eight-months as did crude and energy, which were both down -0.5%, m/m.

The USD is higher against the EUR -0.13% and lower against GBP +0.00%, CHF +0.01% and JPY +0.35%. The commodity currencies are weaker this morning, CAD -0.24% and AUD -0.18%.

The loonie was back and forth yesterday, with traders acting like headless chickens looking for reasons to buy-and-sell in this range. The currency initially underperformed on fears that Europe’s most indebted nations may be forced to reorganize debt payments to bondholders, thus damping demand for currencies linked to growth. Eventually the CAD pared some of these losses on the back of oil prices getting a boost.

The focus this week has been the BoC’s MPR. The details show that policy makers expect to gradually hike interest rates through 2013, while warning that the strong CAD could hurt exports and act as a drag on growth, as well as put added downward pressure on inflation through cheaper imports. Earlier this week, Governor Carney kept rates on hold at +1%. Their new forecast for the loonie is 0.9700.

Despite leading the G10 rally this month, the AUD fell O/N, extending a weekly drop against the dollar, as speculation that the PBoC will raise rates again to combat inflation after reports showed inflation (+5.4% March) accelerated to the fastest pace in more than two years.

Earlier this week, the MAS stepped up its fight against inflation and the BRIC leaders said rising commodity prices posed a threat to growth. The MAS, in its third tightening of policy this year, are combating inflation and their actions along with PBoC fears appears to be spurring risk-aversion and pressurizing commodity and growth sensitive currencies.

The market weakness in commodities and emerging market equities over the last two trading sessions certainly has not supported growth sensitive currencies. Depending on how risk appetite pans out, these pull backs may end up being a good buying opportunity. With Japan’s loose monetary policy, the yen is expected to continue to weaken further with Japan lagging any significant recovery.

Crude is little changed in the O/N session ($107.79 -32c). The growing expectation among investors that the Fed will lag other Cbanks in tightening monetary policy is creating a supportive backdrop for commodities. Also aiding crude prices was the magnitude of the gasoline drawdown last week, the largest in 13-years. The shutdown of a Sunoco plant due to a fire will tighten supplies even further.

The week’s EIA report showed crude stocks climbed +1.60m barrels to +359.3m, remaining above the upper limit of the average range for this time of year. On the flip side, gas supplies plummeted-7m barrels and are near the lower limit of the average range. Oil refinery inputs averaged +14.0m barrels per day during the week, which were-354k barrels per day below the previous week’s average as refineries operated at +81.4% of capacity.

Gold prices are well supported on speculation that higher raw-material costs and record-low interest rates will encourage demand for an inflation hedge amid expectations that Bernanke and Co. will maintain its accommodative monetary policy in the medium term. Gold as a non-yielding asset has a higher opportunity cost when interest rates rise.

The commodity plunged earlier this week on the back of the reduced economic growth forecasts from the IMF and the easing of inflationary pressures. Goldman indicated that if one owned commodities, the risks outweigh any further potential gain. This had been a catalyst for some bulls to lighten up their long positions. Regardless of event and geopolitical risk, the general dollar malaise against its major G7 trading partners is supporting commodities. The dollar tends to trade inversely with the price of the commodity. The metal has jumped +27% in the past year.

The Nikkei closed at 9,591 down-62. The DAX index in Europe was at 7,167 up+21; the FTSE (UK) currently is 5,974 up+10. The early call for the open of key US indices is lower. The US 10-year eased 2bp yesterday (3.47%) and is little changed in the O/N session.

10-year yields touched a one-week low yesterday as US claims unexpectedly jumped, producer prices rose less than forecast and fears that Greece may need to restructure its debt, boosting investor demand for safety.

Investors are beginning to realizing that the global recovery is not necessarily a ‘one-way move up, but will remain inconsistent’. Rumors of analysts revising US GDP lower (April 28) is also providing some support.

In the last of this week’s Treasury issue, the US government sold $13b 30-year bonds. It was a strong auction, stopping at +2.4bp through the screens at 4.531%. The indirect and direct bidders took +58% of the issue, and the auction had a 2.83 bid-to-cover ratio compared to an average of 2.62 over the last six-auctions.

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April 13, 2011

Dollar remains Fools Gold

Filed under: OANDA News — Tags: a-two-day-drop, aud, cad, commodity, dollar, europe, gbp, governor-carney, japan, jpy, market, morning, price, week, yellow — admin @ 10:26 am

Despite all the event and geopolitical concerns, there remains a healthy tolerance for risk in the market. Investors believe that the EUR is less exposed to a decline in risk appetite. Trichet and company’s hawkishness, mixed with the Fed’s dovish response to higher oil prices continue to make the EUR an increasingly attractive alternative to the dollar.

The danger to this morning’s US retail sales number, the market is assuming it will disappoint, could increase global risk aversion, contributing to additional carry trade unwind amongst the G10 currencies. This afternoon we have the Fed’s beige book, there, the focus will be on ‘any evidence that US retailers are increasingly willing to pass on higher input prices to the consumers’.

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

Forex heatmap

The market preconception is that the divergence of global yields will underpin the value of the dollar, mind you, the weaker data is not helping either. Yesterday’s US trade gap narrowed in February to -$45.76b, but by less than expected. The underlying details were weaker, as the pace of decline in imports outpaced that of exports. The nominal, dollar-based deficit, which includes both price and volume effects, narrowed -1.4%, m/m, to $45.8b in February, as the trade deficit in goods shrunk by -1.6% and the trade surplus in services expanded +1.9%. After five straight months of gains, exports contracted -1.4%. The ‘real’ trade deficit in goods remained virtually unchanged, narrowing -0.1% to $49.5b, its widest level since December. This is what matters to GDP, and carries negative implications for the first quarter.

The USD is lower against the EUR +0.16% and higher against GBP -0.02%, CHF -0.04% and JPY -0.48%. The commodity currencies are stronger this morning, CAD +0.19% and AUD +0.50%.

As expected, the BoC stood pat on rates yesterday (+1%). In his communiqué, Governor Carney raised the Bank’s growth forecast for 2011 to +2.9% from +2.4% and predicted that the economy will now return to full capacity in mid 2012, six-months earlier than originally forecasted. Again, he reiterated that the currency could weigh on growth and inflation, citing the loonie as a headwind to growth ‘twice’ in his statement. He repeated the line that a reduction in monetary stimulus would have to be ‘carefully considered’. The market had been expecting it to be replaced with a warning of a reduction in stimulus.

Overall, the BoC is less concerned about global and US risk as it focuses on the strong dollar. Governor Carney is trying to talk the dollar down. The BoC statement followed the trade numbers that are driving the quarterly inflation-adjusted volume-based trade deficit to another record high as export volumes fell -5.2%, m/m, and by more than the -4.3% m/m decline in import volumes.

The statement was less hawkish than it could have been, and suggests the strong potential for policy neutrality for an extended ‘period-of-time’. Softer commodity prices have investors looking to book profits (0.9620).

This month the Aussie has been leading the G10 rally, showing no lasting ill-effects from the decision by the PBoC to hike policy rates last week. Now that the market has been able to digest Japanese event risk and concentrated on global fundamentals has the AUD rising in the O/N session. Signs of global growth is boosting the demand for higher-yielding assets. The currency has snapped a two-day drop versus the yen after industry reports showed Australian consumer confidence rebounded last month (105.3).

Australian yields are still the highest in the G10 and continue to attract regional investor’s en masse. The expected mix of trade surpluses and rising capital inflows will provide support for the currency on these pullbacks (1.0484).

Crude is lower in the O/N session ($106.19 -6c). Oil prices collapsed over the last two trading sessions, solidifying its biggest two-day loss in 14-months. Both the IEA and IMF have said that prices above the $100 watermark are beginning to hurt the global economy. Even Goldman is recommending to investors to take profit on the one directional commodity trades.

Earlier this week the IMF cut US and Japan’s growth rate forecasts and the IEA reported signs of an oil-demand ‘slowdown’ in its monthly report has the black stuff retreating-6% on the week. Fundamentally, current prices aren’t justified by the supply and demand scenario. Technically, price movements have been excessive with investors building in a high insurance premium because of the geopolitical situation. The reality is that commodity price shocks have emerged as a new risk to the global economy’s expansion and why the IMF cites the world economy is more likely to disappoint than to beat expectations.

Last week’s EIA report showed crude stocks climbing +2m barrels. The market expected an increase of only +1.3m. On the flip side, gas supplies decreased-400k barrels, while distillates supplies (heating oil and diesel) increased +200k barrels.

The naysayers believe that the recent MENA events will make it unlikely that investors will see a ‘swift normalization’ of crude-oil production in the region. However, we have a market condition that was way overbought and in danger of giving up more ground with the bears increasing their negative rhetoric.

After rallying to another new record this week, gold prices have softened as investors continue to take profit off the table. The commodity slid by more than-1% yesterday, mirroring the sharp decline of other commodity prices and this despite the correlation between the yellow metal and the dollar index reaching it’s most negative in nearly three-months.

The commodity’s downfall has been sparked by the reduced economic growth forecasts from the IMF and the easing of inflationary pressures. Goldman indicated that if one owned commodities, the risks outweigh any further potential gain. This has been a catalyst for the bulls to lighten up their long positions. Regardless of event and geopolitical risk, the general dollar malaise against its major G7 trading partners will eventually support commodities. The dollar tends to trade inversely with the price of the commodity. The metal has jumped +27% in the past year.

The Nikkei closed at 9,641 up+86. The DAX index in Europe was at 7,145 up+42; the FTSE (UK) currently is 6,006 up+42. The early call for the open of key US indices is higher. The US 10-year eased 7bp yesterday (3.50%) and is little changed in the O/N session.

Treasuries gained for the first time in three days after a nuclear warning and earthquakes in Japan sent global equities lower, increasing investors risk aversion and boosting the demand for the safety of US government debt. Investors are beginning to realizing that the global recovery is not necessarily a ‘one-way move up, but will remain inconsistent’.

The US government will sell $21b in 10-year notes today and $13b in 30-year bonds tomorrow. Yesterday’s $32b 3-year issue was well received, stopping at +0.6bp through the screens at +1.28%. Indirect bidders took +33.7% of the issue, direct took +8.9% compared to an average of +13.9%. The auction had a 3.25 bid-to-cover ratio compared to an average cover of 3.07.

Expect dealers to cheapen the curve ahead of the issue to take down supply.

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April 6, 2011

EURO gets Green Light to Advance Further

Filed under: OANDA News — Tags: a-30-month-high, commodity, economic exposure, gbp, governor-carney, green, japan, jpy, middle, morning, north, portugal, spain, unemployment — admin @ 10:24 am

The EUR has shrugged off a Portuguese downgrade, a Chinese rate hike and is now focusing on Trichet’s expected ‘progressive normalization’ of monetary policy. Tomorrow’s anticipated hike will mark the first significant policy divergence in the G10 core in three-years.

Portugal selling 1b+ bills this morning is considered a success under the circumstance. With an aggressive rise in yield (+5.902%) things could have been worse, the auction may have failed.

The success supports the sovereign’s ability to meet its 15 April bond maturity, but does not undermine expectations that Portugal will have to eventually seek EFSF funding. The IMF stating that Spain did not need financial support reduces the systemic concerns and gives the EUR the green light to test 1.44.

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

Forex heatmap

Yesterday’s US data showed that the service sector is expanding at a ‘moderate’ clip. The headline ISM non-manufacturing index eased to 57.3 from 59.7. Despite being the softest reading in four-months, analysts note that the print still remains above its long-run average of 53.8. Digging deeper, even with the underlying details being softer, they remain supportive of continued recovery ahead. Of note, was respondent’s concern of a possible spillover effects from Japan, specifically with the supply chain.

Six subcategories posted declines, current ‘production’, imports, employment, prices paid, supplier deliveries and new-orders. Inventories remained unchanged, while new-export orders, the backlog of orders and inventory sentiment experienced improved further. Prices paid climbed at a slower pace, but remains above their six-month average. Similar to most consumers concerns, respondents are worried by rising fuel costs and the renewed sluggishness and lack of any signs of recovery in the housing market. It worth noting that some of the categories are not seasonally adjusted.

There were no surprises from the FOMC minutes. The meeting highlighted the dichotomy amongst the members on timing of exit. This certainly evident from the independent rhetoric jousting of late by various Fed speakers. The minutes reiterated that the FED would be hands off with QE2.

The USD is lower against the EUR +0.48% and CHF +0.82% and higher against GBP -0.14% and JPY -0.23%. The commodity currencies are stronger this morning, CAD +0.27% and AUD +0.51%.

The loonie precedes to want to edge higher despite a PBoC rate hike. In times past, a tighter Chinese rate policy would have hurt all risk sensitive currencies. The CAD continues to gather support from commodities and the overall general recent positive sentiment and is set for slow methodical gains, nothing out of the ordinary in these tight ranges.

After printing three year highs and appreciating +1.8% last week outright, it was only natural that some profit taking was required. Even news of possible M&A activity has been slow to lend the loonie a hand.

The ‘hawkish’ tone coming from Governor Carney about how the elevation in commodity prices generally leads to higher interest rates will again give the loonie its bid tone with traders happy to sell historical funding currencies against CAD.

With ‘carry’ historically the go to trade this month, has investors looking to buy the currency on dollar rallies. The Federal political uncertainty is expected to have a limited affect on the currency strength. The loonie will be supported in the long term by its fundamentals, a sound financial system and a strong job environment (0.9610).

Down-under is trying to lead the G10 rally, showing no lasting ill-effects from yesterday’s decision by the PBoC to hike policy rates +25bp. The Aussie is back above 1.035 despite a larger than expected (-5.6%, m/m) contraction in new home-loans in February. Analysts note that this is probably due to the disruption to the housing market from the recent floods.

The currency has printed a 30-month high versus JPY on the back of higher yields enticing investors wanting to own some of that premium. The market is back ‘in yield-chasing mode’. Growth and higher yielding currency’s will benefit. With Japan’s loose monetary policy, the yen is expected to continue to weaken further with Japan lagging any significant recovery.

Earlier this week Governor Stevens left interest rates on hold (4.75%) for a fourth meeting and indicated that the currency’s recent strength was helping to control prices, damping the need for further rate increases. Their levels of yields are still the highest in the G10 and continue to attract regional investors en masse (1.0382).

Crude is little changed in the O/N session ($108.49 +15c). Oil prices continue to trade close to its two and half year high, despite reports that two of Gadaffi sons are seeking his ouster. The commodity has found resistance ahead of today’s inventory report where it’s expected that inventories have increased. Pull backs in the commodity are supported by contagion fears in the Middle-East and on the back of Libyan forces renewed aggression raising concerns about oil supplies for the near-term.

Last weeks EIA report showed crude stocks climbing +2.95m barrels to +355.7m. The market had forecasted a rise of only +1.5m barrels. At the other end of the pendulum, fuel demand fell to its lowest level since November with gas softening -2.3% to +8.87m barrels a day. That is -2.1% less than a year ago. Gas inventories were down -2.7m barrels, while distillate (heating oil and diesel) were up +710k barrels.

Recent events will make it unlikely that investors will see a ‘swift normalization’ of crude-oil production in the region. On any pull backs the Middle-East and North African situation will continue to dominate in the event risk category.

Gold has managed to print a new record high as sovereign-debt concerns boosted demand for the precious metal as an alternative asset. The spiraling Portuguese debt costs, the conflict in Libya and the nuclear crisis in Japan have increased the demand for yellow metal as an investment haven. The metal commodity has jumped +28.5% in the past year.

These geopolitical reasons continue to provide support on pull backs for this ‘lemming’ trade, justifying consumers wanting to own some of the asset in their ‘own’ portfolios. Despite last weeks softening of prices, the commodity has preserved its tenth quarterly gain, its longest winning streak in over 35-years, as low interest rates and event risk provide support. It’s difficult to find a reason not to own some of the commodity.

The Nikkei closed at 9,584 down-31. The DAX index in Europe was at 7,168 down-7; the FTSE (UK) currently is 6,017 up+11. The early call for the open of key US indices is higher. The US 10-year backed up 4bp yesterday (3.42%) and is little changed in the O/N session.

The US curve suffered the full weight of the push-pull effect before the minute’s release. Bernanke’s stating that inflation may be transitory pushed bonds higher, speculation that the Fed minutes were to indicate that policy makers would be debating the end of stimulus measures pull them down again.

The pull effect won as treasuries fell after the minutes showed policy makers differed over whether to begin removing stimulus, fueling concern that interest rates will increase. The market remains cautiously short on the back of inflation threats and dissension within the Fed.

This week is an important week for global yield curves, especially for the ECB and the reason investors are reluctant to take on big bets even with event and geopolitical risk in abundance.

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