Forex Blog

April 18, 2011

Dollar gains by Default

Filed under: OANDA News — Tags: , , , , , , , , , , , , , , — 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’.

April 15, 2011

Dollar Junk not EURO

Filed under: OANDA News — Tags: , , , , , , , , , — 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.

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 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.

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 (1.0524).

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.

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 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 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 ($1,474 +$1.70).

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.

April 13, 2011

Dollar remains Fools Gold

Filed under: OANDA News — Tags: , , , , , , , , , , , , , , — 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).

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.

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 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 ($1,457 +$4.30).

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.

April 6, 2011

EURO gets Green Light to Advance Further

Filed under: OANDA News — Tags: , , , , , , , , , , , , , — 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 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. However, rising interest rates increase the opportunity cost of holding non-interest-bearing bullion ($1,456 up+$3.70).

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.

April 1, 2011

Focus on the Battle within the FED not NFP

Filed under: OANDA News — Tags: , , , , , , , , , , — admin @ 10:18 am

The month-end, quarter-end ‘fix mess’ is now over. Welcome to the beginning of the ‘carry’ month, which April is historically know for. This morning, the market has the grandaddy of economic data releases to contend with, non-farm payroll, followed by ISM manufacturing and the battle of Fed speakers.

The market expects a somewhat robust payrolls headline (+200k), a steady unemployment rate (+8.9) and the ISM to soften a tad, but in line with expectations, which would be consistent with a strong growth outlook.

Today’s we get more Fed speakers, Plosser and Fisher, the market know their views, it’s Dudley, who will be front and center. Up to now he has had close ties with Bernanke’s dovish stance, so expect his copy to balance out some of the recent hawkish comments.

The US$ is little changed in the O/N trading session. Currently, it is lower against 8 of the 16 most actively traded currencies in an ‘orderly’ session.

Forex heatmap

Yesterday’s claims have not affected forecasts for today’s payroll numbers. The claims are for later in March than when the labor department jobs survey was done, but they do confirm gradual improvements in the US labor market. The headline print saw a weekly decline of-6k to +388k.

Digging deeper, the four week moving average gained +3k to +394k. Continued filings were less affected, falling-51k to +3.714m. However, the number of claimants in all programs (not seasonally adjusted) rose just over +4k to +8.77m. On the bright side, that represents a-24% drop year-over-year, compared with last weeks -22.5% decline. Now we sit back and see what payrolls has in store for us.

The last major regional purchasing manager’s index, Chicago PMI, eased slightly to 70.6% in March from 71.2%.The prices paid component climbed to 83.4% from 81.2%, while new orders edged slightly lower to 74.5% from 75.9%. However, the employment index remains supportive 65.6% versus 59.8%.

Finally, US February factory orders unexpectedly declined, -0.1%, well short of market consensus increase of +0.5%. Analysts note that the biggest surprise was that petroleum orders (-0.1%) failed to extend recent price gains. Digging deeper, nondurables increased by +0.3%, while durables were revised up to a -0.6% from a negative -0.9%.

Overall, the durable data remains weak and the nondurable increase was modest, failing to back a strong ISM manufacturing for last month. Shipments and inventory headlines could see first quarter GDP forecasts trimmed even further. The Fed will likely need to drastically revise ‘their’ central tendency GDP outlook lower, it’s currently at +3.6%. The current mark-to-market GDP estimate is now +1.6%!

The USD is weaker against the EUR +0.04% and CHF +0.01% and higher against GBP -0.07% and JPY -0.54%. The commodity currencies are little changed this morning, CAD +0.00% and AUD +0.00%.

The loonie finally got the only piece of data expected for her this week, yesterdays GDP (+0.5%). The details were softer than the headline print. The market views it as a decent print, but analysts note that temporary factors that boosted manufacturing distorted the headline. We should expect some of these effects to be reversed in the February release. If we excluded the manufacturing component, the real GDP would have grown by +0.2%.

It’s worth noting that the inflation adjusted +2.8% month-over-month manufacturing rise is based on temporary factors, specifically skewed towards the auto production in January. It is this that will lead to a downside risk to real manufacturing GDP for February. The inflation readings will not put pressure on Governor Carney to change his immediate stance, it allows policy makers to bide their time.


Digging deeper, the goods-producing industries expanded +1.1% (third consecutive month of gains) month-over-month, while the service sector (70% of the economy) saw modest growth of +0.3%, which was similar to the previous month. 

Despite a Canadian government being toppled last week, the ‘hawkish’ tone coming from Governor Carney about how the elevation in commodity prices generally leads to higher interest rates continues to give the loonie its bid tone as traders happily sell Yen against CAD, pushing that pair towards a yearly high.

In the wings there is further interest to buy the loonie as ‘carry’ becomes the go-to trade. Investors should expect the Federal political uncertainty to have a limited affect on the Canadian dollars strength. The currency will be supported in the long term by its fundamentals, a sound financial system and a strong job environment. The market will take its cue from this morning’s payroll release (0.9686).

It’s quarter end and the AUD is heading for a third consecutive gain outright and against the yen, boosted by last nights retail sales beating analysts expectations (+0.5% versus +0.4%).

April is historically know as the carry month and the AUD is starting on the front foot rallying against JPY, to its strongest level in 11-months, as investors buy higher-yielding currencies on signs Japan will keep monetary policy loose to spur the economy. The AUD strengthened +0.9% versus the dollar last quarter and +3% against the yen. Higher yielding pacific currencies also got a boost from a stronger Chinese Manufacturing data in the O/N session.

Domestic data this week has has been pro-AUD. The currency managed to touch a record high, post 1983 float, after the RBA said loans provided by banks and finance companies climbed last month. The AUD has been supported by investors pricing out the possibility of a rate cut and pricing in the chance of a rate hike again next week. The probability of a reduction in Australia’s benchmark interest rate on April 5 is 13%, down from as much as 34% last week.

Appetite for growth and commodity sensitive currencies depends on the new found stamina of risk tolerance by investors. Further appreciation depends on investor’s interpretation of global future interest rates as the carry trade becomes in vogue again (1.0340).

Crude is little changed in the O/N session ($107.09 +37c). Crude prices are again marching higher on contagion fears in the Middle-East and on the back of Libyan forces renewed aggression raising concerns about oil supplies for the near-term.

Initially, a strong weekly EIA reporting inventory at Cushing reaching record highs temporarily eased prices, but, geopolitical uncertainty is providing a bid on most pull backs.

The weekly reports showed crude stocks climbing +2.95m barrels to +355.7m last week. 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 found renewed support on the back of European debt fears and the ongoing crisis in Libya boosting the appeal of the commodity as an alternative investment. Geopolitical reasons continue to provide support on these pull backs, justifying consumers wanting to own some of the asset in their own portfolios.

The commodity has preserved its tenth quarterly gain, its longest winning streak in over 35-years, as low interest rates, geopolitical and event risk pushes the commodity to record highs. It’s difficult to find a reason ‘not’ to own some of the commodity.

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, with metal being used as a store of value ($1,436 -$3.30).

The Nikkei closed at 9,708 down-47. The DAX index in Europe was at 7,104 up+63; the FTSE (UK) currently is 5,960 up+52. The early call for the open of key US indices is higher. The US 10-year backed up 1bp yesterday (3.46%) and is little changed in the O/N session.

Treasuries are treading water despite the month-end and quarter-end demand. If anything, the market is softer ahead of this morning payroll release on the belief that US economic recovery is strengthening. Bonds are heading for a second consecutive quarterly decline on concern that the Fed may end its QE2 program of debt buying earlier than planned. The market is reluctant to take on big bets ahead of this morning’s employment release.

December 16, 2010

EURO Buyers and Sellers beware

Filed under: OANDA News — Tags: , , , , , , , , — admin @ 11:08 am

It’s the beginning of the silly season where liquidity concerns cramp your style and the obvious becomes irrational. Buyers and sellers beware. A strong Spanish auction this morning has been unable to provide that everlasting support for the EUR, instead temporarily capping the currency’s high as Capital Markets prefer to focus on the EU summit where the debt contagion funding debate is making EUR supporters more nervous. It’s difficult to believe that EU leaders will quickly agree on the potential for a possible extension to the EFSF considering the opposing views, especially Germany’s. Follow the US yield curve, it may provide us with dollar short term direction.

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

Forex heatmap

There were mixed blessings in the US data yesterday. The industrial production report was stronger than expected on several levels. The headline print for November beat analyst’s estimates (+0.4). Even the previous month’s upward revisions added three-tenths to the bottom line. Digging deeper, gains of more than 1% in non-transit business equipment and non-auto consumer durables produced an above trend +0.7% increase in the non-auto manufacturing. It’s worth noting that the volatile auto assembly component softened more than expected (+7.5m units vs. +8.2m m/m). On the whole, the report would suggest that there should be some surprises in store for the fourth quarter results.

The modest US CPI turned few heads yesterday. The total and core print was very much in line with analysts estimates of +0.1%. The growth in the overall index eased two-tenths to +1.0%, y/y, while growth in the core rose two-tenths to +0.8%. The underlying data was mixed, split between what were mostly either modest gains or declines. The biggest decliners included new-vehicles (-0.4% m/m, weight of +6.4% in the index) and personal computers (-0.4% m/m, weight of +0.2%). Ex-food and energy, most other gainers registered lukewarm advances, providing little positives to the headline. The housing component (+42% of the index) managed to hold steady.

Finally, on a happier note, the Empire State Manufacturing Survey index (10.6) reversed most of last month’s surprising headline decline, with some of the details having ways to go to appease the markets. The unofficial ISM-weighted composite index advanced just +1.5pts to 48.4 after having fallen by-7pts the previous month. Orders and shipments both returned to positive territory, but inventories, delivery times and employment all were below their break-even. On a brighter note, the expectations index remains healthy, suggesting that regional manufacturers are still reasonably optimistic about the future.

The USD$ is lower against the EUR +0.23%, GBP +0.38%, JPY +0.27% and CHF +0.01%. The commodity currencies are mixed this morning, CAD -0.07% and AUD +0.10%. Canadian manufactures yesterday posted a solid gain in both the headline (+1.7%) and details, supporting last week’s strong export numbers. Analysts note that most of the subcategory gains flow directly into GDP. Do not expect Governor Carney to be swayed by the release when it comes to tightening monetary policy. The sustainability of the gains will always be questioned as the appreciation of the currency tends to have a lagging effect. The Governor has already indicated, in the October MPR, that net trade is expected to be a mild positive contributor to growth next year. Canadian policy makers will remain weary of Europe’s funding challenges, US growth risks and with benign domestic inflation worries, Carney will not be pressurized any time soon. This month the loonie has gained +1.8% outright vs. its largest trading partner. Gains in commodities, stocks and Euro contagion fears have made the loonie more attractive. The currency has only witnessed modest strength compared to other growth sensitive currencies as Governor Carney highlights the dangers of a persistently strong domestic currency. The loonie continues to struggle within striking distance of parity because of the strong corporate interest to own dollars there. Better dollar buying remains on dips.

Demand for AUD remains limited on speculation that divisions amongst EU members will impede agreement on a plan to limit future debt shocks ahead of the Euro-two day summit this morning. The currency trades under pressure outright as US Treasury yields climb, narrowing the yield advantage of assets down-under. This week, the currency has fallen against all its major trading partners on fear that China will act in answer to slow inflation, thus reducing the demand for growth sensitive and higher-yielding assets. Year-to-date, the currency has climbed +9.1% this year (second biggest winner after JPY), on prospects for commodity-driven economic growth and the yield advantage of the nation’s debt compared with other developed markets. Domestic data remains strong, this months employment data blew all analysts expectations out of the water and supports the currency on pullbacks. Not aiding the currency is the concerns for long dated interest rates in the US. Analysts are beginning to agree that the tight labor market will bring the RBA back into the picture, but believe that Governor Stevens is not behind the curve just yet and will not be required to hike rates in February. With consumers boosting their savings significantly in an environment of rising job and wage growth, suggests that the RBA is still ahead of that curve. Governor Stevens has also mentioned that rates are ‘appropriate’ for the economic outlook. Investors remain better buyers on dips, planning an assault on parity again (0.9880). Sellers remain topside with parity again providing strong resistance.

Crude is lower in the O/N session ($88.25 -30c). Crude prices rose yesterday after the weekly EIA report showed supplies plunging the most in eight years as imports tumbled and refineries bolstered fuel output. Stocks plunged -9.85m barrels to +346m last week vs. an expected decrease of -2.5m barrels. Also aiding prices was imports falling-15% to +7.69m barrels, the lowest level in two years, and refineries operating at +88% of capacity, the most in three months. It’s worth noting that inventories along the Gulf Coast (where 50% of US refiners are located) fell -9.02m to +173.4m as the region levies taxes on year end supplies. The large draw down is mostly due to end of year inventory management at refineries or in other words cooking someone’s books. The black-stuff has also garnered support from reports over last weekend revealing that China’s refiners increased their processing rate last month. The world’s biggest energy consumer boosted their net imports of the black stuff by +26%, m/m, and increased their processing rates to ease a diesel shortage. Coupled with OPEC announcement to maintain their production quotas and the PBOC refraining from tightening monetary policy is supporting the market, probably to the year end at least. OPEC believes that supply and demand are ‘in balance,’ and expect demand growth will slow as the global economy struggles to recover, amid ample supplies. Technically, expect the market to meet resistance again at the $90 high printed earlier this month.

Gold fell yesterday, the most in a week, on speculation that the dollar will extend its rally, eroding demand for the precious metal as an alternative asset. The stronger US economic data points to a recovering economy with a low inflation rate. It was only natural to see some profit taking after gold surged to a new record last week. The commodity remains supported on deeper pull backs by the persistent concern over Euro debt levels. Year to date, debt contagion has driven investors into the third ‘reservable’ currency as they seek a store of value. Despite the fear that China will tighten their monetary policy, most likely in the New-year, a move to curb speculation and dampen inflation, global demand remains robust. Even though the one direction trade feels overdone, investors continue to hold gold as a hedge against currency debasement and long-term inflation. The Euro-zone backdrop is trying to put a floor on metal prices on demand for a haven. Year-to-date, the metal is up + 27.1% and is poised to record its 10th consecutive annual gain ($1,385 -0.30c). Technical analysts believe that gold will outshine other precious metal in 2011 and peak somewhere above $1,600 in 2012.

The Nikkei closed at 10,311 up+2. The DAX index in Europe was at 7,024 up+8; the FTSE (UK) currently is 5,900 up+18. The early call for the open of key US indices is lower. The US 10-year backed up 5bp yesterday (3.47%) and is little changed in the O/N session. Treasury prices plunged, pushing yields up to June levels on the back of stronger US data this week, the Senate passing the tax-bill and on foreign investors beginning to cut their holdings of US debt as risk appetite improves and investors seek better returns elsewhere. With no Government supply coming down the pipe for a couple of weeks, one would expect some support for yields at these levels.

December 15, 2010

Moody’s plays the Grinch, Dollar rally limited

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

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

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

Forex heatmap

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

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

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

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

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

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

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

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

November 1, 2010

‘Shock and Awe to Shucks and Oh’ in two days

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

The market will talk this up as being the biggest week ever for all asset classes. Copious CBank meetings, mid-term elections and extremely influential data will provide the ingredients for volatility. The jewel in the crown will be the two day FOMC meeting, where the market expects helicopter Ben to announce further QE spending. The problem is that no one knows how much, and Ben, himself, was looking for some ideas last week when he supposedly sent out a survey to FI dealers seeking their opinions. Watching the price action in both FX and FI, one gets the feeling that the market is happily pricing in a large repurchasing program. Do not be surprised to see some of that bullish theory being pared back today.

The US$ is mixed in the O/N trading session. Currently it is higher against 9 of the 16 most actively traded currencies in a ‘whippy’ trading range.

Forex heatmap

On Friday, the US economy advanced at an annual pace of +2.0%, q/q, and came in bang on expectations. It marks the fifth consecutive quarter of expansion. However, some of the underlying details emphasize softer growth, like the larger inventory contribution, which analysts believe could provide downside risks for 4th Q GDP. The data in no shape or form should influence policy makers over the next couple of days. To them, they will be focusing mostly on fiscal policy uncertainty. Digging deeper, the mix of growth was weaker, with final domestic demand posting growth of +2.5%, down from +4.3% in the previous quarter. The biggest decliners were net exports (-2.0%) and residential fixed investment (-0.8%). Exports contributed +0.6% to overall growth, while imports took that and more away. It was mostly inventories that dominated the headline, adding +1.44% to the print and remains notably blow the +2.6 to +2.8% growth levels that we witnessed in the early phase of the US recovery. Finally, prices continued to move up, but registered their second straight quarter of decelerating growth (+0.8%). Bring on QE2.

The USD$ is lower against the EUR +0.30%, GBP +0.01% and higher against CHF -0.28% and JPY -0.05%. On Friday, the Canadian growth rate for Aug. came in as expected (+0.3%), with all the subcategories again putting in a solid performance for the month. Analysts note that the release will in no way influence Governor Carney at the BOC. Policy makers remain focused on the downside risks of the US economy. The Canadian economy continues to be shackled to its largest trading partner, the US, and the very reason why the BOC have prudently stepped to the sidelines. The loonie has been caught in a dollar debasing jet-stream for most of last week. Over the past month, the CAD has been one of the worst performers vs. the buck, despite all the negativity surrounding the greenback. Last week Governor Carney stood down on hiking rates as expected, citing a softer outlook for the Canadian economy. Futures prices have priced in a ‘no-hike’ for the next six-months despite policy makers continuing to see the risk to the inflation outlook as being balanced. 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.

The AUD has held investor support for a third consecutive day on speculation that the region will maintain its interest-rate premium as the US and Japan debate further monetary-easing measures this week. Inflation data down-under last week disappointed hawkish speculators. Australian CPI rose +2.8% in the third quarter from a year earlier, after increasing at a +3.1% pace in the previous three month. The market was expecting a rate of around +2.9%. Futures traders have pared their bets from a +47% chance that the RBA would hike to a +16% chance this evening. It’s now expected that any rate increase ‘will be only gradual’. With such a benign rate outlook, the market was betting that the currency would ‘struggle in extending its gains far above parity’ in the medium term. However, the currency has gotten a boost from the price of commodities and the weaker dollar of late. With these variables remaining intact the market can expect another attempt at parity (0.9900).

Crude is higher in the O/N session ($81.95 +52c). Crude prices fell on Friday after a weaker than expected US consumer sentiment print, the ending of a French Port oil strike and the reluctance of the markets to make any major moves ahead of the FOMC meeting. Even with supplies growing, it’s the dollars direction that dominates the black-stuffs prices. Last week’s EIA report again blindsided the market to a certain extent, although the direction was not surprising the volume headline print was. The release was greater than five times analyst’s expectations. Crude climbed +5.01m barrels to +366.2m last week, the biggest increase in four-months. The market had only priced in a +1m barrel gain. Offsetting the reported surplus was the plunge in gas stocks, falling -4.39m barrels to +214.9m. Analysts were estimating an increase of +625k barrels. The net effect was a zero-sum report. 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. The ‘big’ dollars value continues to push prices about.

Gold again rallied, recording its third straight monthly gain, on speculation that Ben and his fellow policy makers will increase their debt purchase numbers, weakening the ‘mighty buck’ and boosting the commodity’s appeal as an alternative investment. Gold, month-to-date was up +3.1%, while the dollar index recorded a loss of -1.9%. There are two trains of thought dominating the market at the moment, some argue that a measured move this week may have a muted affect on the dollar, while others suggest that further easing would weaken the dollar irrespective of the size as investors chase higher yielding assets in other countries. The dollars negative correlation relationship remains intact with commodity prices. For most of this year investors have sought an alternative investment strategy to the historical reserve currency. Investors have been using the commodity as a proxy for a ‘third reservable currency’, pushing the metal to record new record highs. To date, gold has outperformed global equities and treasuries (+22.7%), 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 investors generally seeking protection in an asset with a ‘store of value’. Everyone is now focused on the FOMC meeting ($1,362 +$5.10).

The Nikkei closed at 9,154 down -48. The DAX index in Europe was at 6,665 up +64; the FTSE (UK) currently is 5,719 +45. The early call for the open of key US indices is higher. The US 10-eased 2bp on Friday (2.60%) and is little changed in the O/N session. Longer maturities were better bid after the Fed’s preferred inflation measure, core-GDP price gauge, increased less than forecasted (+0.8%) and adds to speculation that helicopter Ben will boost purchases of longer-term assets. Fundamentally, the US continues to experience softer-than-expected inflation data, and it’s this data that will trigger whether or not the Fed does QE. So, it’s back to speculating on the buy back numbers again.

September 9, 2010

No EURO Irish Wake Just Yet

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

The Forex market will make Fixed Income traders out of us yet. Understanding and appreciating global yield curves helps us in on our Forex odyssey. Yesterday it was the health of the Polish and Portuguese debt demand that managed to convince investors to do a U-turn from adding to their risk aversion trading strategies. This morning, dealers held their breath for the Irish EUR400-600m 3 and 6-month T-Bill auction. Yields north of 2% and 2.35% would only contribute to the recent concerns that the Euro-zone sovereign debt crisis has not gone away. Results saw yields actually drop from the previous sale last month (+1.925% and +2.19%). One has to wonder how active is the ECB pursuing purchasing Euro-zone bonds to provide support?

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

Forex heatmap

There were no surprises in the Fed’s Beige book yesterday. It reconfirmed that US growth slowed over the summer with some sectors faring better than other, especially agriculture and manufacturing. The biggest weaknesses, not surprisingly remains in real estate and construction. Recent data shows that home sales continue to fall after the expiration of a federal tax credit. The Fed also noted that bank lending, a barometer for future growth, witnessed only a small improvement. ‘Most districts reported little or no change from existing low levels of commercial and industrial lending, as businesses remained quite cautious about expansion plans’. Despite the subdued negativity, they reassured the market that the ‘economy was still growing’. Markets initial reaction to this and Obama’s Tax breaks was non-committal. ‘Economic growth at a modest pace was the most common characterization of overall conditions’. Not too much of a surprise was the report indicating that the ‘price of wages and goods and services remained limited’, which suggest benign inflationary pressures in the economy. Lower yields are here to stay for the medium term.

The USD$ is higher against the EUR -0.07%, GBP-0.56%, CHF -0.42% and lower against JPY +0.17%. The commodity currencies are stronger this morning, CAD +0.23% and AUD +0.73%. Wow! Did dealers ever get caught offside after the BOC hiked for the third time this year to +1%? The decision was not even unexpected. They were left holding copious amount of dollars when the sucker punch, the Ivey PMI blew all analysts expectations out of the water (+65.9 vs. 55.9). In his following communiqué, Governor Carney signaled that Canadian policy makers may increase them again this year as the nation’s economy continues to grow. They said ‘financial conditions have tightened modestly but remain exceptionally stimulative’. The market took this as dovish and a signal to own more CAD. Most had anticipated that Governor Carney would have expressed a tad more caution. However, a small not so insignificant disclaimer did appear in his speech when he stated that ‘Canada’s recovery will be slower than projected because of a weaker outlook for the economy of US, and further rate increases need to be carefully considered’. Also aiding the currency’s rise is Fitch Rating’s reaffirming the country’s ‘outlook as been stable’. The one directional play may have overshot its mark in the short term. Do not be surprised to see the market take some dollars back ahead of tomorrows employment report. A favorable report brings parity back to the table.

The AUD is on a roll, threatening to take out yearly highs after recording new fresh 4-month prints on stronger data in the O/N session. The currency happened to advance against all its major trading partners after employers added more jobs than analysts anticipated (+30.9k vs. +25k) and the jobless rate fell (+5.1% vs. +5.3%). Traders are once again increasing their bets that the RBA will hike at its next meeting. Futures prices are currently recording a +26% that Governor Stevens will commence tightening again on Oct. 5th. Analysts believe that the market is somewhat underestimating the number of chances of further tightening over the next 6-12 months. Not helping the currency will be the forming of a minority government. PM Gillard won the backing of key independent lawmakers this week, allowing her Labor Party to retain government and pursue a ‘tax on mining companies’. Technically, ‘the fiscal outlook looks worse under a minority government and management of an economy growing at +10% in nominal-terms may increasingly rest on the RBA’. At the moment the currency seems oblivious to potential European woes (0.9255).

Crude is higher in the O/N session ($74.85 +18c). Yesterday, oil reversed its earlier losses as rising global bourses helped to support prices against a ‘naysayers’ belief that domestic inventories in the US are excessive. The market now believes that a serious rise in risk aversion and a bigger drop in global stocks would threaten that $70 psychological level. At the moment, the market does not have the momentum to follow through on this week’s loss. Earlier this week, the EUR plummeting vs. the dollar had curbed the appeal of commodities as an alternative investment to the greenback somewhat. Last weeks inventory report provided a surprise and technical support for the commodity. It revealed an unexpected decline in supplies of distillate fuels. Distillates (heating oil and diesel), fell -739k barrels to +175.2m. The market had been expecting the inventory to increase by +1.15m barrels. Inventories of crude itself advanced +3.42m barrels to +361.7m Supplies were forecast to climb by +1.2m. The market is wary that the underlying situation has not changed, the fundamentals remain weak, demand does not look good and stockpiles of crude and products remain at a record high. Speculators remain better sellers on up-ticks in the short term. We need another bearish surprise in this morning’s inventory report to push crude to test the $70 psychological support level. It’s starting to look further and further away.

Gold prices continue to advance on its record high print recorded earlier this year as individuals seek to protect their wealth. The uncertainty of recent data has investors contemplating boosting their demand for the commodity as a safe heaven. Last month, bullion appreciated +5.2% alone. Consumers are trying to put there cash somewhere more solid on mounting concerns that the global economy will struggle. Speculators again are supporting the various safe heaven assets on pullbacks, avoiding the riskier classes to invest in due to uncertainties in the markets. With a genuine fear for global growth, by default, should boost the demand for the metal as a protector of wealth in the grand scheme of things. Sentiment for the yellow metal remains bullish. The opportunity costs of holding gold are low due to falling interest rates ($1,256 -80c).

The Nikkei closed at 9,098 up +73. The DAX index in Europe was at 6,157 down -7; the FTSE (UK) currently is 5,442 +13. The early call for the open of key US indices is higher. The US 10-year backed up 5bp yesterday (2.65%) and is little changed in the O/N session. Improved demand for Polish and Portuguese debt product yesterday eased some of the market concerns and had investors lightening up on their risk aversion trading positions. Many companies are lining up to sell debt, continuing this week of heavy issuance as the private sector tries to take advantage of these historical low yields. The second tranche of this week’s $67b auctioned debt was well received. The $21b, 10-year product yielded +2.67%. The bid-to-cover ratio was 3.21 compared to an average of 3.04. Indirect bid was strong at +55%, while the direct bid was +7% compared to an average of +14.3%. The 2/10’s spread is little changed at +214bp.

August 24, 2010

YEN Yada Yada

Filed under: OANDA News — Tags: , , , , , , , , , , , , , , — admin @ 10:13 am

We wake up and hope, but, it’s ugly again today. Two consecutive days of ‘no’ North American data has the market grasping for any excuse to sell the EUR. Speculators have been throwing everything out there to justify pushing the EUR to test its medium term support levels. Excuses ranging from the ‘no’ consensus on behalf of the BOJ and MOF, when it comes to currency intervention, to risk on and off again, or China’s appetite slowdown for commodities are being used. Sellers across the board line up to take a pot shot. Japanese operating profits will not start to decline until we hit 80 USD/JPY, they will not be erased until we hit 67. So, the market has room to maneuver and to squeeze the yen even more!

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

Forex heatmap

Today we are back to some sort of normality, in the sense that we will get some data to gorge on later. This mornings US home sales report could be the tipping point to push capital markets into a trading a ‘defined recession’ again. The Euro-zone Industrial new orders advanced more than the market had been expecting in June (+2.5% vs. +1.5%, m/m). Annualized, that is an impressive +22.6% gain. However, it has provided little comfort for the EUR in the session, as the JPY continues to remain the main driver of volatility this morning.

The USD$ is higher against the EUR -0.32%, GBP -0.81%, CHF -0.12% and lower against JPY +0.76%. The commodity currencies are weaker this morning, CAD -0.61% and AUD -0.82%. Weaker global equity and commodity prices have pushed the loonie to a new six-week low this morning. Inflation data last week has the market questioning if Governor Carney will back away from a normalization of rates policy and take a break from hiking next month. Futures traders are beginning to price a less than 38% chance of rates backing up and probably higher after last nights overseas moves. A couple of weeks ago it was a foregone conclusion that policy makers would hike +25bp. Expectations in the bond market for a boost have reversed after reports from Canada and the US showed the economic recovery may be faltering and inflation is slowing, July’s inflation data rose less than expected (core +1.6% vs. +1.9%). The loonie is not immune to the weaker data out of the US. North America was sold as a unit across the board on the back of the region as a whole could be losing steam. With risk being pared, it was only natural that growth and interest rate sensitive currencies would be dumped even more aggressively. Canada happens to be the US’s largest trading partner, with 70% of all exports heading south. Traders are happy to play the risk-aversion card with longer term CAD bulls looking to pick up cheaper loonies.

Investors hate uncertainty and the outcome of the Aussi election to date is well documented. The result of a hung government initially pressurized the AUD, now it’s all about the JPY. The demand for the safe heaven currency has pushed the AUD to test its one month lows. Concerns that global growth is slowing has damped investor appetite for higher-yielding assets. The currency has underperformed against all of its major trading partners and is expected to do so until there is a new Government formed. The commodity rich currency is not isolated, as other growth sensitive currencies are suffering the same fate. Over the past 2-trading sessions the AUD has come under pressure vs. the JPY on speculation that the BOJ are not ready to intervene on behalf of their currency, dampening the demand for riskier assets. Government data has also happened to put a lid on the recent rally. Net result traders are adding to their bets that the RBA will leave interest rates unchanged for the next 12-months. Interest rate differentials play a big part of the currency’s attractiveness. Risk aversion will likely force the bull’s hand, capping rallies with better sellers on upticks (0.8856).

Crude is lower in the O/N session ($72.41 down -69c). Crude prices this morning have printed new 7-week lows, as a rising US jobless claims and a contraction in manufacturing added to concern growth in the worlds biggest oil-consuming nation is slowing. The dollar strengthening vs. the EUR discourages investors to hedge against inflation using dollar-priced assets. Last weeks EIA report continues to provide fodder for the ‘bears’. Oil stockpiles declined -0.8m bpd vs. a market expectation of a -1m barrel print. Inventories fell to +354.2m barrels w/w. Not to be left out, gas stocks dropped -39k barrels to +223.3m. On the flip side, distillate supplies (heating and diesel) climbed +1.07m barrels to +174.2m. With this bearish report successfully penetrating the $75 support opens up the way to test the $72 surroundings. Prices have also gravitated towards these lows on the back of data showing that economic growth in both China and the US is slowing. The demand for oil products also fell, as gas demand hit a 2-month low, while demand for distillates is close to its lowest level in 10-months. The report re-confirms the IEA conclusion earlier this month that ‘oil demand could take a substantial hit should economic growth continue to falter’. It’s no wonder that the market continues to pressurize commodity prices. Speculators remain better sellers on up-ticks in the short term.

Gold could not hold on to its early morning gains, fluctuating from positive to negative territory, as investors eyed equities. With global bourses under pressure, investors are trying to retain cash on mounting evidence of an economic slowdown. In the O/N session investor again supported the various safer heaven assets on pullbacks, avoiding risky assets due to uncertainties in the markets. With a genuine fear for global growth, by default, should boost the demand for the metal as a protector of wealth in the grand scheme of things. Year-to-date the metal has risen +10.9%. With treasury yields expected to remain low for sometime and with the Fed announcement earlier this month of their intentions to buy bonds, could promote a quickening inflation rate, which would promote pushing commodity prices higher. For most of this year, we have witnessed a gold rally on the back of a weaker EUR ($1,221 -$6.70c). Even with the dollar strengthening, the historical negative correlation is only tentatively holding true at the moment. It’s about preserving wealth that is driving metal and keeping commodities in demand on bigger pullbacks.

The Nikkei closed at 8,995 down -122 The DAX index in Europe was at 5,954 down -56; the FTSE (UK) currently is 5,174 down -60. The early call for the open of key US indices is lower. The US 10-year eased 1bp yesterday (2.61%) and another 5bp in the O/N session (2.56%). US Treasuries remain close to last weeks lows as disappointing US data continues to be digested. Investors remain concerned for the strength of the global recovery. If the Fed does expand its balance sheet then the curve should flatten to analysts medium term projection of +200bp 2’s/10’s (+2209bp). The market seems content in owning longer dated product on these deeper pull backs. This week, the US plans to sell $102b of 2’s (+$37b), 5’s (+$36b) and 7-year notes (+$29b), starting with today’s shorter end. Of note, this will be the smallest monthly offering of ‘the’ combination thus far. Longer term buyers continue to control the market.

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