Forex Blog

November 18, 2011

Loonie (CAD) Rallies On Higher CPI Data!

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

The Canadian dollar (Loonie) is higher this morning as CPI data came in hotter than expected with Core inflation coming in at 2.1% vs. an expected 1.9% and the Headline figure at 2.9% vs. 2.8% expectation.  While these figures are lower than last month, it should be noted that markets are foward-looking and the idea that prices would come down further means that there may be some room for further strength.

That’s not to say that we think the Bank of Canada will be raising interest rates any time soon, but rather they will be on high alert for higher inflation that may harm the economy. 

Another important “feature” of the Loonie is that it has a high correlation with the price of oil so with oil just below $100/barrel, it makes sense that the Loonie would strengthen.  From the chart below, you can see that 1.03 acted as rock-solid resistance, with the next move expected to go back to parity vs. USD.

September 21, 2011

Loonie (USD/CAD) Likely To Weaken Further!

Filed under: Forex News — Tags: , , , , , , , , , , , , , , — admin @ 7:58 am

The Loonie (CAD) has already touched parity with USD earlier this morning and is likely to weaken further as higher CPI data in Canada has been dismissed in favor of risk aversion due to a slowing global economy and the Euro debt crisis.  While inflation may be elevated and higher than expected, it is not out of line with what other regions are seeing around the globe, with the headline figure coming in at 3.1%.  It is extremely unlikely that the BOC will move on rates considering the health of the global economy.

Part of the reason for the weakening of the Loonie is that the global economy is slowing which in turn reduces the demand for oil, which has a high correlation to the value of the Loonie.  In addition, if the US Fed follows through with “Operation Twist” at today’s FOMC announcement, that is unlikely to weaken the US dollar significantly in the short-term.

If the US Dollar gains, then oil and the Loonie are likely to move lower.  While there is triple-top resistance on the chart below at parity for USD/CAD, three times is usually a charm and I expect the Loonie to break through that resistance and trade up to its daily R4 pivot resistance level at 1.01 in the near term.

August 17, 2011

Forex Market Outlook 8/17/11

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June 28, 2011

EUR held to ransom

Filed under: OANDA News — Tags: , , , , , , , , , , , , , , — admin @ 4:01 am

Capital markets remain focused on the parliamentary vote in Greece and on the long-term funding program negotiations. In the near term, the key deadline remains the vote in the Greek parliament on austerity measures, scheduled for tomorrow. The successful outcome to last week’s confidence vote supports market expectations that the austerity measures will pass.

However, according to Prim Minister Papandreou, this vote is too close to call! So much so, that EU members are putting the finishing touches to contingency plans to deal with the possible consequence of a sovereign default in the Euro-zone. Financial markets are pricing in an +80% chance of this occurring.

A positive austerity voting outcome should bring only limited relief to this already nervous market. Without a comprehensive funding program with clarity on the degree of participation for private bondholders, the EUR will remain vulnerable to headline risk.

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

Forex heatmap

Yesterday’s US consumption spending data was noticeably weaker than expected due to the downward revisions to prior months. The -0.1% decline in real-PCE for May was in line with market forecast, and largely reflects the supply driven decline in auto-sales. The surprise was in April, where real consumption spending was revised down from +0.1% to -0.1%. That pulled the annualized growth rate of real consumption spending for the first two-months of this quarter relative to first quarter to +0.6%. Capital markets expect second quarter growth to slip into the +1 to +2% because of weak consumption throughout May.

There were fewer surprises in the price data. The PCE price index matched the CPI with gains of +0.2% in the headline index and +0.3% in the core. Analysts expect the indexes to soften next month due to declining energy prices in the headline index, fewer energy spillover effects in the core and an easing of supply pressures in the auto industry.

The dollar is higher against the EUR -0.08%, GBP -0.30% and lower against CHF +0.14% and JPY +0.09%. The commodity currencies are mixed this morning, CAD -0.22% and AUD +0.13%.

The Canadian dollar, despite trading within its recent tight range, continues to inch closer to parity, touching a three-month low yesterday, as investors remained wary ahead of the vote in Greece tomorrow, to approve an unpopular austerity plan and as commodity prices fall.

Last week, the loonie posted its biggest weekly drop in two-months as risk-averse investors sought refuge in the most liquid of assets, the greenback. Higher yielding growth assets have come under pressure as investors risk-appetite goes ‘walkabout’ on the back of commodities softening on speculation that global economic growth may falter. US consumer spending, which accounts for +70% of US economic activity, came in flat for the first time in nearly a year, and slipped -0.1% when adjusted for inflation yesterday. Personal income also rose less than expected. The disappointing data added to the general cloud over the global economy.

The loonie is headed for the first two-month loss in a year, as rising concern that debt-strapped Greece and other Euro-peripheries will default and an economic slowdown in the US makes interest-rate increases by the BoC less likely.

With the Fed cutting its growth objective for the remainder of the year has 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 (0.9878).

The AUD dropped through key technical support levels to an eleven-week low after the dollar rallied in the O/N session. The currency remains under pressure on concerns that a Greek austerity plan will not resolve Europe’s sovereign-debt crisis and will continue to dampen appetite for higher yields. Supporting the selling pressure was the RBA’s board minute’s for June reaffirming a noncommittal Central Bank. Concern that global growth is slowing is prompting traders to bet that the RBA will cut interest rates. Governor Stevens may reduce his benchmark rate by 19bp over the next 12-months, compared with bets on a +25bp hike on June 1st.

Governor Stevens and company cited growing concerns in Europe, downside surprises in US data and deterioration in non-mining related industries as giving the board enough reason to remain on hold until further notice. The minutes were also less explicit than RBA Governor Stevens’ speech last week on emphasizing upcoming data like the CPI report. 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 (1.0452).

Crude is higher in the O/N session ($91.05 +0.44c). Oil prices fell yesterday as Greece’s debt crisis and the decision to tap global oil reserves continued to weigh on prices. The IEA said its members would release crude from their SPR’s. They intend to inject +60m barrels of government-held stocks onto the global market, immediately increasing world supply by +2.5%. Weaker global data is also put the commodity under pressure this week. US consumer spending stagnating last month and a preliminary Chinese PMI showing that factory output may rise at the slowest pace in 11-months in June is questioning global demand.

Previously, ‘tightness in the oil market has threatened to undermine the fragile global economic recovery’. Year-to-date, unrest in the crude-producing Middle-East and North Africa has sparked hefty price gains. 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’. The spike in energy prices is being cited ‘as the reason for the economic slowdown and this is a reaction to that’. Analyst’s note, that from its peak this year, crude is off-20%.The technicals see strong support first appearing at around $87.

Gold prices yesterday were little changed as indecisive moves in FX-land and ongoing negotiations about a potential bailout for debt-laden Greece have left the market in ‘walkabout’ mode. Last week, the commodity fell $50 after a pledge by EU officials to stabilize the region’s economy slashed demand for the commodity as a haven. Margin calls in other asset classes also required investors to raise fresh capital by selling the yellow metal.

Gold is viewed by some investors as a hedge against inflation, and the surprise release of crude oil stockpiles from developed nations’ reserves damped sentiment amongst investors for rising prices. The commodity could still see a strong pullback if the Greek austerity measures win parliamentary approval tomorrow, as it would likely reduce short-term investor concern and demand for safe-harbor assets.

The 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 ($1,502 +$5.70c). Technical analyst’s see $1,485 as the first level of real support.

The Nikkei closed at 9,648 up+71. The DAX index in Europe was at 7,129 up+22; the FTSE (UK) currently is 5,753 up+32. The early call for the open of key US indices is lower. The US 10-year backed up 5bp yesterday (2.91%) 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.

The US 10-year benchmark was able to back up for the first time in four days as Chancellor Merkel’s coalition government welcomed proposals from French banks and insurers on voluntary participation in a roll-over of Greek debt. The market to date has seen a steady grind to lower yields without a significant pullback. Investors seem to be waiting for the ‘storm to pass until there is some clarity from Greece’.

The US Treasury auctioned $35b 2-year notes yesterday. The issue tailed +1.2bp at a record low yield of 0.395%. It was the first tail in three months and was to be expected because of record low yields. The auction had a 3.08 bid-to-cover ratio compared to an average cover of 3.32 in the six-prior auctions. Indirect bidders took +22% of the issue (the smallest take down in three-years) versus an average of +30.5%. Direct bidders took +13.5% of the issue versus a +14.5% average. Today, we get to take down +$35b 5-years and tomorrow $29b 7-years.

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.

March 17, 2011

ECB Supports European Stability Mechanism

Filed under: OANDA News — Tags: , , , , , , , , , , , , — admin @ 8:52 pm

With the continuation of violence in the middle east and the tragic events in Japan taking most of the headline space, it may be tempting to think that the Eurozone debt crisis had been solved. It hasn’t. Even after today’s European Central Bank’s call to support a draft making the European Stability Mechanism (ESM) a permanent fixture, the matter of Eurozone debt is far from settled.

The ECB issued a statement urging EU countries to support the ESM’s stated goal of providing “temporary financial support to Member States whose currency is the euro experiencing impaired access to market financing”.

The call for support comes just days after ECB President Jean-Claude Trichet argued for greater punitive sanctions against Eurozone debtor nations.

“Member states should need to make a payment following the first violation of the criteria, and face a penalty for repeat offences,” Trichet told Der Spiegel. “We will not do this for ever. This measure is, like all our extraordinary measures, temporary.”

February 16, 2011

King’s stalling has GBP stuttering

Filed under: OANDA News — Tags: , , , , , , , , , , , — admin @ 11:14 am

The BOE has sent a strong message this morning that it will not be hiking rates as rapidly as the market expects. King went as far as to say ‘that some people are getting ahead of themselves’. This has certainly caused some damage to the long sterling punters positions. In this morning inflation report, the BOE has raised its forecast for inflation for 2011 but said growth would also be slower, as ‘high commodity price squeezes, household incomes and governments budget cut’s start to bite’. They expect inflation to fall below target from late 2012. Technically, if rates stay unchanged, they suggest that inflation will be slightly above target two-years out. In translation, they will raise rates, not as quickly or as high as the market expects. Perhaps the BOE focus on longer term inflation target may reveal market worries of a double-dip?

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

Forex heatmap

Yesterday’s US data was a market surprise as investors had been expecting better. Headline (+0.3% vs. +0.5%) and core-US retail sales (+0.3% +0.5%) continue to rise but disappointed the aggressive upbeat expectations. Analysts are questioning the price versus volume effects in calculating the market disappointment. There is talk about a downward revision to 4th Q GDP. The backward revisions certainly took some of the steam out of the January report. Both the headline and core were revised lower in December and it was just the core print adjusted for the November release. Digging deeper, of the 13 subcategories, 8 posted gains and 5 improved results over the prior month. The strongest performance was seen in gas stations (+1.4%-price effect), food (+1.3%) and non-store retailers. It’s worth noting that analysts are suspicious of the commodity sensitive categories, they are concerned that the retail sales in volume terms were weaker than the headline readings. The offset effect came from building materials (-2.9%), sporting goods (-1.3%) and food services (-0.7%). Unusually severe weather in many parts of the country is likely to have weighed on consumer spending and better results are expected in the quarter, helped by recent reduction in payroll taxes. The US consumer is the key to unlocking a full economic recovery. The consumer is still shopping despite high unemployment, questionable income growth and tight credit. That being said, the cost pressures from commodities will pose a challenge in the months ahead.

US import prices accelerated higher last month, doubling to +1.5%, higher than market expectations. This is the fourth consecutive month of price increases (4-month annualized rate more than +15%). These numbers will have the Fed being challenged on its price stability policy. Digging deeper, both fuel (+3.9%) and non-fuel imports (+0.8%) provided the largest increases. Not to be outdone, Export prices were up for the sixth consecutive month, rising by +1.2% and supported mostly by agriculture (+3.2%) and non-agriculture (+0.9%). Year-over-year, import prices are up +5.3%, while export prices are +6.8% higher. Obviously, export prices got a boost from the Fed’s QE2 stance.

Finally, manufacturing in the NY region grew at its fastest pace in eight-months yesterday (+11.92 to +15.43). Analysts note that with capacity utilization at historical lows, there remains plenty of room for manufacturing to aid consumer consumption in the economic recovery. Digging deeper, the main highlights saw the new-order index soften from +12.39 to +11.80, while current shipments plummeted from +25.39 to +11.31. The employment index was mixed, with current employment easing from +8.42 to +3.61 and the workweek index rising from +2.11 to +6.02. It’s worth noting that the Empire index has been relatively consistent over the past year. Analysts are optimistic that business will begin open their coffers and spend more of their cash hoards on capital goods.

The USD$ is lower against the EUR +0.37%, GBP +0.03, CHF +0.45% and JPY +0.16%. The commodity currencies are stronger this morning, CAD +0.33% and AUD +0.32%. With the lack of Canadian data yesterday, the loonie took its cue from the softer US retail sales data and eased a tad vs. its largest trading partner outright, but performed admirably on the crosses, managing to print a six-month high against JPY. The weaker sales print suggests that it will not be a straight arrow to economic growth. The loonie remains contained in a tight range outright, requiring some guidance from domestic data that starts with today’s leading indicator and manufacturing release and finishing this week with Canada’s inflation snapshot. Stronger fundamentals of late (trade surplus and employment) has helped to push the loonie higher against most of its major trading partners on speculation that Governor Carney will hike borrowing costs quicker than other Cbank. Swaps traders are pricing that the BOC will raise its target lending rate by +0.83% over the next 12-months, up from +0.60% a week ago. Parity, the new paradigm, is becoming well adjusted too by investors, consumers and manufactures. We can continue to expect CAD to outperform on the non-U.S. dollar crosses and outright, better sellers have appeared on dollar rallies (0.9863).

The AUD has strengthened from a two-week low in the O/N session vs. the greenback as Asian bourses gained, increasing demand for higher-yielding assets. The currency temporarily strengthened to a nine-month high vs. the JPY after Chinese inflation data saw CPI rising less than expected (4.9% vs. 5.3%) earlier this week. This has boosted the demand for higher-yielding assets. Also aiding the currency was the RBA minutes from this month’s meeting stating that a ‘slightly restrictive’ policy stance was appropriate as a resources boom boosts incomes. The minutes offered no new real news, but stated clearly that the medium-term outlook for the Australian economy remains robust. Analysts believe that Governor Stevens is waiting for the consumer to start consuming before looking to hike rates again. For the time being, policy is ‘appropriate’ in ‘restrictive’ territory, and is dependent on the consumer when rates will rise again. Last week, the market pricing for rate hikes over the next 12-months fell-4bp to +34bp. Analysts note that with futures dealers interpretation, combined with such a clear message from Stevens, still leaves the rates market vulnerable to the weaker data on lending and consumption over the next few months. With risk appetite on the up and Chinese CPI less than expected has investors wanting to acquire the carry trade again (1.0000).

Crude is little changed in the O/N session ($84.76 +0.44c). Oil prices fell yesterday, giving back some early Tuesday gains as the dollar briefly turned higher and equities slipped on mixed US economic data. Deeper pullbacks continue to be supported by the geopolitical variable. Concerns about the Middle East and production problems in the North Sea are boosting Brent relative to WTI. Lower-than-feared Chinese inflation tentatively supported oil prices earlier this week. Even the value of the Yuan lent a helping hand, especially after reaching a 17-year high vs. the dollar making it much cheaper for them to acquire ‘their’ coveted commodities. Last weeks EIA report revealed no surprises. Both crude and gas stocks happened to edge higher. Fundamentally there is far more oil in storage, more fuel capacity and more idle oil wells to limit a much stronger market rally. It is the fear of a sudden reduction in supply from the Middle-East that will support commodities longer term.

Gold futures have climbed to the highest level in a month as rising consumer prices is boosting the demand for the precious metal as a hedge against inflation. Despite the market not witnessing the same level of speculative fund and ETF participation that occurred throughout December, the commodity is receiving support from Chinese’s inflation, which accelerated the most in at least six years, and on UK consumer prices rising the most in more than two years. The commodity that every investor hated last month continues to find support on deeper pullbacks. This is because the Middle-East remains the unknown variable. The commodity is being used as a store of value. Has the commodity peaked or is it simply a short-term correction? The commodity is attracting technical buyers after rallying above its 20-day moving average. On deeper pullbacks, the metal should remain better bid on speculation that currency volatility will boost demand for a safe heaven investment once the Euro contagion fears raise its ugly head again over the coming weeks during the Euro-periphery refunding season ($1,376 +$2.60c)

The Nikkei closed at 10,808 up+61. The DAX index in Europe was at 7,419 up+19; the FTSE (UK) currently is 6,072 up+35. The early call for the open of key US indices is higher. The US 10-year eased 3bp yesterday (3.60%) and is little changed in the O/N session. The Fed completed the second of four-rounds of US securities purchases yesterday, again supporting the longer end of the yield curve. Treasuries seem to be trading in a vacuum as the market debates the merits of yesterday’s US economic releases. Investors are questioning the true strength of the softer US retail sales release and the Empire manufacturing pick up. The 2’s/10’s spread tightened (+273) as concerns eased that inflation in accelerating. Despite the data being somewhat bullish for the FI market, overall bearish sentiment is capping the price rally and keeping the market within a tight range.

January 31, 2011

December 17, 2010

Dollar loses its Swagger

Filed under: OANDA News — Tags: , , , , , , , , , , , — admin @ 11:12 am

What a little love between friends can achieve, a EUR that’s a damn sight stronger this morning. Euro leaders have decided to amend the Euro Treaty to make possible the creation of a permanent mechanism to aid troubled Euro-zone countries. The details are iffy, but translating political jargon, they will work on them as it’s in their common interest to have a strong stable currency. With Congress approving an extension of the Bush-era tax cuts, coupled with this morning’s stronger than expected German business Ifo survey has led to a cautious recovery in risk loving currencies. The dollar is loosing its swagger, these thin markets will have dealers hunting for short EUR stops just above this weeks highs.

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

Forex heatmap

Yesterday, we were fed some mildly better than expected US release followed by a Philly Fed headline that hit it out of the park. The jobless claims data continues its downward trend (+420k vs. +421k). Month-to-date, the monthly average is down -17.5k compared to the November release and has the market believing that the December NFP should be much healthier than last months. Initial jobless claims have retreated for ten of the past fifteen weeks. The less volatile four-week moving average has been moving lower since August (+422.8k) and currently sits at its lowest level in two years. The trend sits in prime position to want to breach that +400k psychological barrier sooner rather than later. The details of the report were not as strong. All the subcategories posted gains, reversing nearly all the previous month’s improvement. It worth noting that continuing claims data (+4.135m vs. +4.113m) lags behind initial claims by one week, and the extended (+0.977k) and emergency programs (+3.85m) another week behind that. Certain unemployment benefits for the long-term unemployed expired at the end of last month, and Obama’s Tax-cut proposal will include a thirteen-month extension.


The US housing sector will be a drag on fourth quarter GDP. We witnessed mixed reports for housing starts (+555k vs. +534k) and permits (+530k vs. 552k) yesterday. The details for starts were better than the headline gain as the data focused on single family homes (+6.9%). Housing starts averaged +588k in 3rd Q, and if we assumed a flat December print, then we should expect approximately a +544k print or a decline of -7.5%.  Analyst’s note that the rise in singles will mitigate some of the decline because of the higher value added involved in single home. With permits falling it would suggest further softness in the New-Year.


The Philly Fed headline print (24.3 vs. 22.5) comes with a warning, despite the headline being somewhat encouraging and confounding consensus expectations for a drop, it is the strongest reading on manufacturing conditions in five years. However, the details burst the bubble. The increase was due to a faster acceleration in prices paid and received. Digging deeper, seven of the nine subcomponents posted improvements, of which one experienced a decline (inventories) and one reentered growth territory (prices received).The hiring activity and shipments registered slower growth which was offset by the six-month index posting its fourth consecutive monthly improvement.

The USD$ is lower against the EUR +0.80%, GBP +0.01%, JPY +0.11% and CHF +0.68%. The commodity currencies are mixed this morning, CAD -0.06% and AUD +0.00%. The loonie continues to modestly underperform against its major trading partners despite the stronger fundamentals out of North America. Yesterday it happened to be commodity prices weighing on the range bounded currency. Stellar Canadian manufacturing data this week coupled with Cbanks interest to convert a portion of their reserves into CAD is supporting the loonie on dollar rallies. Manufacturing data posted a solid gain in both the headline (+1.7%) and details midweek, 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.

It’s hardly believable, but the AUD is poised for another weekly gain outright as global equities advance and EU leaders agree to create a permanent crisis management system, boosting demand for higher-yielding assets. With risk back on, the currency can make another assault on parity. The currency had been trading under pressure outright as US Treasury yields climb, narrowing the yield advantage of assets down-under and on fear that China will act in answer to slow inflation, reducing the demand for growth sensitive and higher-yielding assets. Year-to-date, the currency has climbed +9.1% (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 (0.9876). There has been interest to short AUD/CAD as a hedge vs. long gold trades.

Crude is higher in the O/N session ($88.05 +35c). Crude prices softened yesterday, as seasonal factors pointed to warmer weather over the holiday period. This week’s EIA report showed that the category of distillate fuel (includes heating oil and diesel) increased +1.09m barrels to +161.3m. This supply print will provide some bearish proof for the report, unlike the weekly headline print showing 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 midweek 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 had previously garnered support from reports 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.

Being long the lemming gold trade has the weaker bulls tentatively worried after this week’s price action. 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. Investors are booking year end profits following a +26% rally this year. This weeks declines have taken the market somewhat off guard. It’s speculated that the selling has been caused by ‘year-end posturing, or even movements of large funds out of the market’. The stronger US data of late points to a recovering economy with a low inflation rate. However, thus far, the commodity remains supported on deeper pull backs by the persistent concern over Euro debt levels. For most of this year, debt contagion has driven investors into the third ‘reservable’ currency as they seek a store of value. 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. The commodity is poised to record its 10th consecutive annual gain ($1,376 +$5.40c). Technical analysts believe that gold will outshine other precious metal in 2011 and peak somewhere above $1,600 in 2012.

The Nikkei closed at 10,303 down-7. The DAX index in Europe was at 7,031 up+8; the FTSE (UK) currently is 5,901 up+21. The early call for the open of key US indices is higher. The US 10-year eased 3bp yesterday (3.42%) and is little changed in the O/N session. Treasury prices remain soft, pushing debt yields to a seven-month high, on stronger US fundamentals reducing the demand for safety. With the Senate passing the tax-bill and foreign investors beginning to cut their holdings of US debt as risk appetite improves has speculators seeking better returns elsewhere. Liquidity remains a premium as we enter the holiday stretch.

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.

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