Forex Blog

November 2, 2010

Dollar debasing jet-stream

Filed under: OANDA News — Tags: , , , , , , , , , , , , — admin @ 9:38 am

Softer income and spending data in the US yesterday raises questions about how healthy the important shopping season will be. Will the pending QE2 announcement provide the Midas touch? It’s been well documented that the problem with this ‘policy’ is that it does not add net assets to the private sector. This is the primary misconception regarding QE. The expansion of the monetary base is not ‘net new money in your pockets’. By day’s end, it will not help finance new spending or corporate investment, it will not create jobs and it will not increase aggregate demand. So, what’s the point? Someone is betting on a sustained psychological change. That is all the US government really has to offer at this moment as we encroach on 10% unemployment.

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

Forex heatmap

US data was mixed yesterday and should have little bearing on the Fed’s pending announcement tomorrow. Analysts concede that pressure on personal income also highlights the pressure on the Fed to boost the economy. US consumer spending remained soft in Sept (-0.1% vs. +0.2%) and was split between the role of higher prices and a higher volume of spending. Even adjusting for inflation the headline was a miserable +0.085, m/m. It’s noted that the US consumer remains ‘dependent upon government transfers for income growth’, and even with that there are question on how healthy the important holiday shopping season will be. Digging deeper into the spending subcategories, the real-gain was driven by higher durables spending (+0.8%), with services spending (+0.056%) playing a secondary role, and nondurables spending fell -0.18%. One of the go to inflation indicators for the Fed, the headline price deflator for total spending, came in as expected (+1.4%), while core-inflation happened to print a mildly weaker than expected flat release (+0.0% vs. +0.1%). Even more disconcerting to see was the total personal income had fallen to -0.1% (first time in eighteen-months). Wage and salary disbursements came in flat, marking the second consecutive month of decelerating growth. The other components for personal income were eclectic, proprietor’s income was up +0.5%, rental income increased by +1.2%, but personal income receipts on assets was down -0.3%. The price-adjusted personal income ex-current transfer receipts has remained unchanged for three months, pushing the personal savings rate to +5.3% from +5.6% in Aug. In reality, US personal incomes are flat-lining, forcing individuals to use their savings to finance purchases. This is not the ideal way to prop up incomes.  

Not to be left behind by China’s strong manufacturing numbers this week, the US’s manufacturing expanded at its fastest pace in five months yesterday (56.9 vs. 54.2). The details were surprisingly strong with the ISM’s new orders climbing to 58.9 from 51.1, while the production index jumped to 62.7 from 56.5. Again, it seems that US manufacturing is outstripping other facets of the US economy. The employment gauge rose to 57.7 from 56.5, and the index of export orders increased to 60.5 from 54.5. The inventory index fell to 53.9 from 55.6 in Sept., while the print of customer stockpiles rose to 44 from 42.5. Now we can make our way back to further Fed speculating.

The USD$ is lower against the EUR +0.58%, GBP +0.23%, CHF +0.64% and higher against the JPY -0.15%. The loonie received support from all the four corners of the globe yesterday. Stronger manufacturing numbers in both China and the US favor commodity prices, which usually affects growth sensitive currencies like the CAD. With US income and spending on the soft side, suggest fresh ammunition for the FOMC to vote for substantial QE2 tomorrow. Last week, the Canadian growth rate for Aug. came in as expected (+0.3%), with all the subcategories again putting in a solid performance. Canadian policy makers remain focused on the downside risks of the US economy, as the Canadian economy continues to be shackled to its largest trading partner, and the very reason why the BOC have prudently stepped to the sidelines. The loonie has been caught in ‘the dollar debasing jet-stream’. 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. Canadian data highlights this week see the Oct. Ivey PMI on Thursday and the employment release on Friday. Now it’s back to the waiting game.

Both Australia and India seem to be getting ahead of the curve and have hiked rates unexpectedly O/N just as Japan and the US consider additional monetary stimulus, which could increase the risk of an influx of capital into both Asian-Pacific countries that might ‘exacerbate inflation’. The Australian rates market was not able to price in a hike after the weaker than expected CPI-inflation data for 3rd Q, and was completely flatfooted by the RBA’s decision to hike rates +25bp to 4.75%. The AUD rallied to just short of parity and 3-year rates jumped +10bp. This was the first hike since May. The following communique emphasized both the strength of the domestic economy and signs of recovery in its main trading partner, China. Specifically, the RBA pointed to a combination of higher wages, on the back of strong terms of trade gains, strong employment and improving credit growth in an economy with already limited spare capacity. Governor Stevens take is that this will keep domestic demand potent medium-term and that inflation likely to rise in coming years. Importantly, the RBA said ‘this outlook, which is largely unchanged from the Bank’s earlier forecasts, assumes some tightening in monetary policy’. Analysts now expect the strength of the commodity sector will keep spare capacity tight and the RBA to continue hiking in 2011. They are done for this year. All of this is a good enough excuse for the currency to trade aggressively at a premium vs. the dollar in the medium term (1.0000).
Crude is higher in the O/N session ($83.24 +29c).

Crude prices have rallied this week as speculators increased their bets of higher prices after stronger manufacturing data in China, adding to signs that economic growth is withstanding cooling efforts by the government. The market is betting that a quantitative easing announcement will support that recovery, weaken the dollar again and support commodities. The danger is that speculators may be getting ahead of themselves. 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.

A positive move for the dollar was bound to affect the yellow metal. Year-to-date, there has been a strong correlation between the two asset classes. With the greenback rebounded yesterday eroded the appeal of the metal as an alternative investment. It’s the depth of the pull back that will test the underlying strength of the commodity. In this morning session with buck under pressure, gold shines. Last month, the commodity rose +3.7%, printing a new record high of $1,388.10 an ounce, as the dollar fell -2.2%. QE2 chatter dominates the market and there are two trains of thought, 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. For most of this year speculators have sought an alternative investment strategy to the historical reserve currency. The market has been using the commodity as a proxy for a ‘third reservable currency’, the reason for the record highs. The debasing fears of the dollar, coupled with the sustainable growth issues of the US economy have had investors seeking protection in an asset with a ‘store of value’. It’s now up to the Fed to provide direction ($1,356 +$6.10).

The Nikkei closed at 9,159 +5. The DAX index in Europe was at 6,606 up +1; the FTSE (UK) currently is 5,713 +19. The early call for the open of key US indices is higher. The US 10-backed up 2bp yesterday (2.62%) and is little changed in the O/N session. Treasury prices got a boost in the early session yesterday after one of the Fed’s preferred inflation indicators, the core-price deflator, was unchanged at +1.2%, y/y. The FI asset class happened to pare some of these gains after the PMI expanded faster than forecasted last month, damping speculation that helicopter Ben will step up deep debt purchases to boost the economy. With the US economy showing signs of stability, the market should expect further position adjustments ahead of the Fed’s announcement tomorrow as the masses speculate on the buy back numbers.

October 12, 2010

EUR’s 11% gain really too much?

Filed under: OANDA News — Tags: , , , , , , , , , , — admin @ 10:23 am

Since last Friday’s NFP release the market has had quite a bit to chew on. Over the weekend global leaders have failed to narrow their differences on currency values and have turned to the IMF ‘to calm frictions that are already sparking protectionism’. Historically, this is an institution that generally relies on powers of persuasion. Is this the method that Capital Markets can expect to rely on? It’s a fact that countries favor cheaper currencies to aid growth, just do not be so overt about it. Realistically, the negative dollar trade has become overcrowded and profit taking is inevitable. Perhaps QE2 fears for the buck are slightly overdone? Technical analysts will tell us that we should be expecting a dollar extension to a 1.36 handle. Perhaps this afternoons FOMC minutes will give us a surprise or two.

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

Forex heatmap

Last week it was jobs, this week we get to witness key readings on inflation and retail spending down south. Market anticipates benign inflation to be confirmed again as softer price pressures are in no danger of rising any time soon. With CPI this Friday, market consensus is looking for a +0.2% print, while core (ex-food and energy) is seen at +0.1% after the flat reading the previous month. The Fed is scheduled to release this afternoon its Sept. 21st minutes. Back then it announced it was willing to do more to sustain the US economic recovery.

The USD$ is higher against the EUR -0.62%, GBP -0.33%, CHF -0.73% and lower against JPY +0.06%. The commodity currencies are weaker, CAD -0.35% and AUD -0.63%. The loonie has been under pressure since the headline release of its employment report on Friday (-6.6k vs. +10.2k). According to analysts, the details are more encouraging than the ‘headline drop’. Digging deeper, full-time jobs rose by +37.1k, while the destruction of -43.7k part-time jobs managed to keep the headline in the red. Optimists will tell you the conversion of part-time to full-time jobs is a mild positive, as it expands hours worked, and they tend to be better paying and more stable. In the big picture, the slowdown of the Canadian economy has surprised policy makers of late. Now that the labor market seems to be taking a pause, futures prices are looking for the same in the rate policy decision from the BOC next week. The demise of the greenback had the CAD threatening parity earlier last week as commodity prices provided a bullish backdrop for the currency. That being said, interest rate differentials is not the primary reason for wanting to own the currency. The ongoing threat of QE2 continues to gives all major currencies a leg up on the ‘historical reserve currency’. It seems that reason may be beginning to wear thin as the dollar strengthens against all its major trading partners.

The AUD fell for a second day amid speculation the currency’s advance last week to a record was overdone. A stronger employment report down under earlier this month happened to push the currency to new heights vs. the greenback. Australia’s employers added +49.5k workers and the unemployment rate held at +5.1% in Sept. Month-to-date, the AUD has climbed +8% vs. the buck as data fueled bets that the RBA will raise interest rates before the year ends. Futures traders now see a 42% chance that the RBA will increase its target rate next month, down from 66% last week. The dollar and commodity prices continue to pressurize growth currencies short term. Investors are better buyers on deeper pullbacks as the interest rate differential continues to be of appeal for alternative investments (0.9783).

Crude is lower in the O/N session ($81.05 -$1.16c). Oil prices continue to slide this morning, snapping a three-week record printing price rally, as the dollar strengths vs. the EUR, and curbing the appeal of commodities as an alternative investment ahead of OPEC meeting this week in Vienna. This move had nothing to do with inventories or demand. It is a plain vanilla dollar move. Last week’s inventory report was mixed, a little bearish for oil and bullish for the products, that said, the focus remains on pending QE strategies been implemented by different governments. Crude supplies climbed +3.09m barrels to +360.9m, leaving stockpiles +13% higher than the five-year average. Analysts had expected weekly inventories to rise by +413k barrels. In contrast, gas stockpiles fell -2.65m barrels to +219.9m. Supplies of distillate fuel (heating oil and diesel) slipped -1.12m barrels to +172.5m. Refiners reduced their operating rates by -2.7% to 83.1%. In fact, the drop in refinery runs has probably caused the drop in fuel supplies. Also of note was the drop in fuel consumption, falling -6.4% to +18.5m barrels a day (the biggest weekly decline in nearly seven years). Gas demand also fell -4.2% to +8.99m barrels a day. Until the report, higher inventory supplies had been the biggest inhibitor for a market advance over the past quarter. The market remains wary that the underlying fundamentals have not changed, but the dollar value continues to dictate the direction of commodity prices.

Despite everything, Gold is a commodity in demand close to record highs. The long holiday weekend has be unable to deter investors as the one directional trade has been in demand on fear that the ‘buck’ will remain under pressure in the short term. With market confidence wavering in currency prices, and with free money, it’s making commodities attractive on ‘deeper’ pull backs. Aiding the trade has been the collapse of the dollar vs. its major trading partners. Any time that governments are in the business of printing money then the commodity is bound to do well. Technically, the weakness of the dollar may have been overdone in the short term. The market is currently experiencing a pull back in prices, a dollar rally and paring of bear ‘positions’. To date, gold has outperformed global equities and treasuries (+24%), prompting record investment in gold-backed exchange-traded products. A concern about the strength of the dollar coupled with the sustainable growth issues of the US economy has had investors seeking protection in an asset with a ‘store of value’. With the Fed on the verge of implementing further QE programs ‘tend to be supportive of asset prices and is fueling concerns about the potential longer-term inflationary affect of such measures’. The opportunity costs of holding gold are low due to falling interest rates, by default, the market should expect better buying of the metal again ($1,343 -$10).

The Nikkei closed at 9,388 down -200. The DAX index in Europe was at 6,240 down -70; the FTSE (UK) currently is 5,602 -70. The early call for the open of key US indices is lower. The US 10-year eased 3bp since Friday (2.36%) and is little changed in the O/N session. The market has priced in aggressive ‘future’ buying by the Fed over the last few weeks and last Friday’s employment numbers may have put anticipated buying over the top as record yields continue to be printed. QE2 fundamentally will keep yields low, that being said the market may have dragged bond prices too high as the FOMC announcement could disappoint the FI market that has priced in aggressive new treasury purchases. After the long weekend let’s see what dealers make of the G20 spat.

September 24, 2010

US Durable Goods Up 2% in August

Filed under: OANDA News — Tags: , , , , , , , , , , , , , , — admin @ 1:35 pm

The US Commerce Department said that new orders for durable goods excluding transportation increased by 2 percent in August after a 2.8 percent decline in July. This is the largest single-month increase since March beating expectations by a full percent.

“Overall, I think it’s a much stronger number than the headline suggests. It was a weak report last month but I think this definitely shows underlying improvement,” said Tom Simons, money market economist at Jefferies & Co. in New York.

Source: Reuters

August 25, 2010

Noda Yen for me thank you

Filed under: OANDA News — Tags: , , , , , , , , , , , , — admin @ 10:08 am

Its fear that is driving capital markets, the kind of thing that may reinforce the idea of a double-dip recession, not fundamentals or technical’s. An Irish downgrade three-months ago would have sunk the EUR, instead the German Ifo survey rising to a three-year high this morning, is tentatively convincing the market that ‘their’ economy will not lose as much momentum as believed. How long can the one economy shoulder the EUR? Mind you, with US yields so low most economies could. Japan debating over a rising yen has markets speculating on the timing of intervention by the BOJ. Owning the currency is not yet toxic, but positions are been lightened in anticipation. Direct intervention will probably be trumped by monetary easing.

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

Forex heatmap

It’s the ‘bad’ after the ‘bad’. Currently, it’s difficult to sugarcoat any data coming out of North America. US existing home sales happened to plunge to a new record low yesterday. In the absence of any stimulus, the headline print is devastating to the sector (+3.83m vs. +5.26m, -27.2%). The months ahead look similarly dismal, as the inventory overhang headache is worsening. By default, this will lead to weaker house prices for the future. Digging deeper, there was nothing positive in the report. Months supply ballooned to +12.5 months vs. a +8.9 prior print. This has occurred on the back of increased listings and collapsed sales, and we are not evening including shadow inventories in the data (foreclosed homes off the market). Analysts are even predicting future direr months supply prints ahead. By default, this will lead to further erosion of prices and no positive wealth effect. The permanent wealth shock will lead to a higher savings ratio by the consumer, the go to variable for the Fed. Interestingly, most of the record decline occurred in the single family component sub-category (+3.37m vs. +4.62m).

The Richmond Fed data was better than the market had been expecting (11 vs. 8), but continues to lean on the softer side. The manufacturing activity in the district remains in expansion mode. However, that being said, the pace continues to decelerate for the 4th-straight month. Digging deeper, the rate of shipment growth was cut in half from last month. Not helping was the easing up of the new-order volumes and the backlog of orders from July. This will eventually point to a slowdown in shipments over the coming months. Worth noting was the six-month forward expectations plummeting – 77% to 7 (lowest level in two years). New-orders is expanding in the district, but at a slow pace. This is in contrast to other surveys of late. Companies expect capital spending to slow down to levels not seen in over a year. Finally, employment conditions continued to improve, but at deteriorating pace.

The USD$ is lower against the EUR +0.09%, GBP +0.09%, CHF +0.21% and higher against JPY -0.47%. The commodity currencies are stronger this morning, CAD +0.11% and AUD +0.41%. One should not get too upset with the Canadian retail sales data yesterday. In fact it was much stronger than the headline would have you believe (+0.1% vs. -0.4%). The disappointment on the dollar value of retail sales was due to lower prices. In volume terms, total sales advanced +0.9%, m/m, a huge plus and contributor to this quarters GDP final print. What is the BOC to do? Well, prior to the report, futures were pricing in a 32% chance of a hike in Sept. But, one has to assume that they are not solely relying on Canadian fundamentals. With respect to the report and weighing up the strong gains in real-manufacturing shipments, expect Governor Carney to continue to normalize his rate policy by hiking +25bp and then step to the side lines for a breather. Retail sales are only about 40% of consumer spending. Weaker global equity and commodity prices pushed the loonie to a new six-week low yesterday. The currency is not immune to the weaker data out of the US. Over the past two trading sessions, weaker CAD long positions have been squeezed out as fear of a double-dip occurring has investors seeking sanctuary in risk aversion trading strategies. It is only natural that growth and interest rate sensitive currencies would be dumped even more aggressively. Traders are happy to play the risk-aversion card with longer term CAD bulls looking to pick up cheaper loonies north of 1.0650.

The AUD has ended two downward days on speculation that Japanese policy makers may consider intervening in the markets and dampen the demand for JPY. Comments from Japanese officials have squeezed their currency lower across the board in the O/N session. Global bourses under pressure have been capable of pushing the AUD to test its one month lows this week. On the whole, 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. 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 (0.8870).

Crude is higher in the O/N session ($72.05 up +42c). Yesterday, crude prices fell to a new 7-week low on speculation that US inventories of crude and fuel increased last week as economic growth slows. It is the fifth daily decline undermining investors’ need to hedge against inflation using dollar-priced assets. Last weeks EIA report provided fodder for the ‘bears’ and the market anticipates this morning release will fare no better. 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. 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 rebounded with a vengeance yesterday, and continues to stay the course this morning, from its 4-week lows as investors seek sanctuary in the safer heaven asset classes on the back of weaker equity markets. With global bourses under pressure, investors are trying to retain cash on mounting evidence of an economic slowdown. Speculators again are supporting the various safe 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 +11.9%. 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 8,845 down -150 The DAX index in Europe was at 5,927 down -8; the FTSE (UK) currently is 5,141 down -15. The early call for the open of key US indices is lower. The US 10-year plummeted 10bp yesterday (2.50%) and are little changed in the O/N session. The short end of the US curve happened to print record low yields after yesterdays worse than anticipated US home sales. Investors are concerned for the strength of the global recovery and are trading to flatten that US yield curve, 2’s/10’s are currently at +203bp. Analysts medium target has been +200bp as fear drives the market to lower rates. Treasuries 2-year note sale came in with a yield of 0.498% (a record low). The bid-to-cover ratio was 3.12, compared with a 4-auction average of 3.19. The indirect bid (foreign buyers) was 29%, compared to the average of 35.4%. The direct bid was 12% vs. 17.9%. In total, the US plans to sell $102b of debt this week. We had the 2’s yesterday (+$37b), 5’s today (+$36b) and 7-year notes tomorrow (+$29b). This will be the smallest monthly offering of ‘the’ combination thus far. Longer term buyers continue to control the market, that being said, product does look rich on the curve.

August 17, 2010

Prices Stabilizing?

Filed under: Forex News — Tags: , , , , , , , , , , , , , — admin @ 1:56 pm

This morning in the UK, CPI figures came in as expected with the headline number coming in at 3.1%, down .1% from the previous month.  While this is still outside of the target range, the BOE is hoping for a gradual fall that will allow them to leave monetary policy unchanged.  The BOE has a dual mandate to keep inflation in check and encourage employment.

Here in the US, our own PPI figures came in as expected as well, with the headline number coming in showing the first increase in nearly 4 months.  Prices increased .2% for the month vs. last month’s decline of .5%, showing that deflationary forces may be protracted—at least for now.

In the Euro zone mixed readings of economic sentiment came in, with German investor confidence weakening more than expected to a 16-month low of 14 vs. an expectation of 20.  However, the current situation survey increased to 44.3 vs. an expectation of a gain to 24.  All in all this shows a positive outlook for the German economy, as reflected in the German stock markets gains this morning.

In Australia, minutes from the RBA’s rate policy meeting show that they are “comfortable” with current interest rates and are prepared to see if the heightened concerns over the global economic uncertainty are warranted.

In the forex market:

Aussie (AUD):   The Aussie is mostly higher this morning as the resumption of risk appetite has returned to the market.  While the RBA minutes did not provide evidence that a further rate hike may be coming, they will be keeping an eye on potential inflation which they expect to be tame as global concerns increase.

Kiwi (NZD):   The Kiwi is higher on risk appetite, as the docket for news for NZ is light this week.   PPI figures and consumer confidence figures are due out later this week.

Loonie (CAD):   The Loonie is higher across the board as manufacturing shipments increased .1% vs. an expectation of a decline of .5%, providing a lift to the business outlook.  In addition, oil prices are higher this morning to 76, and the Loonie has been beaten up as of late because of Canada’s close ties to the US economy.

Euro (EUR):  The Euro is higher this morning as its current account deficit showed a surplus of 1.0B vs. last month’s deficit of 17.9B.  In addition, mixed confidence figures from Germany are seen as largely positive, as an improved outlook for the EU economy is likely.  However, don’t expect the ECB to move on rates any time soon, as there is still sovereign debt risk aplenty.  Borrowing costs in Spain and Ireland decreased as concerns over their budgets have decreased.

Pound (GBP):   The Pound is mostly lower despite risk appetite this morning, as CPI data came in as expected at 3.1%.  While inflation is still currently above the government target of 3%, the BOE is hoping that prices will fall, allowing them to keep accommodative policy in place.

Dollar (USD):   The Dollar is lower as would be expected under a “normal” risk-taking scenario this morning.  Building Permits and Housing starts came in lower than expected, while PPI data showed a gain of .2% meeting expectations.  In addition, a conference on housing is taking place which will mostly produce no solution to the problems that plague the housing market.  Two of the biggest problems, both Fannie Mae and Freddie Mac, escaped mention in the Financial Regulation bill, drawing the ire of those who believe that these entities were the cause of the housing debacle.

Yen (JPY):  The Yen is weaker against all but the Pound, as risk appetite is encouraging carry trades.  However, as the Yen hovers near 15-year highs vs. the Dollar, expect the intervention talk to heat up.

So the numbers here in the US still look weak, but they were not horrible.  PPI increases for the first time in 4 months show that prices may be stabilizing which will keep the deflationistas at bay for another day.

In the UK, in-line CPI data means that the BOE most likely has time with its current monetary policy to play out, as the Pound bulls were hoping for a higher CPI reading which would most likely cause speculation of a return to normalized policy increase.  Tomorrow, the minutes from the rate policy meeting will be released, and it will be interesting to see if any sentiment has changed as inflation has remained above the government target for the third quarter in a row.

The Euro zone appears to be stabilizing as well, as budget concerns in the countries with debt problems have subsided, and the German economy still appears to be rocking.

The commodity currencies will continue to trade on risk themes, as near-term rate hikes are most likely out of the question.  The “wait and see” approach appears to be the course that they will follow.

And lastly, speculation over Japanese intervention in the Yen will heat up with any further Yen appreciation.  Risk aversion will most likely be the driver as carry trades are unwound—but will the BOJ succumb to government pressure?

Stay tuned!

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July 23, 2010

The Dirt on Stress Tests

Filed under: OANDA News — Tags: , , , , , , , , , , , , , — admin @ 10:21 am

A stronger than expected German Ifo confidence survey this morning (106.8 vs. 101.5) is supporting the EUR ahead of the Bank Stress Test releases. Along for the ride is Sterling aided by its 2nd Q GDP print (+1.1% vs. +0.3%). Market sentiment has been on a high since the release of improved economic data out of the Euro-zone and US yesterday. A string of strong earnings is boosting the hope of a global recovery. But, will the Stress Tests be transparent and stringent enough to appease the markets appetite for wanting to apply more risk? The results are available at noon. Different scenarios will be considered, a base case and an adverse economic scenario, which includes and excludes assumptions about sovereign debt haircuts (haircuts are expected to be in a range of 17% on Greek debt, 3% on Spanish bonds and none on German debt). Most concern remains over the treatment of banks’ holdings of sovereign debt. Banks will be required to demonstrate that their Tier 1 capital does not fall below +6%. It is widely expected that banks will also be required to provide evidence of how any necessary capital is to be raised to meet any shortfall. It’s anticipated that 10-20 banks (out of 61) may need to raise new capital (approx. EUR30b), but none of the larger EU banks are expected to be in this category. Initial public reaction will probably want to sell the market and then investors will have to figure if the tests are a ‘beneficial catalyst for change’. Will the tests help overcome the lack of information that has been a recurring problem during the financial and credit crisis?

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

Forex heatmap

US unemployment insurance claims are reverting back to the ‘bad old days’ of June. Last weeks headline print of +464k happened to drag the series to just below the elevated 4-week moving average witnessed last month. The volatility of the series is expected to continue beyond next week, when by then analysts expect it should to have settled down. So it seems that its odd’s on for at least another rise. State continuing claims fell -223k to +4.487m vs. market expectations of +4.5m, while Federal softened by -368k. Collectively, the decline is explained away in part ‘to benefit exhaustions rather than changes in labor market conditions’. Analysts expect that part of the decline to be ’reflected in the monthly unemployment rate’. It’s worth noting that when individuals exhaust their eligibility, they are likely to report themselves as ’job-wanters’ rather than active ‘job-seekers’. This action will remove them from the traditional unemployment rate measure.

Most analysts continue to see ‘doom and gloom’ in the post US existing home sales surprise yesterday (+5.37m vs. +5.1m, -5.1%). Opinion seem adamant that that the gains will ‘vaporize’ over the remainder of the summer. Many are predicting new record lows as the stampede to buy in Apr. before the homebuyer tax credit expired has increased pending home sales in the 1st Q and directly supporting re-sales ‘since the pending transactions close and show up in re-sales only 30-60 days later for the most part’. We already have witnessed the seasonally adjusted pending home sales plummeting -30% in May and the seasonally adjusted mortgage purchase applications are still -42% lower. Proof is in the pudding, in black and white, record lows are around the corner. Digging deeper, re-sale activity in the single-family home segment was hit the hardest (-5.6%). Condo’s fared a tad better (-1.5%). On average, the re-sale housing market has just less than 6-months of supply, well below the cycle’s high of 11-months. None of this reflects the infamous ‘shadow inventory’ out there.

The USD$ is lower against the EUR +0.01%, GBP +0.32% and higher against CHF -0.08% and JPY -0.01%. The commodity currencies are stronger this morning, CAD +0.39% and AUD +0.21%. Yesterday’s Canadian retail sales was better than the headline suggested (-0.2% vs. +0.5%) for two reasons. Firstly, the dollar value of retail sales ex-autos and gas receipts actually climbed +0.2%. One can assume that it was gas prices that distorted the headline and the core-sales. Secondly, the decline in the dollar value of retail sales was all in price terms, as the volume of sales actually advanced 4bp in May. However, the gains were not that impressive. That been said, Canadian loonie enthusiasts were preferably pre-occupied with Carney and Co.’s MPC report. He enforced that there was no pre-ordained path for interest rates in Canada. Earlier this week, the expected BOC rate hike was followed by a somewhat dovish communiqué. According to Carney ‘the global economic recovery is proceeding, but, is not yet self-sustaining’. This week’s 25bp hike will ‘leave considerable monetary stimulus in place’, with both the core and total inflation to advance at about a +2% annual rate through 2012 (within their target zone). Some will argue that with signs of a significant slowdown underway in the US, it’s possible that the BOC may be persuaded to move back to the sidelines on the Sept. go-around. Carney has given himself the latitude to step back and assess global growth for the 3rd Q. The market will take time out and digest today’s Euro-zone’s stress tests before ‘throwing all in’. Stronger commodity and equity prices favor buying CAD on pull backs.

The AUD traded near its 2-month high this morning as concerns on the bank stress tests faded. The strength of the carry trade is once again encouraging investors to apply the ‘risk-on’ trading strategy. The currency gained +2.7% vs. the greenback this week after the RBA’s July minutes showed that Governor Stevens intends to use results of Europe’s stress tests and local inflation figures, due out next week, to decide whether to resume raising rates. The pace of CPI increased nearly doubled to +0.9% in the first quarter. Fundamental analysts believe it would take another rate hike for the currency to trade again in the 90’s and technically it’s a sell on approaching these levels. The Governor has also indicated that the election, called by PM Gillard, would not impact the Aug. 3 interest-rate decision and that the medium-term picture for Australia is ‘fairly positive’. Policy makers are ‘reinstating their view that domestic growth will be about trend’ and are ‘not alarmed by the global demand backdrop’. In retrospect, policy makers remain ‘very upbeat’. Because of equities actions, the market is a cautious buyer on pullbacks, wary that the recent strong rally technically may be overdone (0.8934).

Crude is little changed in the O/N session ($79.02 down -28c). Crude prices rallied yesterday on the back of a report showing accelerating growth in Europe’s manufacturing and services industries. Investors took this as a sign that demand in the region would rise despite a surprising EIA report earlier this week. The market had been expecting a drawdown on inventories yet again. However, not so, stocks showed a surprise increase, reporting a rise of +400k barrels of oil for the week whilst the market had been expecting a headline decline of -1.6m. The dovish report continued with its gas inventories rising +1.1m barrels and its stockpiles of distillates (diesel and heating oil) doubling expectations to +3.9m barrels. All last week the market was hung up on the growth concerns of the world’s two biggest consumers as China’s economic growth eased and the Fed said that the ‘US outlook had softened’. Once again technically, the gas markets numbers show ‘lackluster demand and will put pressure on the entire energy complex’. We continue to remain range bound with the price action as the market looks for vindication.

All this week we witnessed investors paring their commodity interests amid uncertain markets. The ‘yellow metal’ has constantly been fighting its technical support 100-day moving average. Prices have found it rather difficult to gravitate too far from that $1,185-88 magnet. Dealers expect investors to dump their remaining long positions on a break of this level. Tentatively, gold futures are trying to rebound on speculation that the Fed will act to stimulate US growth. This action should drive the dollar lower and boost the appeal of the precious metal as an alternative asset. At the moment it’s has been frustrating for investors to buy into the intraday story, the ‘too and froing’ of the price action in a tight range has proven expensive this week. A positive equity market, bullied by the seasonal earning’s reports should continue to drag the commodity higher. Bigger picture, technically, the bullish sentiment had been on hiatus with profit taking testing the medium term support levels. Fundamentally, in the short term the metal will find it difficult to rally aggressively, as historically, this is the ‘slowest’ season for physical demand. Despite this, longer term view, market concerns over global economic growth should support the ‘yellow’ metal prices on much deeper pull backs. However, that been said, weaker longs firstly need to be taken out of the market. Year-to-date, the commodity has gained +9.3% and is in danger of giving up more ($1,198 +$3.00).

The Nikkei closed at 9,430 up +210. The DAX index in Europe was at 6,177 up +36; the FTSE (UK) currently is 5,314 up +25. The early call for the open of key US indices is higher. The US 10-year backed up 5bp yesterday (2.95%) and is little changed in the O/N session. After printing new record low yields, the US front-end plunged on higher earnings easing concerns that the Fed may have to consider more stimulus measures to help sustain the US economic recovery. With the Treasury planning to auction $104b of new product next week ($38b 2’s, $37b 5’s and $29b 7’s), cumulatively lower that the previous two months, will certainly have dealers wanting to cheapen the curve a tad at these technically ‘rich’ low–yields. Current market sentiment has dealers wanting to be better buyers on deeper pull backs, as the market foresees a flatter yield curve as analysts predict that 10’s will yield 2.75% by year-end.

July 21, 2010

Market wary of Stress Tests before betting Farm

Filed under: OANDA News — Tags: , , , , , , , , , , , , , — admin @ 9:28 am

Helicopter Ben, today, will confirm that the Fed is concerned about the deterioration in the economic outlook and again indicate that they are probably a long way from implementing any further policy stimuli. His semi-annual testimony, this afternoon and tomorrow, in front of the US House and Senate, is unlikely to create big waves throughout the Capital Markets. That will be left to this Friday’s Euro-zone stress test releases. The dollars is looking as if it’s running out of steam to the downside. Are we turning the corner? Its weakness has been partly due to a lower level of concern about the European fiscal crisis. It’s logical that doubts about sovereign defaults and the longevity of the EUR will increase again (Hungary, Ireland, Portugal Greece etc.). Market will soon realize that US growth is only slowing and not stalling!

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’ trading range.

Forex heatmap

US housing data was not as bad as the headline suggested yesterday. Housing starts (+549k down -5%) did disappoint the weaker expectations camp, however, on the flip side, building permits advanced (+586k vs. +575k). Digging deeper into the underlying variables, the starts was ‘focused on lower value-added multiples’, one could interpret it as somewhat of a plus for the headline print. Analyzing the sub-components, singles fell -0.7% from a run rate of +457k in May. It was the multiples sub-category that accounted for the headline drop in total starts (-21% m/m). Building permits advanced +2.1%, its first increase in 4-months. It was the multi-family units that led the gain (+19.6%-the most in 8-months). This happened to offset the -3.4% decline in the single-family print. It’s worth noting that starts are back to its lowest level in 10-months. Analysts expect that the housing category again will burden the 2nd Q GDP growth. That been said, keep an eye on the business investment print, it has triple the weighting than housing in GDP and it’s on an upswing.
Perhaps the next eyesore will be on the resale side of things as the data has yet to record the drop in pending home sales and mortgage purchase applications. Expect this do so over the next few months.

The USD$ is lower against the EUR +0.00%, GBP +0.30%, CHF +0.19% and JPY +0.33%. The commodity currencies are stronger this morning, CAD +0.94% and AUD +0.15%. It’s done. It’s over with, no surprises from Governor Carney at the BOC yesterday. Policy makers raised its benchmark lending rate for a second consecutive month (25bp to +0.75%), and said that slower economic growth through next year means any future moves will be ’weighed carefully’. The growth forecast was cut to +3.5% from +3.7% for this year and to +2.9% from +3.1% for 2011. In the following communiqué he stated that ‘given the considerable uncertainty surrounding the outlook, any further reduction of monetary stimulus would have to be weighed carefully against domestic and global economic developments’. ‘The global economic recovery is proceeding but is not yet self-sustaining’ according to Carney and the rate increase will ‘leave considerable monetary stimulus in place’, with both the core and total inflation to advance at about a +2% annual rate through 2012 (within their target zone). Some will argue that with signs of a significant slowdown underway in the US, it’s possible that the BOC may be persuaded to move back to the sidelines on the Sept. go-around. Carney has given himself the latitude to step back and assess global growth for the 3rd Q. Longer term speculators continue to wager bets that the CAD will outperform other economies whose monetary policy is expected to experience a prolonged period of near-zero benchmark rates. For now, speculators prefer to be buyers of CAD on dollar rallies.

The AUD continues too trade near its strongest level in two months vs. the dollar on speculation that the Fed will announce steps to ‘spur lending to boost growth in the world’s largest economy’. However, vs. the JPY, the currency is struggling on speculation that the slowing global economy will deter the RBA from raising interest rates next month. Fundamental analysts believe it would take another rate hike for the currency to trade again in the 90’s and technically it’s a sell on approaching these levels. Already this week, the minutes of the RBA’s July meeting showed that policy makers plan to use the results of EU bank stress tests and local inflation figures to decide whether to resume the most aggressive round of interest-rate increases. Governor Steven’s indicated that the election, called by PM Gillard, would not impact the Aug. 3 interest-rate decision and that the medium-term picture for Australia is ‘fairly positive’. Policy makers are ‘reinstating their view that domestic growth will be about trend’ and are ‘not alarmed by the global demand backdrop’. In retrospect, policy makers remain ‘very upbeat’. Because of equities actions, the market is a cautious buyer on pullbacks, wary that the recent strong rally technically may be overdone (0.8854).

Crude is little changed in the O/N session ($77.82 up +24c). Crude happened to pare its initial losses yesterday, ending the day in the black, despite the weaker US housing data. The turnaround occurred on the back of China’s expanding economy and on expectations that the weekly US inventories declined last week, proof perhaps of improving fuel demand. We will get to see if it’s true later this morning in the EIA release. With the dollar continuing its problems vs. the EUR is boosting speculator demands for energy futures as an alternative investment. All last week the market was hung up on the growth concerns of the world’s two biggest consumers as China’s economic growth eased and the Fed said that the ‘US outlook had softened’. Bigger picture, the market is concerned about the fuel demand tapering off. Last week’s EIA report fell -5.06m barrels, or -1.4%, to +353.1m (the most in 10-months) vs. an expected decline of only -1.5m barrels. This has left crude supplies +7% above the five-year average for the period. The headline print certainly looks bullish, but, with +350m barrels, supplies are not that tight. Digging deeper, gas supplies climbed +1.6m barrels to +221m, w/w, and not unlike the stocks of distillate fuel (heating oil and diesel), increasing +2.94m barrels to +162.6m, almost three times the size of the gain forecasted. Analysts believe that crude will soften after government reports again this week will signal that the US economic recovery is stalling, which in effect will stain fuel demand. Technically, the gas markets numbers show ‘lackluster demand and will put pressure on the entire energy complex’. We continue to remain range bound with the price action, as the market is looking for stronger evidence to tackle its support and resistance levels.

The safe-haven interest that happened to push gold to record prices last month failed to materialize again yesterday, as investors liquidated their holdings of precious metal amid uncertain markets. The metal is fighting its technical 100-day moving average. Dealers expect investors to pull the trigger and liquidate their remaining long positions on a break of the moving average. The rebound in the EUR has reduced, somewhat, the demand for the ‘yellow metal’ as a haven against European-debt concerns. A number of factors have been supporting the ‘yellow metal’ over the past month, however, the reason are beginning to fall by the way-side. Firstly, a positive equity market, bullied by the seasonal earning’s reports initially helped the commodity. Now, equities are having trouble of their own. With Moody’s downgrading Ireland and Portugal, it was expected to highlight the fragility of the sovereign debt issues, but, that has not materialized. Big picture, technically, the bullish sentiment had been on hiatus with profit taking testing the medium term support levels. Fundamentally, in the short term the metal will find it difficult to rally aggressively, as historically, this is the ‘slowest’ season for physical demand. Despite this, longer term view, market concerns over global economic growth should support the ‘yellow’ metal prices on much deeper pull backs. However, that been said, weaker longs firstly need to be taken out of the market. Year-to-date, the commodity has gained +7.8% and is in danger of giving up more ($1,188 -$3.40).

The Nikkei closed at 9,278 down -22. The DAX index in Europe was at 6,036 up +69; the FTSE (UK) currently is 5,204 up +65. The early call for the open of key US indices is higher. The US 10-year eased 1bp yesterday (2.93%) and is little changed in the O/N session. Treasuries prices remain better bid on the back of softer US housing starts, proof perhaps that it’s a sign that economic growth is ‘fading’. The shorter end of the yield curve happened to print record low yields again. With the softer economic data and growth targets being revised has investor’s grabbing yield as the market prices in an increase to the ‘extended period of low interest rates’ promised by the Fed. Current market sentiment has dealers wanting to be better buyers on pull backs, as the market foresees a flatter yield curve for the remainder of the week. Various dealers are looking for 10’s to yield 2.75% by year end, if so, we have a lot of pain to get through!

June 30, 2010

EU fear of liquidity crunch exaggerated dollar falls

Filed under: OANDA News — Tags: , , , , , , , , , , — admin @ 10:01 am

This week after the G20, the BIS argued that extremely low real rates have altered investment decisions, and is postponing the recognition of losses, increased risk-taking, as investors search for yield and encouraged high levels of borrowing. This is collectively an argument for the second coming of the ‘double-dip’ recession occurring. It’s agreed that various asset classes are facing their financial abyss, however, snippets of good news is providing us with ‘hope’ ahead of employment figures in the US this week. This morning, the EUR has received a shot in the arm as the ECB lent banks, below forecast, EUR131b LTRO at 1%. The market had been expecting EUR250b ahead of banks repaying EUR442b in 12-month funds tomorrow. Fears of a liquidity crunch seem exaggerated. However, certain individual banks might suffer and we shall soon see which ones under the EU stress tests.

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

Forex heatmap

Yesterday’s released data is pushing this already fragile market towards ‘their’ specific abyss. The CB consumer confidence index did not fall, but plunged this month (52.9 vs. 62.8-a three-month low). It was a surprise to the market, as the usual pre-empting indicators gave us no heads up of the outcome. In fact the headline print contradicted the mild improvement reported in the UoM survey. Digging deeper, both the current situation and outlook components of the headline index fell roughly 15%. The other sub-sectors did not fare any better. Just in time for this Friday NFP report. The labor market indicators declined by about a point following three consecutive gains. Finally, the inflation expectations index edged down to 5.2% from 5.3%. This is further proof that the Fed can extend their extended period of low rates. Perhaps the plummeting headline is a delayed response to the sharp drop in equity prices in May.

Other data showed that the S&P/Case-Shiller Home Price Index was much stronger than the market had been expecting. Seasonally adjusted, the index broke a two-month losing streak by rising +0.4% in April. It’s worth noting that prices advanced in 17 of the 20 cities followed. However, analyst’s note that the non-seasonal print is now up +3.8%. What will the price structure be like given the recent decline in demand following the tax credit expiration?

The USD$ is lower against the EUR +0.25% and higher against GBP -0.15%, CHF -0.11% and JPY -0.11%. The commodity currencies are stronger this morning, CAD +0.56% and AUD +0.52%. Canadian data yesterday revealed that the IPPI (Industrial Product Price Index) climbed +0.3% m/m in May (more than expected +0.1%) on the back of a weaker loonie making imports more expensive. However, it’s worth noting that the core three-month moving average (ex-food and energy) continues to trade sideways. On the flip side, the RMPI (Raw Materials Price Index) plunged -7.2%, on lower crude oil prices. Similar to all growth currencies, the loonie fell to its lowest level in three weeks as concern over Europe’s fiscal woes and signs of a global slowdown backed up investors and speculators interests away from equities and commodities. With the risk-off trading scenario, the CAD is down -3.4% this quarter, recording its first quarterly decline in a year. On the crosses, CAD is holding its own and in relative terms is seen as a safer way to play a global economic recovery with links to commodities and less banking. Speculators had been betting that Cbanks will up the ante and use the currency as a safe haven destination for capital. Do not be surprised to see the currency trade beyond parity in the coming months as long as the ‘double-dip debate’ does not take hold.

The AUD happened to rally O/N and reduce its first quarterly loss in nearly two-years as regional bourses trimmed some of this weeks ‘plummeting losses’, on speculation that the purge in higher-yielding assets may have been somewhat overdone. Also lending support to the currency was a release of domestic fundamental reports showing that bank lending had increased and that house prices had advanced. However, that been said, there is still an underlying panic in the market and dealers note that ‘the path of least resistance on any disappointing news is to the downside’. Already this week weaker global industrial and confidence data has investors talking of ‘double dips’ which will obviously affect growth and high-yielding currencies. In this quarter alone the AUD has dropped just over -5.5% vs. the greenback. The initial aftermath of the G20 has not materially changed risk attitude. In fact, it seems that the markets have become more ‘jittery’. Earlier this month, comments from the RBA, who said that Europe’s debt crisis would ‘inevitably weigh’ on global growth, had fueled speculation that the Governor Stevens may keep rates unchanged until at least the end of the year. It seems that that ‘previous rate rises has given them flexibility to leave borrowing costs unchanged at next month’s meeting’. To date, the crisis in Europe has not had a material impact on the Australian economy, but, that’s been called into question. European funding fears has technical analysts wanting to sell the currency on rallies and shifting into more risk adverse currencies like JPY and CHF (0.8542).

Crude is higher in the O/N session ($76.21 up +30c). Crude has aggressively fallen from this weeks 2-month high as the dollar rallies vs. the EUR, thus reducing the appeal of commodities as an inflation hedge and alternative investment. After rallying earlier in yesterday’s session on fears that Alex would disrupt production as it moves towards the Gulf of Mexico, prices fell on a much weaker than anticipated US consumer confidence print (see above). Prices have recorded their first quarterly decline in nearly two-years (-9.9%). The commodity ended last week under pressure after the EIA inventory release reported an unexpected gain in supplies. Oil stockpiles rose +2.02m barrels to +365.1m vs. an unexpected fall of -800k barrels. On the flipside, gas supplies fell -762k barrels to +217.6m vs. an expected market decline of -180k barrels. Imports of crude oil climbed +4.3% to +10.1m barrels a day, the highest level in 18-months. The headline print certainly fly’s in the face of the ‘bulls’ way of thinking. Crude stocks remain well above the five-year average level, and are +3.2% above a year ago, the biggest year-on-year surplus in 6-months. Distillate stocks (diesel and heating oil) rose +297k barrels, less than expected as demand dropped to its lowest level in 7-months. Currently there are too many negative variables that support the bear’s short positions. The fear that a double dip is on the cards has the speculators wanting to sell. Direction is dictated by demand and with ample supply and global growth worries has speculators once again wanting to sell on rallies. Today’s weekly stock report is expected to reveal a small drawdown on inventories this morning.

Bigger picture, Gold continues to be a safe heaven attraction. Over the past two-trading sessions the commodity has retreated from its record highs on technical resistance and profit taking, a healthy purge in the recent one directional trade. With the Fed indicating low rates for an extended period of time had questioned the dollar recent strength in recent trading session’s and by default the commodity provided an alternative investment vehicle. Technically, pull-backs have been bought. The commodity’s prices, especially vs. EUR and GBP, should remain strong on speculation that European’s Economic woes will be prolonged. With broader risk appetite under pressure, the market is capable of printing new record highs again and again. The upward bias trend remains intact as the ‘yellow metal’ is trading with a greater consideration of its safe haven status. Year-to-date, the commodity has gained +16%. Generally, it has become the benefactor when all other currencies fail. Thus far, Europeans have been content in using the commodity as a hedge against their European holdings, believing that the EUR has not bottomed out just yet. For now, buyers are waiting in the wings to purchase product on pull backs as equities flounder ($1,242 +30c).

The Nikkei closed at 9,382 down -188. The DAX index in Europe was at 5,971 up +20; the FTSE (UK) currently is 4,933 up +19. The early call for the open of key US indices is lower. The US 10-year eased 6bp yesterday (2.95%) and is little changed in the O/N session. Treasures remain in demand across the US curve at quarter end on fears of a slowing global economic recovery and an ECB lending facility about to expire. Plummeting consumer confidence yesterday only provided support for the ‘bulls’ positions. Also helping the ‘safer’ asset class is this weeks NFP report where many analysts expect a much weaker headline print. The belief that the US economy’s momentum is ‘not’ being built upon should continue to provide a better bid on deeper pullbacks.

May 31, 2010

EURO going nowhere fast

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

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

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

Forex heatmap

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

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

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

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

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

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

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

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