Media | Forex Blog

November 1, 2011

Papandreou’s Dangerous Game

Filed under: OANDA News — Tags: a-growing-sense, central bank watch, country, eur, european-union, financial, media, minister-george, portugal, region — admin @ 9:27 am

At first glance it is difficult to understand what could possibly have motivated Greek Prime Minister George Papandreou to announce a public referendum on the Greek debt deal. Any sense of stability that had been achieved by last week’s summit meeting of Eurozone leaders, and the news of a deal to prevent the region’s debt crisis from spreading, has been irretrievably lost.

In order to qualify for emergency funding, Greece was tasked with getting its financial house in order. The so-called “austerity” measures to accomplish this goal have centered on the imposition of new taxes together with deep spending cuts. Public opposition remains vehemently opposed to these actions and it is far from a certainty that a referendum would support further efforts to contain the deficit.

If Greek citizens were to refuse to support the referendum thereby failing to meet the country’s obligations, would the European Union turn its back on Greece and cast it adrift?

This is difficult to say with certainty, but there is a growing sense that Greece’s continued membership within the Eurozone is growing more tenuous. A public vote rejecting efforts to impose a greater degree of fiscal responsibility would surely be seen as poke in the eye to those countries fronting most of the money that has enabled Greece to pay its bills for the past year.

Stronger Mandate or Economic Blackmail?

So, what exactly does Papandreou hope to accomplish with this unnecessary action? Is Papandreou truly concerned with giving the public an opportunity to participate in deciding the country’s future or is this simply an attempt to avoid meeting the terms and obligations of the Eurozone’s debt plan?

If it is the latter, then Papandreou is counting heavily on the Eurozone’s fears that allowing Greece to default would result in unacceptable damage for both the region and the euro. On this, Papandreou may be skating on thin ice.

Having already provided much of a 130 billion euro bailout, Eurozone officials may opt to simply cut their losses. It would be a straightforward matter to redirect money ear-marked for Greece to the banking system to help cover the large Greek exposure many banks have on their books. By insulating the financial system from further losses in this manner, the need to respond to Greece’s pleas for more cash is significantly diminished.

Such a forceful action may also send a message to other countries like Portugal and even Italy who may harbor similar thoughts that the EU will never allow them to default.

The likely date for a referendum is early next year but there is another event this week that could change the Greek landscape before then. A confidence vote is scheduled for this Friday and Papandreou’s precarious hold on power is fading quickly. Two member’s of Papandreou’s government have vowed to sit as independents while a collection of government members have called on Papandreou to resign in a letter sent earlier today to the media.

No matter the outcome of Friday’s vote, one thing is certain – the possibility of the rally following last week’s Eurozone summit extending into the new year has been dashed.

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Papandreou Sends Markets into Nose Dive on Referendum Call

Filed under: OANDA News — Tags: a-growing-sense, a-yes-vote-, country, emergency, eur, european-union, greek-prime, london, media, north, referendum — admin @ 7:23 am

European markets tumbled on Tuesday following Greek Prime Minister George Papandreou’s announced a referendum would be held on the question of further austerity measures required to receive further emergency funding from the European Union. Given the level of resistance to spending cuts already exhibited by the public, there is no guarantee that a referendum would result in a yes vote.

A rejection would result in a new election and almost assuredly mean a disorderly default. This new risk has seen investors abandoning European stocks with the malaise expected to spread to North America when stock markets in Canada and the U.S. open for the day.

“Papandreou could lose the referendum, which means that new elections would have to be called,” Thomas Costerg, European economist at Standard Chartered Bank in London, said in an e-mail. “Heightened Greek uncertainty could propagate to other fragile euro-area countries, in particular Italy.”

Source: Bloomberg

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July 8, 2011

UK-Style Austerity Trap

Filed under: OANDA News — Tags: bank, britain, business, chinese, conservative, election, employment, gbp, government, media, party, retail, second, social — admin @ 9:33 am

The chanting may be louder and the protests more violent but like Greece, the UK is suffering through its own austerity program. However, unlike Greece which is having restraint forced upon it in exchange for emergency funding from the European Union, the UK is engaging in a self-imposed program of spending cuts and tax hikes in an attempt to balance its budget.

In the three years prior to the 2010 British election, government spending and total debt ballooned to levels not seen since the Second World War. In the final few years of the previous government’s 13-year reign, spending had become so out of control that Britain found itself in violation of the debt and deficit limits imposed by the 1992 Maastricht Treaty.

Under the terms of the treaty, all European Union members must ensure yearly deficits do not exceed 3 percent of GDP while total debt must not exceed 60 percent of GDP. By the end of 2009, Britain’s deficit was more than 11 percent of GDP and the country’s accumulated debt stood at nearly 70 percent.

During the campaign period leading up to the election early last year, the Conservative party led by David Cameron made economic reform the center plank of the party’s election platform. While Cameron ultimately won the election to become Prime Minister, he needed the support of the third-place Social Democrats to form a coalition and gain the majority necessary to pass legislation. More on that later.

Coalition Delivers an “Austerity” Budget

Less than two months after forming the government the newly-minted Chancellor of the Exchequer, George Osborne, released a budget that Osborne described to the media as “tough but fair”. The main objective of the budget was to begin the process of balancing the books that the government claims will be accomplished primarily through spending cuts rather than tax increases. The government estimates it can accomplish the task within five years.

Despite the pledge to rely more on reduced spending as opposed to raising taxes, one of the leading elements in the budget released last June was to increase the Value Added Tax (VAT) to 20 percent from 17.5 percent. The budget also contained wide-ranging spending cuts starting with a cap on public sector wages and other programs designed to reduce overall spending.

The government has been forthright in admitting that these moves – while necessary to restore confidence in the economy – will be difficult in the short-term. An understatement perhaps for any of the 300,000 or so public sector workers who are expected to lose their job in the coming months. Private sector rolls could also suffer as the government reduces or even withdraws funds set aside for large-scale infrastructure projects.

To date, the employment outlook has actually improved in the months following the budget. Last May unemployment was pegged at 8 percent climbing to 8.1 percent by October – by the end of the first quarter of 2012 unemployment had fallen to 7.9 percent with the most recent reading for May placing unemployment at 7.7 percent.

Time will tell if the economy can continue to add jobs as the austerity measures take greater effect. Still, while employment has performed better than expected so far, wages themselves continue to be depressed. Wage increases are on-hold across the spectrum and while workers are certainly not enthusiastic about this reality, there is comfort in continuing to receive a regular pay cheque.

The impact of wage stagnation is further amplified, however, by rapidly rising price inflation. This past May higher energy and food costs, coupled with the government’s increase in the Value Added Tax, helped pushed inflation to more than twice the Bank of England’s 2 percent inflation target.

Despite the increase in price inflation, overall economic growth remains constrained. The latest projection by the National Institute for Economic and Social Research has Britain’s economy expanding by a mere 0.1 percent during the second quarter of the year. This has caused a dilemma for the Bank of England – should interest rates go up to deal with inflation at the risk of overall growth, or should interest rates remain low to promote growth while possibly driving inflation even higher?

Not surprisingly, the Bank of England’s Monetary Policy Committee (MPC) remains divided on the question but at this point at least, those arguing against rate hikes are in the majority. On Thursday, even as the European Central Bank was raising interest rates in the Eurozone by a quarter point, the Bank of England announced it would maintain the current 0.5 percent benchmark rate.

Can the Coalition Hold Itself Together?

As consumers feel the pinch from stagnant wages and rising inflation the government comes under greater pressure to ease up on the pace of change. The two parties forming the coalition are at opposite ends of the political spectrum making it difficult to imagine sufficient common ground can be found to maintain the arrangement for the duration of the current mandate. Indeed, it is a marvel that a full year has already passed with relatively little acrimony between the two parties.

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February 28, 2011

The Root Cause!

Filed under: Forex News — Tags: a-bit-stronger, aud, bernanke, central, change-the-view, congress, food, globe, loonie, market, media, middle-east, sooner-or-later — admin @ 1:49 pm

Whether it is fears of inflation, interest rate differentials, or geo-political events that are driving world markets, it is important to get to the root cause and try to understand what is going on around the globe to be able to ascertain what is the best course of action.The major problem around the globe is asset price depreciation, and the cheap money used to cause the bubble-like appreciation of those assets. Banks around the globe are on the hook for lending money to people through mortgages on assets that are now declining in value and stand to lose a tremendous amount of money.So Central bankers are not willing to return to normalized interest rate policies for fear that they will further depress asset prices. They commonly but mistakenly refer to this as “deflation”. So by keeping rates extraordinarily low, they hope to encourage inflation so that the black hole on banks’ balance sheets may be filled.

The problem is that the greatest amount of destruction occurred here in the US, so no amount of accommodative policy is going to return home values to where they previously were. So the Central bank is printing money around the clock to replace the funds that the banks are hemorrhaging through bad mortgages.

Only now the inflation has made its way abroad, as higher food prices manifest themselves in emerging economies causing social unrest as people can no longer afford food. Cue the rioting. As people organize, governments get toppled which causes further instability, thereby raising the risk premium in the market.

And the self-fulfilling cycle continues. But make no mistake about it, the root cause of what is going on today is overly accommodative monetary policy from the US Fed, and Dollar debasement just symptomatic of the overall problem.

In the forex market:

Aussie (AUD): The Aussie is reluctantly higher as risk appetite has increased this morning after a weekend where the world didn’t implode. China came out with its five-year growth targets which are reduced from previous years, and this applied downward pressure to the Aussie earlier in the morning. The RBA rate decision comes out tomorrow.

Kiwi (NZD): When life gives you lemons, you make lemonade and no truer could that statement be than in New Zealand. While the damage form the earthquake was horrific, this can actually be a longer-term positive as the rebuilding period will provide jobs and economic activity. Trade balance figures came in showing a surplus for the first time in nearly 7 months.

Loonie (CAD): The Loonie is also higher ahead of this morning’s GDP report which is expected to show 2.9% annualized growth. In addition, higher oil prices have pushed the Loonie to multi-year highs vs. USD. (Click chart to enlarge)

Euro (EUR): The Euro is higher this morning on anti-Dollar sentiment even though CPI data came in slightly lower than expected. The ECB rate decision is due out at the end of the week.

Pound (GBP): The Pound is higher across the board as there is little news for the UK this week that could change the view that rates should be going higher in the near future.

Dollar (USD): The Dollar is weaker against all but the Yen in what is a classic risk-taking scenario. Major highlights for this week are Bernanke’s testimony to Congress and Friday’s Non-Farm Payrolls report (NFP). The important thing to take away from this week is will there be anything out there that will cause Ben to strengthen monetary policy? I don’t think so at this point.

Yen (JPY): The Yen is weaker across the board as retail trade figures came in better than expected, but industrial production figures came in worse. Now that the market has successfully navigated the geo-political risk the weekend posed, continued risk appetite should continue. (Click chart to enlarge)

If I had to point to the one single source of the economic malaise that has plagued the world, I would say that it US monetary policy. Because the US dollar is the world’s de facto reserve currency and commodities are priced in Dollars, this affects everyone.

The problem is that in almost all developing nations around the globe who are getting hit the hardest, is that people cannot afford to feed themselves. Commodity inflation is taking place and Central bankers’ reluctance to raise rates to combat inflation is causing political disruption.

Let the media tell you that these political uprisings are about human rights—but make no mistake about it these started because of high inflation and low economic prospects. And you can thank the low US dollar for this.

As emerging markets countries raise rates to combat inflation, the US dollar will get weaker. How weak it can go is anyone’s guess, before it becomes the major risk theme in the market.

So keep an eye on the news this week and any sign that the US Fed may become less accommodative about US monetary policy. But don’t count on it—as the scheme is likely to continue unchallenged.

To learn more about how you can take advantage of world events through the currency market, be sure to check out our currency trading courses!

To follow these events live with a free, real-time practice account, click here! Don’t miss out on the world’s fastest growing market!

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February 25, 2011

Dollar Done?

Filed under: Forex News — Tags: a-100-handle, a-common-source, a-respite-from, a-were-higher, bernanke, central, dollar, egypt, flight, food, globe, loonie, market, media, world — admin @ 2:34 pm

With recent turmoil in world markets, one of the “surefire” things we would normally assume under such risk aversion did not take place. In the past, when world economic markets have been faced with adversity and risk, the US dollar was one of the most sought after investments.Because the US dollar is the world’s de facto reserve currency, people want to own Dollars when risk increases, as many times those Dollars will be moved into US Treasury bonds.

This has not occurred this week, as the Dollar has been primarily lower despite higher oil prices and stock market losses. In fact, as I mentioned yesterday, the primary beneficiaries of the flight to safety trade this week were the Swiss franc, the Japanese yen, and gold.

Meanwhile, oil has pulled back from trading a 100 handle as Saudi Arabia is going to raise the supply of oil they send to market to make up the losses from Libya, but again, I think $100 oil is here to stay for a while. The story with oil is not really about supply shocks, but rather with the weak US dollar.

In the UK, GDP figures came in slightly lower than expected, showing a 4th quarter decline of .6% vs. the expectation of a decline of .5%, pushing the YoY figure down to 1.5% vs. an expectation of 1.7%. The Pound is weaker across the board as a result.

Here in the US, revised GDP figures showed an increase of 2.8% vs. the expectation of 3.2%, and personal consumption figures came in slightly higher than expected at .5%. While this still shows good growth, the lower figure has to change assumptions about budget deficits, which means that deficit is actually higher than is being reported. Oops.

So lower oil prices today have encouraged some early risk-taking, as stock markets and commodity currencies are higher.

In the forex market:

Aussie (AUD): The Aussie is higher following the MSCI Pac Index higher as yield differentials and general Dollar weakness have increased demand.

Kiwi (NZD): The Kiwi is also higher in the wake of the earthquake despite the market pricing in a rate reduction at the next rate policy meeting. This would normally be a negative, but the positive interest carry and weak US dollar make it still more attractive.

Loonie (CAD): The Loonie is mixed this morning, as lower oil prices and lower US GDP figures highlight the difference among the commodity currencies.

Euro (EUR): The Euro is lower as it has actually been trading more closely linked to oil prices than the Loonie. In addition, German CPI data showed an increase in prices which combined with hawkish rhetoric from the ECB could mean rate hikes will happen soon. (Click chart to enlarge)

Pound (GBP): The Pound is lower across the board as GDP figures came in lower than expectations. In addition, business investment was also lower, as was a consumer confidence survey. How the BOE will react is anyone’s guess at this point. (Click chart to enlarge)

Dollar (USD): GDP revisions came in lower than expected, and later this morning consumer confidence figures are due. In addition, there is a lot of Fed speak on the docket, with policy-makers trying to justify current policy as weak dollars are driving inflation.

Yen (JPY): The yen is mixed as the demand for safe haven assets has decreased, though it is trading higher vs. USD, EUR, GBP, and CAD. Stocks in Asia were higher overnight, as oil prices began to reverse.

It is amazing to see the confluence of events that is taking place around the globe in the form of protests. Libya, Egypt, Tunisia, Wisconsin….

Whoa, Wisconsin? I’m not trying to put on my tin-foil hat just yet and claim conspiracy, but these events can be linked to a common source—weak US fundamentals and the need for loose monetary policy to accommodate it.

While I have been harping on inflation all week and will probably continue to do so until the Fed does something to change policy, it will be interesting to see the reactions both here and abroad. While the Fed may be able to manage core inflation, they may not be able to manage the inflation expectations that in turn could become a self-fulfilling prophesy.

This is exactly the type of build-up that could lead to over-reactions that the textbook that the Fed uses doesn’t account for. So while getting a respite from higher oil prices is nice today, it does not mean that risk has left the market.

In fact, going into the weekend I am very concerned about risk, as who knows what might occur. I would not be surprised to see some flight to safety by the end of the day, though nothing surprises me any longer!

To learn more about how you can take advantage of world events through the currency market, be sure to check out our currency trading courses!

To follow these events live with a free, real-time practice account, click here! Don’t miss out on the world’s fastest growing market!

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October 25, 2010

Geithner’s Currency War Truce Sure to be Tested

Filed under: OANDA News — Tags: a-trial-balloon, america, country, current, current-account, expense, geithner, likelihood, market pulse, media, money, obama, previous, yuan — admin @ 8:48 pm

Last week, US Treasury Secretary Timothy Geithner floated a trial balloon prior to the G20 Finance Ministers meeting scheduled for the weekend. In a letter addressed to all twenty of the G20 member nations and subsequently released to the media, Geithner called for targets limiting currency account surpluses.

Describing these targets as necessary to ensure the “orderly re-balancing of global demand”, Geithner also encouraged the G20 member nations to refrain from engaging in deliberate currency devaluation as a way to boost exports at the expense of other nations.

The current account balance is the difference between the money that flows into a country, and the money that leaves. While there are other factors included in the current account balance, most of this money flow is attributed to international trade making this a common indicator to measure the earnings from exports. A country with a negative account balance imports more than it exports, while a positive account balance points to a trade surplus.

Current Account Targets

In his proposal, Geithner called for those countries with a current account surplus to limit the surpluses to no more than four percent of the country’s Gross Domestic Product (GDP). In fairness, there was some muted praise for the idea, but limiting current account surpluses was rejected out-of-hand by several countries, and most notably, by Germany and China.

This is hardly surprising as both countries are highly dependent on their exports to fuel their respective economies. But while we’re being honest here, let’s call Geithner’s proposal for what it really is – an attempt to limit China’s exports that have long been largely funded by the American consumer.

In 2008, China’s current account surplus topped $426 billion; this worked out to about 9.4 percent of GDP. In 2009 however, China’s exporters were feeling the pinch of the global recession and exports declined dramatically to $284.1 billion or 5.8 percent of GDP. 2010 is following the previous year’s storyline with the first half surplus sitting at $124.2 billion and 4.9 percent of China’s overall GDP. As such, 2010 will be hard-pressed to improve on the previous year’s disappointing sales.

Given the results of the last two years, it appears that China’s current account surplus is well on the way to meeting Geithner’s proposed limit. Rest assured however, China is not content with the current export numbers and is certainly not prepared to accept any target that further limits its exports. If anything, China will act to boost exports and this will be done by keeping the yuan in check.

How will the US respond? Well, like the administrations that have preceded it, the Obama camp will continue to spill much ink forming its position that China unfairly targets the US consumer by manipulating the yuan to keep the true cost of its exports in check. What is more noteworthy however, is that unlike the past few administrations, the House recently passed a bill giving the government the power to impose tariffs and other fees on goods imported into the country. If approved by the Senate, the bill could receive Presidential approval and become law late in the year. Some observers worry that this could mark the beginning of a more serious trade spat with China and other emerging nations looking to access the US market.

Despite the rejection of current account targets, Geithner did manage to extract a tepid “pledge” from the attending finance ministers to refrain from deliberately devaluing currencies in order to maintain trade advantages. Of course, there are no targets or formal guarantees around any of this, so it is likely the agreement is not worth the paper it is written. Assuming of course that it was actually written on paper, which apparently, it wasn’t.

To call this a “truce” that will prevent the likelihood of a currency / trade war is giving the pledge far too much credit. China may allow the yuan to appreciate slightly as it did last week, but you can be sure that China will do what it feels is necessary to keep the yuan low against the US dollar thereby maintaining its trade advantage.

The US too will soon engage in its own form of currency manipulation. Of course, it will not call it currency manipulation. No, the US plans to follow through with the much-hyped second round of quantitative easing dubbed by some as “QE2”.

Given the likelihood of further stimulus spending and the negative impact it will have on he dollar, Geithner is being a little disingenuous by targeting China’s policy of currency manipulation. The government can spin this any way it likes, but for America’s trading partners, it will be seen as nothing more than an obvious attempt to weaken the dollar at the expense of others.

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April 30, 2010

Month-End needs Overshadow Greece and China

Filed under: OANDA News — Tags: cad, currency, european, greece, jpy, media, spain, usd — admin @ 4:01 am

Simply put, today is month-end. Traders all week have been consumed with the peripheral market noise. The Fed, Greece, China, all important, but when it comes to ‘lemming’ revaluation of portfolios for month-end requirements, logic tends to be thrown out the window with the bath water. Banks models suggest that USD will have to be sold today. With a long week-end in the UK and strong a ‘percentage’ chance that a Greek bailout could finally be formulated has us asking the question will market participants want to trim their record short EUR positions. The percentage play says yes. Technically, already we have taken out the 1.3280 and the 1.3310 resistance this morning and there is a plethora of individuals wanting to sell EUR’s at higher levels making this move drag-on. Their ideal entry level is around the 1.3400 print. The intraday month-end move can be somewhat justified by what portfolio managers have been doing in April. They have been meticulously selling EUR denominated assets’ requiring them to repurchase EUR’s to re-hedge themselves. Will the SNB allow us to re-enter at better levels?

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

Forex heatmap

We woke to a nice surprise in North America yesterday with fewer unemployment claimants applying for benefits and providing the investor evidence that the economic rebound is lifting the labor market. The weekly jobless claims fell by -11k to +448k last week and in-line with market expectations. The labor market is healing slowly with firings easing and manufacturing companies adding workers. The knock on effect should improve consumer spending for the remainder of the year. The first whispers for nest week’s NFP number is around +175k. Digging deeper into the report, the 4-week moving average of initial claims (less volatile measure) rose to +462.5k last week from +461k. The number of people continuing to receive jobless benefits dropped by -18k to +4.65m, disappointing various analysts who had expected a drop to +4.62m. On the plus side, the individuals using their traditional benefits and are now collecting emergency and extended payments decreased by -91k to +5.4m. The report certainly plays into the Fed’s rhetoric of this week where they indicated that the labor market is beginning to improve.

Is China ready to revalue this weekend?

• The G20 last week did not pressure them, thus saving face and giving the Chinese autonomy to revalue on their ‘time scale’.
• It’s a long-weekend in China. The norm of late has been to announce policies before a long weekend.
• The Shanghai Expo is a prestigious event in China. This would give the media an excuse to focus on the cultural event rather on the policy decision, some would say ‘saving face for the authorities’.
• Finally, China is scheduled to have dialogues with the US by the end of May. This is an opportune time to get the ‘reval or reform’ issue out of the way.

Many none of these reasons are valid, but, after this week it would be throwing an interesting ingredient into the mix.

The USD$ is lower against the EUR +0.37%, GBP +0.33%, CHF +0.30% and higher against JPY -0.11%. The commodity currencies are stronger this morning, CAD +0.23% and AUD +0.38%. The Canadian dollar is two for two, rising a second consecutive day against most of its G7 members as stocks and crude oil climbed, boosting investors’ appetite for currencies tied to global growth. Stronger global corporate earnings coupled with the Fed’s statement that it will hold interest rates ‘exceptionally low’ and a more optimistic view of labor markets is also helping the loonie to soar towards parity and beyond. The belief that European official will speed up the financial aid process for Greece has speculators looking to invest in growth commodity currencies. Canadian fundamentals, similar to Australia have been hitting it out of the park when compared to other economies. Unlike the RBA, the BOC seems to be behind the blackball when it comes to their lending rate adjustments. Governor Carney reiterated to a House of Commons committee this week that it’s ‘appropriate to begin to lessen the degree of monetary stimuli’. The Canadian Finance Minister’s comment that the loonies’ appreciation to parity has been orderly shows that the government is comfortable with the currency’s value. Canada seems to have adjusted appropriately to these levels. USD rallies remain shallow and are met with strong resistance. If the Chinese do happen to revalue this weekend owning the CAD looks good.

It’s a know fact that the AUD has climbed +27% vs. the USD over the past 12-month and is the best performer amongst the 16 most-traded global currencies. A survey conducted by CBA bank amongst 600-medium sized importer and exporters expect the currency to advance to 0.9560 (0.9311) by year-end. Again, last night the currency advanced, heading for its third-straight monthly gain as signs Greece will agree to budget cuts to win a potential $159b bailout has revived investor appetite for higher-yielding assets. Also aiding the currency cause was the strengthening momentum of the regional bourses coupled with the news that Australian bank’s happened to boost their lending last month. Similar to the CAD, any improvement in risk appetite will have investors coveting higher yielding growth currencies. Expect better buying on pull backs.

Crude is higher in the O/N session ($85.96 up +79c). Now that the Fed has stated that it will keep rates on hold for an extended period of time, coupled with the weekly EIA report showing that refineries cap-u is at the highest level in two years has once again given the black stuff a ‘leg up’. With the Fed emphasizing the strength of the economic recovery in this week’s minutes is having a positive impact on the commodity. The somewhat ‘bearish’ inventory headline was offset by the surprising decline in gas stocks. Oil inventories rose +1.9m barrels last week, more than double expected (+0.9m). That puts total crude and refined products at their highest level in 4-months. They have grown in five of the last six weeks. All this is occurring despite refineries increasing their operating levels (+89% vs. +85.9%) w/w. It’s worth noting, that in total, refiners have dragged their utilization rate higher by +6.4% in the last month alone, and all the while not knowing how much fuel demand will rise in the next few months. Digging deeper into the report, distillate inventories (heating oil and diesel) rose by +2.9m barrels vs. an expected build of + 1.2m. In contrast, gas stockpiles fell -1.2m barrels, compared with expectations for a gain of +600k. Analysts remain concerned that the European contagion issues will dominate risk aversion, making the $80 floor ripe to be threatened in the medium term. It’s worth noting that crude oil volatility has fallen to its lowest level in almost 3-years on the back of rising stockpiles and OPEC’s ‘investment in production capacity easing concerns of shortages’. The lack of volatility has ‘temporarily’ dampened any selling enthusiasm. Expect better selling to remain on rallies.

After gold achieving another 4-month high earlier in the week, investors took some profit off the table for the first time in five sessions yesterday, on speculation that gains by the dollar will curb demand for the metal as an alternative asset. For most of this week, investors have sought surety in owning dollars and gold after S&P’s lowered the credit ratings for Spain, Portugal, and Greece. Gold priced in the EUR, GBP and CHF did manage to print new record highs. Historically, gold falls when the dollar gains. In a ‘bigger picture’ frightened Capital is seeking a safer heaven as the European confusion continues. Various technical analysts believe that $1,300 is a possible one-year target with consumer support. Downgrades and fear of defaults will continue to have investors seeking an alternative to an ‘on going weakening’ of the EUR and low interest rates unless the EU/IMF can strike a market accord ($1,173).

The Nikkei closed at 11,057 up +132. The DAX index in Europe was at 6,191 up +47; the FTSE (UK) currently is 5,629 +12. The early call for the open of key US indices is higher. The US 10-year eased 2bp yesterday (3.73%) and is little changed in the O/N session. Treasury prices initially softened ahead of the final weekly auction yesterday ($32b 7-year auction). Again, it was another weekly record amount of $129b to be absorbed by the market. The European contagion issues did make it somewhat expensive to take down product at the beginning of the week. However, yesterday’s 7-year auction came in at a yield of 3.21% compared with pre-auction yield of 3.204%. The bid-to-cover ratio was 2.82 vs. last month’s 2.61 and Feb.’s 2.98 (8-auction average is 2.79). The indirect bid (proxy for foreign interest) was 60%, the highest this year, compared with 41.9% in Mar. and 40.3% in Feb. With a lack of product on offer for awhile, investors have kept the FI curve better bid on price pull back for the moment.

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December 4, 2009

More on NFP!

Filed under: Forex News — Tags: charts, employment, interest, interest-rate, interest-rates-, light-list, light-shading, media, shading, trade — admin @ 10:33 am

Is the Non-Farm Payroll Report Believable?

The Bureau of Labor Statistics. BLS for short. Perhaps it should just be BS?

On the heels of President Obama’s “Jobs Summit”, the shockingly surprising NFP number reported showed not only a much smaller number of jobs lost (11K vs. an expected 125K) but also a revised figure from October to a drop (111K vs. 190K previously reported). I suppose this is one time that the media can use the word “unexpected” and actually be correct.

And while I’m not going to start conspiracy theories based on the extraordinary timing of this surprise number, it is rather comical to see all of the big smiles and back-patting going on today.

Here’s a sobering thought: we’re not out of the woods yet.

While this figure is good news for the economy, it may mean bad news for the markets, particularly stocks and commodities. While high-priced commodities don’t really benefit the end-user, having a declining stock market (if that occurs) could be damaging to the economic recovery. The reason for this is that it may give Bernanke and the Fed a reason (besides all of the others they’ve been ignoring) to raise interest rates sooner than later.

A quick peek at the charts confirms our suspicion. Here’s a chart of AUD/USD which is emblematic of the risk-taking trade: (click chart to enlarge)

The market’s initial reaction was to bid up this pair as the risk-taking trade seemed to be the play of the day. When things are going well here, investors seek out additional yield if they believe things are getting better or stabilizing.

But then, the pair sold off as investors realized that this could mean rate hikes here in the US. I detailed this in a previous article and mentioned that one of the things holding back Bernanke was the employment numbers. If these numbers continue to improve going forward then he could be forced to act more quickly then he may have liked.

He was taken to task at his re-confirmation hearing so perhaps the coincidental timing of this NFP figure will allow him to save face AND reverse the path to dollar destruction he was following.

And while the markets may sell off in the short-term, I think this bodes well in the longer-term. Let’s get the markets back to trading on the fundamentals, and not on anti-dollar sentiment. Savers have been punished long enough, and those who acted poorly have had ample time to rectify their misdeeds.

Now let’s just hope these numbers are real, and not just waiting for yet another revision down the road. Now that doesn’t make for a good photo op!

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