Recession | Forex Blog

September 15, 2011

Merkel and Sarkozy need Today’s Philly Fed to Bounce

Filed under: OANDA News — Tags: business, europe, food, france, gbp, greece, jpy, recession, usd — admin @ 4:20 am

Currently, the market is betting on “convinced”, Merkel and Sarkozy are convinced that Greece will remain one of its fraternity members. Papandreou looks likely to be receiving the next tranche of IMF funds (EUR8b) to increase the chance that the private sector initiative to reschedule Greek debt will meet the required threshold. In theory, this ‘combo’ eliminates the risk of Greek default until the next IMF review in December.

Ever since Germany and France showed their hand, the EUR has strengthened, but not materially so, as investors, in the ‘house of cards’ play, deal with a Euro-zone debt debacle, tenuous US economic data and a potential Fed policy change that can confirm or reject the rising call for more stimulus. The gravest problem facing the region is the recent collapse in growth indicators. Without more rapid nominal GDP growth the Euro-zone will remain unstable almost regardless of policy action to pass around ‘limited funds’. The last thing the region requires is the US to enter an official recession, they need this morning’s Philly Fed to bounce.

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

Yesterday’s US data offers more evidence that the economy stalled in August. Retail sales were well below analyst’s forecasts and July was revised down, even wholesale prices recorded a similar print of being flat. This gives the Fed the green light to do something at next weeks meeting. Consumers are wary to spend. All along they have been the Fed’s ‘go to’ variable. With unemployment remaining high and the recovery weak, retail and food services sales were unchanged for the prior month. PPI showed no momentum either, as lower energy costs offset higher food prices. Fundamentally, the US economy has hit a brick wall, flat sales and wholesale prices, no job growth, unemployment rate on hold (+9.1%) and inflation moderating adds up to a whole lot of nothing happening in the US economy. If we included the Euro debt debacle, the US congress inability to agree on a job stimulus package, then we are talking about another recession. The market now expects something extraordinary to be tabled at the FOMC meeting.

The dollars is lower against the EUR +0.10%, GBP +0.16% and higher against CHF -0.07% and JPY -0.06%. The commodity currencies are weaker this morning, CAD -0.22% and AUD -0.36%.

The loonie started the week under water outright and above parity as risk aversion was aggressively applied on Greek fears of a default. The currency was able to take back some of those losses, however, renewed uncertainty after an Austrian parliamentary committee delayed a vote on an increase in Europe’s bailout fund has the CAD eyeing parity again. There is some genuine interest to own the loonie at these levels by corporate Canada, once this business is concluded the currency is in real danger of weakening much further on the back of broader risk aversion sentiment. Merkel and Sarkozy can only prop up the EUR for so long.

Last week was the second consecutive week for the currency to decline as the BoC kept rates on hold as expected (+1%). Tenuous data south of the border showing the US economy hitting a brick wall does not support the currant loonies’ relevant strength. The US remains Canada’s largest trading partner and an extended slowdown will eventually percolate hard throughout the Canadian economy. Governor Carney has applied the expected ‘dovish’ tone on the Canadian economy, explicitly noting ‘the need to withdraw monetary stimulus has diminished’ which is an ‘expected about-face from the July statement. The Governor will be turning towards becoming more concerned about global growth.

Analysts are beginning to downgrade Canadian growth this year and next, largely based on a downgrade to the external environment in which the Canadian economy is operating. There are better buyers of dollars on dips (0.9924).

Governor Bollard at the RBNZ left interest rates unchanged O/N (2.50%), and signaled no urgency to raise them until the global recovery strengthens, weakening the Kiwi and dragging down the neighborly Aussie in the process. The pricing for RBNZ rate hikes over the next 12 months fell-4bp on the back of the announcement.

The AUD had tumbled earlier this week to a new one month low outright and versus the JPY on fears that Greece may default and on a weak business outlook. The NAB business confidence index earlier this week fell to-8 last month, the lowest level in two-years. Manufacturing, retail, wholesale and construction conditions all remained very weak, while mining and the service industries generally remained strong. Now that the domestic data is coming out a bit negative, there will be some questions ahead on what will happen to the Aussie economy. If anything, the RBA is likely to be on hold for an extended time, allowing investors to sell higher yielding assets.

Australia released a new methodology for calculating seasonally adjusted inflation that indicated the RBA’s core measures may have been lower last quarter. Under the new settings, CPI rose an estimated +0.7% in the second quarter and the weighted mean advanced +0.5%. There’s still strong interest to sell the Aussie on rallies and buy the dollar as it becomes tougher for the AUD to outperform while all eyes are on European issues (1.0247).

Crude is lower in the O/N session ($88.35 down-0.56c). Oil declined yesterday after the weekly EIA data reported that fuel inventories climbed, demand dropped and retail sales hit a brick wall in the US.

Last week’s EIA inventory report revealed that crude stockpiles decreased by -6.7m barrels to +346.4m, above the upper limit of the average range for this time of year. On the flip side, gas inventories moved up by+1.9m barrels (the biggest gain in three months), after increasing +200k barrels in the prior week, and are above the upper limit of the average range. The market had been expecting gas stocks to ease by-500k barrels. Fuel use fell -3.8% to +18.7m barrels a day. Refineries operated at +87% of capacity, down -2.3% points from the prior week.

The big crude drawdown was discounted because of tropical storms which reduced production. With the ongoing weakness of gas consumption crude remains better offered on rallies.

Despite gold finding a temporary base just ahead of $1,800 earlier in the week, bullion was able to erase some of the bounce gains yesterday on the back of the Chinese White Knight potential. US equities rallied for a third day, and the dollar rose against a basket of major currencies, reduced the appeal of gold as an alternative investment. Year-to-date, the commodity has rallied +44% and it is in its eleventh bull year.

Technical analysts believe that commodity prices have recently undergone a strong correction, followed by a decent consolidation and particularly as European sovereign concerns remain. Investors are guessing that the Fed will be required to ease monetary policy in answer to stimulate their economy. The Fed’s efforts to drive interest rates lower to support lending should curtail the dollar’s appeal and by default, support commodities eventually ($1,818-$8.20c).

The Nikkei closed at 8,668 up+150. The DAX index in Europe was at 5,443 up+103; the FTSE (UK) currently is 5,309 up+83. The early call for the open of key US indices is higher. The US 10-year backed up +8bp yesterday (2.02%) and is little changed in the o/n session.

Treasuries yields rallied for a third consecutive day on “eased” concern that the Euro-zone’s debt crisis may cripple the region’s banks and on pressure from this week’s supply. This is a temporary fixed income excuse as dealers begin to position themselves for the FOMC meeting next week.

Yesterday was the last of this week’s three auctions. The $13b-long bond issue was well received as everyone expects the Fed to take action by purchasing assets out the curve, which is driving buying in the long end (Operation Twist).

The 30-year bond drew a yield of +3.31%, below the previous record of +3.54% at the February 2009 offering. Indirect bidders took down +39.4%, compared with +12.2% at the August auction, the lowest level since February 2008. Direct bidders bought +17.3% of the notes at the sale, compared with an average of +11.6% for the past 10 auctions. Some dealers now see a +50% chance of a cut in interest on excess reserves at next week’s Fed meeting.

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August 31, 2011

Negative 2nd Quarter Triggers Canadian Recession Fears

Filed under: OANDA News — Tags: a-much-stronger, a-very-strong, auto, cad, central bank watch, finance, gross-domestic, japan, recession — admin @ 3:02 pm

Wednesday’s release by Statistics Canada revealed that for the three months ending in June, the Canadian economy contracted by 0.1 percent. With a recession typically defined as two or more consecutive quarters of negative growth, Canada is already half way back to a recession.

Like most of the industrialized world, Canada suffered through a recession triggered by economic events in late 2007 and 2008. For Canadians, the recession lasted from the final quarter of 2008 to the end of the second quarter of 2009. While growth as measured by Gross Domestic Product (GDP) during the recession declined by more than 3 percent, this was still better then most other G7 countries where losses were much more pronounced. Canada also was one of the first to emerge from recession returning to positive growth by the third quarter of 2009.

These realities helped the country garner a reputation as somewhat of a fiscal prodigy. Hoping to continue to build on this legacy, Finance Minister Jim Flaherty downplayed the GDP result noting that Canada’s economic and fiscal fundamentals remain “sound and sustainable”.

“The weakness in Q2 was largely due to external factors — the tsunami and earthquakes in Japan in the second quarter had a very strong effect on the auto sector, particularly auto imports,” he said. “And of course there was some slowness in U.S. growth, so that affected our exports. The domestic situation is much stronger.”

As much as Canadians may wish to believe it, the ability of Canadian monetary policy to manage the economy is often overpowered by a much stronger force – the huge market lurking below the 49th parallel. For most of its existence, Canada has been an exporting nation and remains so to this day. An abundance of resources combined with an educated and skilled workforce situated within sight of the world’s largest consumer market has for the most part, served Canadians positively for well over a century.

However, there is a downside to this arrangement; today, about 75 percent of Canada’s exports find their way to the American market. When times are good and American consumers feel confident regarding their economic future, Canada enjoys a trade surplus that prior to the last recession, averaged more than $70 billion a year. In 2009 and 2010 the surplus declined sharply to $20 billion a year.

Should the U.S. economy tip back into recession and force consumers to cut back even further on their spending, this will certainly impact Canadian export sales. It may even push Canada’s economy to recession. Already the Bank of Canada has noted that Canadian growth is likely to ease in the final two quarters of the year and all talk of an interest rate hike appears to now be a thing of the past.

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August 19, 2011

Citigroup, JPMorgan Raise Recession Fears

Filed under: OANDA News — Tags: chief-economist, country, gross-domestic, into-defaulting, makes-the-risk, michael-feroli, recession, usd — admin @ 8:53 am

Citing a sharp decline in growth and an uncertain political climate, Citigroup Inc. and JPMorgan Chase & Co. both reduced their outlook for the U.S. economy for the remainder of the year and into 2012. JPMorgan analysts issued a note to clients predicting that U.S. Gross Domestic Product for the fourth quarter will fall from the earlier prediction of 2.5 percent to an anemic 1.0 percent. The bank also suggested the slowdown will extend into next year with the growth outlook for the first quarter of 2012 now slashed from 1.5 percent to just 0.5 percent.

Citigroup also picked up on the theme cutting its 2011 growth to 1.6 percent for the current year from an earlier view of 1.7 percent. For 2012, Citigroup has revised its stance downwards from 2.7 percent to 2.1 percent.

Growing Recession Fears

In addition to the outlook downgrade, both banks signaled the growing possibility of a return to recession for the U.S. economy. Morgan Stanley told clients that with the weaker growth now expected in the U.S. as well as a slowdown in Europe, the global economy is “dangerously close to recession”.

JPMorgan’s chief economist, Michael Feroli, echoed the same sentiment noting that the revised outlook makes the risk of a recession “clearly elevated”.

The political climate in Washington was also called into question in the wake of the debt crisis debacle that very nearly forced the country into defaulting on its debt payments. Citigroup analysts suggested that the “political paralysis” made for an uncertain future with little progress expected on plans to deal with the growing deficit and mounting debt.

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What’s Your Safe Heaven Currency Choice?

Filed under: OANDA News — Tags: a-fourth-weekly, black, eur, governor, loonie, market, recession, usd — admin @ 4:27 am

Capital markets reached a tipping point yesterday, pushed over by Euro bank funding concerns and weaker US data. The market has been seeing red from the bourses ever since. In currencies, it has been eerily quiet, even with the fall of global risk appetite continuing. The FX market has been trading these moves essentially flat. Perhaps the lack of price action has to do with the lack of positions. Trading safe heaven currency choices are limited and getting smaller all the time.

What are FX traders using for safe heaven other than gold? Japan’s finance minister Noda continues to warn the market about intervention and states that further yen strength would ‘elicit measures in the new supplementary budget’. That’s one strike against using JPY.

The SNB continues its charge for a weaker franc. The Bank has revised its year end forecasts and expects EUR/CHF to reach 1.14, previously forecast at 1.13 and USD/CHF at 0.84, previously at 0.83. Everyone knows that sustained CHF depreciation will only occur with improving global economic conditions.

The Fed is telling foreign exchange that they do not need to worry about the funding rate for at least two years. With rates at zero, they have now created the perfect ‘funding currency’, weakening the dollar without making that an ‘official policy statement’.

With the historical reserve currencies impeding the markets natural appetite in these times of stress perhaps the market should be looking more at a basket of Asian currencies, despite their own Cbank’s intervention or a commodity growth sensitive basket? Domestically there the cracks are appearing. Australia dependence on China and Canada’s 70% trading ties with the US are obvious reasons. Natural choices are been limited, perhaps the reason for lack of volatility, or are we just waiting for that Jackson Hole QE3 announcement?

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

Red and redder, that’s what the market sees. Yesterday’s US data was just another nail in the in the growth coffin. First, CPI surprised on the upside with a +0.5% seasonal increase. The market was expecting +0.2%, the blame comes from the positive seasonal adjustments for gas, though food and energy with +0.4% gains both exceeded the core rate which came in at +0.2%. It was the largest monthly gain since March. With short term rate expectations already anchored close to zero, yesterday’s headline print ‘handcuff’s the Fed’, giving them little room to ease a lot more. Policy makers have made it very clear that economic growth and jobs are in trouble. However, with little improvement in the labor market, and given what’s going on with economic growth, pricing power should weaken going forward, for the time being it remains stubbornly high.

No one wanted to hear that more Americans filed applications for UI last week. Initial jobless claims rose +9k to +408k. The number was above market expectations. Is the rise sufficient to conclude that the recent positive trend has been broken? The four week average is +402.5k, the lowest level in five months. Continuing claims paints the same picture, at +3.702m the outcome is just above expectations of +3.695m. Again revisions were applied to previous weeks, and they rarely go in ones favor! The four week continuing claims average of +3.716m is the lowest in two-months. All the numbers have been seasonally adjusted, before seasonal, initial claims fell-12k and continuing claims-45k. There was nothing in the report to imply that the recent financial turmoil has caused the US economy to slow further during this month. All the market knows is that the US economy has a long way to go to return to a healthy job market.

It was the disappointing Philly Fed survey (-30.7) that had investors running for the exits. With negative readings on overall activity, orders shipments and employees do support this week’s unexpected drop in Empire State business conditions (-7.7). When you include existing home sales unexpectedly dropping last month (-3.5% to +4.67m units) as cancellations of pending contracts continued to depress buying activity, you have the variable to create a highly volatile nervous illiquid trading environment whose priority is to that seek a safe heaven trading strategy.

The dollar is higher against the EUR -0.03%, GBP -0.00% and lower against CHF +0.71% and JPY +0.26%. The commodity currencies are mixed this morning, CAD +0.14% and AUD -0.21%.

Parity looms again for the loonie ahead of this morning inflation data. Fears about the stability of the European banking system, weaker data from its largest trading partner has been affecting crude and weighing on commodity, growth sensitive currencies.

Yesterday, Canadian monthly wholesale sales rose unexpectedly in June (+0.2%-$47.7b), but a decline in sales volume (-0.5%-because of a declining CAD driving import costs higher) was yet another sign for the market to expect a weak GDP print in the second quarter. Add this to a disappointing trade and manufacturing data for the month and we should have Governor Carney staying on the sidelines even longer.

The Governor speaks today in testimony at a special parliamentary meeting. Market expects him to sound more dovish than he did last month and again will probably reiterate the risks to the economy already identified.

This month, the loonie has dropped -3.8% as global equities tumble on renewed concern that the Euro-zone’s sovereign-debt crisis is getting worse. In the O/N market, investors have been better sellers of dollars on rallies (0.9890).

The AUD for a second consecutive day fell outright in the o/n session as Asian stocks extended global losses, curbing appetite for higher-yielding assets. The Aussie is on course for a fourth weekly drop against the JPY as traders increase bets for an interest-rate cut from the RBA amid concern that global growth is slowing. The RBA’s August minutes showed policy makers are concerned that turmoil in financial markets could slow global economic growth. Concerns over developments in Europe and the US continue to overshadowed the RBA’s robust medium term domestic outlook. Many now expect Governor Stevens to remain on hold for the remainder of the year, as ‘risks for the RBA have become more evenly balanced and the outlook remains conditional on the strength of the global economy’.

If global turmoil continues, it could temper domestic inflation over time and ease pressure on the RBA to raise interest rates. Some futures traders now expect the RBA to reduce its key interest rate by-128bp over the next 12-months. Even with core inflation still running above the RBA’s target range, the policy makers can afford to step aside, unless there a dramatic collapse in global financial markets. That can be said for all other Cbanks. Just like the loonie, the AUD will trade with the swings in global risk appetite. Currently, investors are better sellers of the currency on rallies (1.0382).

Crude is lower in the O/N session ($79.97 down -$2.41c). Crude declined the most in a week yesterday after growth forecasts were cut and on the back of disappointing US data pushing global equities further into the red. The Philly Fed survey showed manufacturing activity contracted sharply in the US this month. Investors continue to run away from risky assets due to the uncertainty surrounding how policy makers will act to contain the crisis in Europe.

This weekly inventory report is also bearish for the black stuffs prices. Oil stocks rose +4.23m barrels to +354m versus an expected inventory decline of-500k barrels, and are above the upper limit of the average range for this time of year. In contrast, gas inventories fell by -3.5m barrels, a week after dipping by -1.6m barrels in the prior week, but are in the upper limit of the average range. Oil refinery inputs averaged +15.4m barrels per day during the week, which were-205k below the previous week’s average as refineries operated at +89.1% of their operable capacity. Over the last four weeks, imports have averaged +9.30m barrels per day, which were-606k below the same four-week period last year.

For the moment, Crude prices continue to hold just above strong support levels ahead of $75, but those levels look vulnerable this morning. The Fed’s monetary policy will be bearish for the dollar and so should be bullish for crude in the longer term. However, markets appetite is telling us different in the short term.

Gold has hit a new high this morning, up just under +2.5% since yesterday, on disappointing weekly jobless claims last week. Investor’s fears again are being tested with various global growth forecasts being cut and on questionable concerns for Chinese growth. The commodity has jumped +20% since the start of the third quarter, with many analysts being forced to revise yearly forecasts as a combination of Euro-zone and US debt crises has renewed buying pressures.

Apart from the administration side effects of owning the commodity (CME’s +22% margin), the metal continues to be a recipient of safe-haven flows. Gold’s prices have more than doubled since the recession began in late 2007. Big picture, with the Fed’s efforts to drive interest rates lower to support lending are curtailing the dollar’s appeal as a safe haven and by default, support commodities. The commodity is heading for its eleventh consecutive annual gain. In this trading environment, $2,200 is very much in the realms of possibility over the next six months ($1,863 +$41.60).

The Nikkei closed at 8,719 down-224. The DAX index in Europe was at 5,410 down-192; the FTSE (UK) currently is 5,000 down-91. The early call for the open of key US indices is lower. The US 10-year eased 12bp yesterday (2.07%) and is little changed in the O/N session.

A disappoint Philly Fed had investors seeking shelter in treasuries and at one point pushing 10’s to new record low yields below 2%. Investors panicking managed to aggressively flatten the yield curve. The 2/30’s spread fell-7bp to a 10-month low on speculation the US economic recovery is stalling.

Yesterday’s CPI data is trying to handcuff the Fed on easing monetary policy further. However, with slower growth and a fragile jobs market should, over time, influence pricing power and inflation. With the short end of the yield curve resigned to trading on top of or close to o/n fed funds, dealers will expect longer-dated product to trade more volatile as investors reach for yield and on speculation that the Fed may extend bond buying away from shorter-dated notes and towards 10-year product to help stimulate the economy. For the near term, bond investors are likely to continue to keep a close eye on equities as they dictate these treasury moves.

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August 17, 2011

CHF another EURO Disappointment

Filed under: OANDA News — Tags: cad, chf, data, eur, governor, month, next, recession, spain, time, voice, yellow — admin @ 4:08 am

Now that the SNB has failed to live up to investors expectations of introducing the CHF to a new pegging system, there will be pressure on the Cbank to intervene in FX to weaken their currency as speculators again balk at the introduction of a fresh liquidity boost.

Governor Hilderbrand, for the third time in three weeks, has boosted sight deposits +66% to CHF200b. The markets reaction to a ‘no’ temporary Euro peg or a floor to limit the damage to the country’s strong export industry is failing to dampen the market demand for the currency as a safer heaven bet. Since the announcement, the currency has appreciated +2%. Analysts estimate that the franc’s overvaluation currently stands at +13% and would require a series of FX interventions to get the franc back to trading at 1.28 EUR, its current fair value.

If anything, the Cbank is remaining flexible, the use of draconian measures in this time of heightened uncertainty could push whats left of consumer confidence into full on panic.

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’ session.

Most US data yesterday was a pleasant surprise, if nothing else it kept investors occupied ahead of the Sarkozy and Merkel news conference. US industrial production rose at its quickest pace in seven months in July (+0.9%) as motor vehicle output rebounded strongly, further easing fears that the US economy could be sliding head-first into another recession. The report suggests that the recovery may have regained some momentum over the last few months. The underlying figure, a +0.3% rise in manufacturing ex-autos, shows only moderate growth. It remains to be seen if this can be sustained this month given the financial markets disruptions. Capacity utilization of +77.5% in July is well above the +0.76.9% estimate, with June revised up by +0.2% to +76.9%. It is the highest print in three-years.

Other data showed US residential construction, while still depressed, was not a drag on the economy as the second-half of the year got under way. Data showed housing starts slipped a less-than-expected -1.5% last month, to a seasonally adjusted annual rate of +0.6m units as builders broke ground on new multifamily units to meet demand for rental apartments. On the face of it, housing starts remain somewhat range bound at these historically low levels as homebuilders continue to reduce existing inventories against a backdrop of elevated foreclosures. Data earlier in the week showed that sentiment among home builders was steady at low levels this month, but they were pessimistic about future sales over the next six-months. Other data showed that new building permits fell -3.2% to a +0.597m unit pace last month. Digging deeper, permits were dragged down by a -10.2% drop in the multifamily segment, while permits to build single-family homes rose +0.5%.

There was much said but noting ‘really’ conclusive in the Merkel/Sarkozy summit. They unveiled wide-reaching plans for closer Euro-zone integration, including deficit limits and biannual summits, but said joint Euro bonds could only be a longer-term option. Apparently, they are potentially harmful to the healthiest economies. Yesterday’s surprisingly soft German GDP release will have many question this decision. By day’s end, the two-leaders are not the voice for ‘the’ union. Their objective of the meeting was to shore up some much needed market confidence that has taken a good hiding in August. Their proposals will be considered as a welcome ‘step forward in a common effort to strengthen the governance of the Euro-area’. Both leaders focused on the longer term governance issues and new taxes rather than on measures to spur growth. The leaders seem to be heading in the right direction, but little new is being offered!

The dollar is lower against the EUR +0.09%, CHF +1.36% and JPY +0.28% and higher against GBP -0.40%. The commodity currencies are stronger this morning, CAD +0.18% and AUD +0.46%.

Canadian data yesterday (backward looking) added nothing positive to the Canadian landscape. Weaker manufacturing sales (-1.5%) will only pressurize Junes GDP further. Digging deeper, most of the details are as bad as the headline itself. Inflation adjusted manufacturing shipments fell -1.6%, month-over-month. This adds to the risk of a an outright contraction in the Canadian economy in the second quarter. The data will only re-enforce expectations for the BoC to remain on hold for the next couple of quarters by putting growth well under Governor Carney’s forecast of +1.5%, q/q annualized growth.

The preliminary evidence for the third quarter (forward looking data) is a touch more encouraging thus far. Hours worked expanded sharply in July (+1.1%, m/m) and manufacturing new orders surged in June. Looking beyond this timeline is more difficult due to the ongoing changing nature of global economies, especially in Europe, as they adjust to sovereign risk concerns. Analysts note that with the ‘rise in unfilled orders and new orders, manufacturers may sell down high inventory positions rather than add to production and employment volumes in the near-term, choosing instead to buy time and see what the order book looks like later in the year’.   The largest losses in the month were concentrated in the petroleum and coal shipments category (-6.6%). Machinery shipments also plunged (-4.2%), followed by primary metals shipments (-1.6%) and transportation equipment shipments (-0.6%). Auto shipments were unchanged on the month. This was the first quarterly contraction of shipments in two-years.

Over the past three trading sessions, the loonie has managed to advance from almost its lowest level in seven-months as equities stateside stabilize, reducing the demand for the buck as a refuge. The CAD, despite last week’s turmoil remains one of the better behaved currencies, even with weaker domestic data. This month, the loonie has dropped -3.1% as global equities tumbled on renewed concern that the Euro-zone’s sovereign-debt crisis is getting worse. The CAD, seen as a barometer of risk, closely tracks oil, equities and macroeconomic data from the US, which consumers about +70% of all the country’s exports. Yesterday’s disappointing data had the loonie underperforming against the other major crosses because of the depth of its economic ties with its largest trading partner.

There is a flip-side, because of the yield differential (for now), investors will want to divest away from the EUR and USD. Once the markets absorbs all of last weeks Cbanks actions or lack of, there will be an appetite from investors to own a second tier reserve basket. Most commodity and interest rate sensitive currencies certainly belong to this basket. The focus this week is likely to remain on broader risk aversion, however, there may be a shift back to fundamentals as investor sentiment starts the week on a calmer footing.

Uncertainty around Eurozone’s austerity measures and debt management issues along with overall global growth forecasts will have investors treading lightly. In the O/N market, investors have been better sellers of dollars on rallies (0.9802).

The AUD trades tentatively against all its major trading partners this week after the release of the Cbank’s August minutes on Monday which showed policy makers are concerned that turmoil in financial markets could slow global economic growth. Investors have been paring bets of an interest rate hike any time soon.

The RBA’s August minutes were largely in line with the post-policy meeting statement, however, concerns over developments in Europe and the US continue to overshadowed the RBA’s robust medium term domestic outlook. Many now expect Governor Stevens to remain on hold for the remainder of the year, as ‘risks for the RBA have become more evenly balanced and the outlook remains conditional on the strength of the global economy’. If global turmoil continues, it could temper domestic inflation over time and ease pressure on the RBA to raise interest rates. Some futures traders now expect the RBA to reduce its key interest rate by-128bp over the next 12-months. Even with core inflation still running above the RBA’s target range, the policy makers can afford to step aside, unless there a dramatic collapse in global financial markets. That can be said for all other Cbanks. Just like the loonie, the AUD will trade with the swings in global risk appetite. Currently, investors are better sellers of the currency on rallies (1.0538).

Crude is higher in the O/N session ($87.22 up +0.57c). Crude prices fell yesterday after Germany, Europe’s largest economy, almost stalled in the second quarter (+0.1% vs. +1.3%), bolstering concern that global fuel consumption will diminish. Sarkozy and Merkel considering Eurobonds as a longer term option does not help market confidence.

The weekly inventory report is expected to show that US oil supplies fell to a five-month low this morning. Last week’s EIA release had been bullish for the commodity, dragging prices up from their ten-month low. The report showed that oil stocks fell -5.2m barrels after the market had projected a +1.5m barrel build. Not to be outdone, gas stocks dropped -1.59m barrels to +213.5m, compared with market projections for a +500k barrel build. Average gas demand over the last four-week’s has fallen-3.4%, y/y. Distillates (heating oil and diesel) fell-737k barrels to +151.5m versus an expected rise +1.1m barrels. Refinery utilization increased +0.7% point to +90% of capacity, whereas the market projected a decrease of -0.4%

Crude prices continue to hold just above strong support levels. The Fed’s monetary policy will be bearish for the dollar and so should be bullish for crude in the longer term.

Now that the CME margin rule change has been priced out of the equation, gold prices have been allowed to rally for a second consecutive day as European sovereign debt concerns bolster demand for the yellow metal as an investment haven. Earlier this week, the commodity gained for the first time in three sessions as a weaker dollar revived demand for the metal as an alternative investment. Apart from the administration side effects of owning the commodity, the metal continues to be a recipient of safe-haven flows in times of uncertainty. This is one of those times. Gold’s prices have more than doubled since the recession began in late 2007. The metals climb has accelerated on the back of the European debt crisis threatening to spread to three of its biggest economies, France, Spain and Italy. The Fed’s efforts to drive interest rates lower to support lending are curtailing the dollar’s appeal as a safe haven and by default, support commodities.

Investors have bought more gold in the last month than in the prior six months according to CFTC data last week. The commodity is heading for its eleventh consecutive annual gain. In this trading environment, $2,000 is very much in the realms of possibility over the next six months ($1,795 +$10.30).

The Nikkei closed at 9,057 down-50. The DAX index in Europe was at 5,904 down-91; the FTSE (UK) currently is 5,299 down-58. The early call for the open of key US indices is lower. The US 10-year eased 4bp yesterday (2.22%) and is little changed in the O/N session.

Treasury prices rallied late afternoon yesterday as French and German leaders dismissed calls for the issuance of euro bonds that would allow borrowing on behalf of all 17 euro states, encouraging demand once again for a safe heaven asset. Investors were looking for more urgency from leaders to tackle the Euro crisis, lack of it and US bonds again set to retest this months low yields.

With the short end of the yield curve resigned to trading on top of o/n fed funds, dealers will expect longer-dated product to trade more volatile as investors reach for yield and on speculation that the Fed may extend bond buying away from shorter-dated notes and towards 10-year notes to help stimulate the economy. Month-to-date, treasuries prices have surged, pushing 10-year yields down more than-50bp. For the near term, bond investors are likely to continue to keep a close eye on equities as they dictate Treasuries’ moves.

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August 16, 2011

EURO Weight on Germany too heavy?

Filed under: OANDA News — Tags: chancellor, commodity, country, france, gbp, greece, jpy, loonie, post, recession, spain — admin @ 4:36 am

The market has already been forewarned that there will be no political end to the Euro-zone crisis from today’s tete-a-tete between Merkel and Sarkozy. Even with German officials insisting that Eurobonds were not on the agenda, a reluctant Chancellor may have to accept that there is only one way to prevent the Euro collapse and that is with Eurobonds replacing sovereign bonds. This would require members to pool their Eurozone risk to reduce their refinancing costs. This is good for struggling members like Greece and Italy. However, the borrowing costs would also rise for the Germans and the Dutch, maybe costing them their triple-A rating.

Issuing Eurobonds, it is believed would add EUR47b to the Germans bill, a snip if you look at the alternative. Capital markets successfully attacking Italy, then France, the Germans losing their coveted AAA credit rating. This in turn could trigger a global depression and a bill for the Germans three times the cost of issuing Eurobonds. As a politician, Merkel must keep her options open!

This morning, the EUR remains supported by a combination of the short selling ban and growing concerns about outflows from a ‘be-leagued dollar’. The divergence in growth between the core and periphery countries is narrowing as noted from the disappointing German GDP data. Growth in Europe’s largest economy slowed sharply in the second quarter (+0.1%), leaving it below pre-crisis levels and calling into question Trichet’s decision to tighten twice this year. Combined with the French data last week, this is more than just a soft patch for the ‘invincible core’. Perhaps policy makers may have to begin their discussions on reversing this years hikes over the coming months?

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

The ECB came off the sidelines, for the first time in nineteen weeks, to shore up market confidence and announced yesterday that they had settled EUR22b in bond sales last week, the highest weekly settlement in thirteen-months since it began buying Euro-zone government bonds in the secondary market. Since it takes a few days for bond transactions to settle, analysts believe that the final monetary intervention value will be close to EUR25-30b. As a term of reference, just after the first Greek bailout package, the ECB bought +16.5b in bonds. It is believed that the bulk of the buying was that of Italian and Spanish bonds. Their direct intervention has helped lower significantly the cost of borrowing for both sovereign entities. To date, the total acquisition under the ECB bond buying program equates to EUR96b. Given the size of the Italian and Spanish bond market, the sum is not particularly high, but it seems to be sufficient to show capital markets that the ECB is serious about containing the sovereign debt crisis.

Yesterday’s US June TIC’s data is notable for a record foreign private sector selling of bonds, notes (-$18.3b) and long-term securities ($23b) compared with the previous record set during the height of the financial crisis in 2008. The increased sales had been influenced by the debt-limit deadline. The market should be prepared to see a further negative overhang in July’s data, as a resolution did not occur until the beginning of this month. The ‘net’ underlying long-term securities transactions (ex-swaps) in June was a positive +$3.7b and down from a weak +$24.2b print in May.

The dollar is higher against the EUR -0.44%, GBP -0.20% and lower against CHF +0.34% and JPY +0.02%. The commodity currencies are weaker this morning, CAD -0.64% and AUD -0.82%.

Over the past three trading sessions, the loonie has managed to advance from almost its lowest level in seven-months as equities stateside rise, reducing the demand for the buck as a refuge. The CAD, despite last week’s turmoil remains one of the better behaved currencies, even with weaker domestic data. Late last week, Canada recorded its biggest trade deficit in nine-months in June (-$1.56b the fifth consecutive), as energy and auto exports fell, adding to evidence the country’s recovery is waning. Governor Carney said last month that export growth will remain modest because of a strong currency and the need for companies to regain competitiveness.

This month, the loonie has dropped -3.1% as global equities tumbled on renewed concern that the Euro-zone’s sovereign-debt crisis is getting worse. The CAD, seen as a barometer of risk, closely tracks oil, equities and macroeconomic data from the US, which consumers about +70% of all the country’s exports. Yesterday’s disappointing Empire State Manufacturing Index had the loonie underperforming against the other major crosses because of the depth of its economic ties with its largest trading partner.

The AUD traded under pressure against all its major trading partners last night, after the release of the Cbank’s August minutes which showed policy makers are concerned that turmoil in financial markets could slow global economic growth. It was the first day in four that the currency retreated outright, as investors pared bets of an interest rate hike any time soon.

Crude is lower in the O/N session ($86.71 down -$1.17c). Crude prices rallied for a third consecutive day yesterday, rebounding from last weeks ten-month low, after M&A activity dragged US bourses higher and on Japanese’s data contracting less than expected in the second quarter at the weekend. This morning’s disappointing European data is providing the excuse for energy prices to take a step back.

Last week’s US inventory numbers had been been bullish for the commodity. The report showed that oil stocks fell -5.2m barrels to +349.7m last week. The market had projected a +1.5m barrel build. Crude imports fell-34k barrels per day to +9.07m. The IEA stated that the US’s SPR saw its stock levels fall -2.5m. Not to be outdone, gas stocks dropped -1.59m barrels to +213.5m, compared with market projections for a +500k barrel build. Average gas demand over the last four-week’s has fallen-3.4%, y/y. Distillates (heating oil and diesel) fell-737k barrels to +151.5m versus an expected rise +1.1m barrels. Refinery utilization increased +0.7% point to +90% of capacity, whereas the market projected a decrease of -0.4%

Crude prices continue to hold just above strong support levels. The Fed’s monetary policy will be bearish for the dollar and so should be bullish for crude in the longer term.

Ever since the CME changed the margin requirements for gold (+22%), the weaker bulls have had their backs against the wall with prices plummeting. Yesterday, the commodity gained for the first time in three sessions as a weaker dollar revived demand for the metal as an alternative investment. Apart from the administration side effects of owning the commodity, the metal continues to be a recipient of safe-haven flows. This morning’s weaker than expected German GDP print is again providing support. Gold’s prices have more than doubled since the recession began in late 2007. The metals climb has accelerated on the back of the European debt crisis threatening to spread to three of its biggest economies, France, Spain and Italy. The Fed’s efforts to drive interest rates lower to support lending are curtailing the dollar’s appeal as a safe haven and by default, support commodities.

The Nikkei closed at 9,107 up+21. The DAX index in Europe was at 5,877 down-145; the FTSE (UK) currently is 5,272 down-78. The early call for the open of key US indices is lower. The US 10-year eased 1bp yesterday (2.26%) and is little changed in the O/N session.

Treasury prices were little changed along most of the yield curve Monday, apart from long-bonds, who happened to have a lousy 30-year auction last week, as global equities found some of their lost ‘mojo’. Investors are looking for any signs of stability after last weeks hyped up volatility sent them scurrying to the exits demanding safe heaven product.

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August 10, 2011

Canadian Dollar Lower on Recession Fears

Filed under: OANDA News — Tags: a-weak-period, capital-markets, cents-yesterday, commitment-and, currencies, david-watt, forex round up, greatest, potential, prospects, recession, toronto — admin @ 7:20 am

As fears grow that the U.S. economy could be headed for a weak period, or even another recession, the Canadian dollar has seen its value decline. The U.S. buys 75 percent of Canada’s exports and the prospects of lower demand for these goods has investors leaving the loonie for other currencies.

The Canadian dollar depreciated 0.9 percent to 98.61 cents per U.S. dollar at 8:23 a.m. in Toronto, from 97.72 cents yesterday, when it jumped 1.7 percent, the most since May 2010. One Canadian dollar buys $1.0141.

“While the Fed did make a conditional commitment and indicated it’s going to do more, it also left the impression that the near-term outlook for the U.S. economy has become exceptionally choppy,” said David Watt, senior currency strategist at Royal Bank of Canada’s RBC Capital Markets, by phone from Toronto. “They’re going to be on hold for the next two years. It’s not exactly the greatest vote of confidence in the potential for the U.S. economy to stage a sharp rebound.”

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June 2, 2011

Consumers Still In Wait-and-See Mode

Filed under: OANDA News — Tags: a-half-later, a-more-positive, a-paltry-1-8, a-secret-weapon, a-slight-easing, a-steady-rise, consumer, consumer-price, crisis, economy, market pulse, recession, unemployment, usd — admin @ 9:45 am

The latest feedback on the state of the U.S. economy does little to boost confidence in the overall health of the world’s largest market. Growth for the first quarter fell far short of expectations registering a paltry 1.8 percent. For the previous three months, the economy expanded by a robust 3.1 percent but this trend is clearly on the decline.

Certainly the U.S. has faced recessions in the past and has suffered through sustained cycles of low growth but in each of these cases, there was always a secret weapon held in reserve – the might of the American consumer. Historically, the buying power of U.S. consumers accounts for about 70 percent of the total economy and there was always a sense that as soon as people started spending again, recovery was all but assured.

This time though, it feels very different; and not even the continuation of record low interest rates have proved tempting enough to entice consumers to open up their wallets.

There are a couple of reasons why this is so. Firstly, there has been very little improvement in the employment outlook. Prior to the recession, unemployment was in the range of 4.5 percent – after the onset of the crisis in late 2007 however, unemployment rose steadily peaking at 10.1 percent in October, 2009. A year and a half later, unemployment has improved only marginally to 9 percent and even this is in jeopardy based on the decline in the latest Institute for Supply Management’s factory index reading.

The true number of unemployed is actually much higher of course. The official survey used to arrive at the unemployment rate considers only those who reported that they were actively looking for work. Those that have quit looking, or those working part-time but would like to be full-time, are not counted as unemployed.

Regardless of the method to determine the unemployment rate, the simple fact is that the current unemployment rate remains double the rate considered “full” employment prior to the recession. On the plus side, the economy is finally creating new jobs; but at the anemic rate it is doing so, it will take several years to recover the jobs lost since 2007.

In May, just 38,000 new positions were created compared to April’s 244,000. Even those that are working are feeling vulnerable and in a bid to protect themselves, consumers are spending less while saving more.

The other factor hampering consumer spending is the rise in inflation. Driven by higher energy and food costs, these essentials are taking a greater chunk of total income leaving less for the non-essentials. Since January, inflation has been on a steady rise from 1.6 percent at the beginning of the year, to 3.2 percent in April.

The Consumer Price Index was up 0.4 percent in April with gasoline prices jumping 3.3 percent for the month. On a more positive note, commodity prices have retreated somewhat and the expectation is that inflation will ease as a result. While this will be welcomed by consumers, until we see a significant improvement in employment, it will take more than a slight easing in inflation to convince consumers to crank up the spending.

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Moody’s Downgrades Greek Debt; 50% of Default

Filed under: OANDA News — Tags: a-steady-rise, consumer, consumer-price, corporate-and, european, existing-bonds, investor, percent-have, recession, these-risks, usd — admin @ 7:38 am

Moody’s Investor Services downgraded Greece to Caa1 from B1 and raised the prospect of a default to an even 50 percent. The European Union is currently working on a second bailout plan that may include debt re-profiling where investors are asked to reinvest in new Greek debt when existing bonds mature.

“Taken together, these risks imply at least an even chance of default over the rating horizon,” Moody’s said in a statement. “Over five-year investment horizons, around 50 percent of Caa1-rated sovereigns, non-financial corporate and financial institutions have consistently met their debt-service requirements. Around 50 percent have defaulted.”

Source: Bloomberg

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May 25, 2011

Lagarde the EURO before Extinction

Filed under: OANDA News — Tags: commodity, currency, dean's fx, jpy, local, markets, recession, usd — admin @ 4:13 am

It’s a horror show, with market anxiety keeping risk assets defensive. We have politicians pitted against policy makers. The ECB is warning that restructuring is not a solution. If Greece fails to meet the term of it’s bailout, their debt will be ineligible as capital. Europe’s policy options to manage Greece’s debt crisis are narrowing fast.

Politicians are being pressurized into finding an electorate appeasement. The Greek Prime Minister is considering seeking a national consensus on the crisis and is determined to stay in the union. Just what the Euro-zone requires, another referendum.

On the plus side, news that the Finnish government have rubber stamped the Portuguese bailout and that the German banks have passed a second stress test have brought some relief to the EUR. It’s nearly back to the desired level for speculators to short it again. Little of the European positive news is being appreciated, its risk and quantifiable risk that’s associated with the Euro-zone that is driving currency values.

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

Sales of new homes in the US yesterday beat market expectations (+323k), despite trumping the March print by +7.3%, sales are still down-23% from last years April print of +420k. It has been a roller coaster of reporting this year and does very little to the underlying ‘flat’ trend. The reporting at the beginning of the year was impeded by weather factors, while the latter focused on beating an increase in FHA insurance premiums in the middle of last month. Digging deeper, sale gains were able to push down the number of new homes available for sale, weighing on the month’s supply, down-10% to +6.5. The medium price of new homes grew +1.6% to $217k, an appreciation of +4.6%, y/y, while ‘existing home sales’ appreciated +4.6% year/year. The reality, the job market and increased affordability may be starting to help underpin a housing market that’s lagged behind the rest of the economy. The one reason for the continued slump is growing interest from investors in buying distressed properties.

To date, both the Richmond Fed’s manufacturing and services index were bad this month. Yesterday, the manufacturing component fell to-6 from +10 (the first negative reading in nine-months), while the service sector revenue index dropped from +28 to +9. The manufacturing print happened to beat the most pessimistic of supply chain disruptions. On the services side, revenue remains positive, however, some of the energy relief in prices has not been enough to overcome gas spikes and low wage growth. Digging deeper into manufacturing, both the shipments (-13) and new orders (-15) plummeted, registering some of the lowest levels during this recession. Somewhat heartening, the number of employees index held steady (+14), while the wages index dropped +6.

The dollar is higher the EUR -0.12% and JPY -0.18% and lower against GBP +0.10% and CHF +0.37%. The commodity currencies are weaker this morning, CAD -0.16% and AUD -0.49%.

This month, the CAD has weakened outright versus the dollar, its longest losing streak in six-months, as crude-oil prices trade heavily amid mounting investor concern that global economic growth is faltering. Weaker domestic fundamental data, like last weeks retail sales and inflation numbers may dissuade Governor Carney at the BoC from boosting interest rates later this month. The Bank next meet on the 31-May to determine their interest rate policy. The market is experiencing risk-on and off again trading, creating volatility within a tight range.

With 0.9850 barriers supposedly maturing at month end, the market will see defense maximized as expiries draw closer, providing resistance for the time being, despite the underlying momentum wanting to drag the dollar to test higher. To date, risk sentiment has been stung over Euro-zone debt restructuring and on doubts about the pace of global growth. Investors are better buyers on these pull backs (0.9785).

O/N, the AUD felt the wrath of the market, falling to a six-week low versus the greenback and -1.2% against the yen as concern that Europe’s debt crisis is deepening sapped demand for higher-yielding assets. Domestic data is also weighing on the currency, a government report showed construction work completed rose less than economists forecast. It increased +0.7% in the three-months versus a +1.4% gain. Traders are beginning to reduced their bets on the amount of interest-rate increases by the RBA over the next 12-months to 22 basis points from 25 yesterday.

Until last night, providing support for the currency is the belief that the local dollar was gaining stature as a global reserve currency, similar in nature to that of the CAD. Aussie yields are still the highest in the G10 and always look attractive. The expected mix of trade surpluses and rising capital inflows should provide support for the currency on these much deeper pullbacks for the time being (1.0508).

Crude is lower in the O/N session ($98.70 -0.89c). Oil rallied the most in a week yesterday, as the dollar declined, boosting commodities’ appeal as an alternative investment, and after Goldman and Morgan Stanley increased their oil-price outlooks. Already this week, Oil has been pushed and pulled by a gyrating dollar, on the back of European contagion fears and what this may eventually mean for demand. Year-to-date, crude prices are up +39%.

Last week’s weekly crude supplies fell-15k barrels to +370.3m versus an expected build of +1.7m barrels. Cushing supplies dropped -1.59m barrels to +40.0m, while imports were off-394k barrels per day to +8.54m barrels per day. Distillate stockpiles (heating oil and diesel) also posted a surprise draw, dropping -1.16m barrels versus expectations of a +700k build. On the flip-side and a surprise, was gas inventories growing as expected but modestly, rising +119k versus a forecast for a +800k barrel build. The refinery utilization rate rose +1.5% to +81.7% of capacity, much bigger than the +0.2% expected.

Technically, the report could be seen as overall bearish because of the weaker gas demand. Despite the market being awash with product, the long-term fundamental supply and demand of commodities is still pointing to higher prices. Lower interest rates continue to help the commodity which competes with yield-bearing assets for investors’ cash.

Gold rose to a three week high yesterday, on concern that that Europe’s sovereign-debt crisis may worsen and a weaker dollar spurred demand for the metal as an alternative asset. Strong buying recommendations from Goldman and Morgan Stanley was also good enough reason to drag the commodity up from last week’s lows. The yellow metal is being used as a store-of-value and trades like a currency.

The inability of the dollar to maintain its safe-haven status is currently supporting metals. Last week, the commodity had been moving in tandem with oil and the risk-on-risk-off commodity trade. So far this week that relationship has broken. Expect investors to remain nimble because of the gyrating greenback.

The metals bull-run is far from over with speculators continuing to look to buy gold on these deeper pullbacks. Interestingly, the sale of gold coins this month remains on track for the best month in a year amid the worst commodities rout in three-years, which would suggest that bullion’s longest ‘bull market’ still has room to run ($1,525 +$2.10c).

The Nikkei closed at 9,870 down-54. The DAX index in Europe was at 7,123 down-27; the FTSE (UK) currently is 5,849 down-8. The early call for the open of key US indices is higher. The US 10-year eased 4bp yesterday (3.13%) and is little changed in the O/N session.

Treasuries happened to give up some of the weekends gains after an unexpected new home sales data and on the back of Treasury issuing $99b of new product this week. Dealers wanted to cheapen up the curve ahead of this week’s three auctions as yields continue to hold close to three-year highs making it difficult for investors to want to own product at these levels.

‘Rates remain in a tight range, and despite seeming incredibly low, they reflect a Fed comfortable with the inflation and economic outlook and their ability to adjust’. Expected mixed US data this week has investors remaining better bid on pull backs, providing bullish momentum for the FI asset class, who it seem want to register even lower record yields over the medium term.

Yesterday’s $35b two-year auction was a strong issue and came to the market 0.5bp through, at 0.56%. Indirect bidders too 31.3%, while direct took 19.1%, with 3.46 bid-to-cover ratio. This morning we get the $35b seven year notes. Will the markets appetite be as strong?

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