Forex Blog

May 20, 2011

Forex Week in Review May 15-20

Filed under: OANDA News — Tags: , , , , , , , , , , , , , , — admin @ 11:48 am

Developments with respect to Greece remain a source of stress for the markets. How will Greece find the €27bn it needs to fill its 2012 ‘funding gap’? Restructure, reprofiling? The market is trying to shape word definitions rather that reshape a quicker market solution for Greece. Before you know it we will have created a Lehman style contagion affair. Today’s Euro pullback appears to have been prompted by pre-weekend nervousness on peripheral finance issues and reports of heavy liquidation in Greek bonds that have coincided with the Spanish/Bund spread blowing out. It’s your typical ‘buy the rumor sell the fact’. It’s easy to create a lot of noise when liquidity is non existent on a Friday. Below are some of the highlights of the week:


EUROPE

  • IMF names John Lipsky as interim Managing Director
  • EUR headline inflation was unrevised at +2.8%, y/y, last month, but core-inflation surprised to the upside to +1.6%, y/y. Together with strong GDP numbers last week this clearly argues for further ECB tightening.
  • Rightmove data showed UK property asking prices rising +1.3% this month, to the highest level since June 2008.
  • Eurogroup chair Juncker conceded that Greek debt is currently at unsustainable levels and said that Europe would consider ‘reprofiling’ of Greek maturities, though only in the context of more spending cuts and asset sales from the Greek government.
  • UK inflation, both headline and core, surprised to the upside last month. Headline inflation accelerated to +4.5%, y/y and core CPI jumped to +3.7% from +3.2%, y/y, in March, a new record high. Much of the spike was caused by airfare prices, up +36%, y/y.
  • The letter from BoE Governor King to the UK Chancellor of the Exchequer again downplayed the above-target inflation. King continued to expect, in line with the inflation report, CPI to return back to target with the Bank rate moving in line with market interest rates.
  • German ZEW economic sentiment was on the weak side, printing at 3.1 in May, down from 7.6 in April and continues the downward trend since February. The ZEW current situation assessment increased to 91.5 from 87.1.
  • The BoE May minutes showed no change in the voting pattern despite some expectations of one less member supporting a hike. As at the last meeting, Weale and Dale voted for a +25bps hike and Sentance voted for a +50bps hike.
  • UK jobless claims printed higher than expected at +12.4k vs. the flat consensus forecasted. The claimant count unemployment increased slightly to +4.6%, but the ILO unemployment was down to +7.7% from +7.8%.
  • Strauss-Kahn resigns from IMF, France’s Lagarde possible successor.
  • FT Deutschland reported that the ECB might cease to accept Greek sovereign debt if maturities were extended. Board-member Stark was quoted making similar comments at a public forum in Athens.
  • UK retail sales surprised with a strong +1.2%, m/m read ex-gas, above the +0.8% forecast. It was the strongest increase in over a year,
  • Spain-Germany 10-year spread exceeds April wides.

Americas

  • Russia’s central bank (CBR) reported in its annual report that its previously disclosed increase in allocation to the CAD in 2010 came at the expense of the GBP, rather than lowering allocation to EUR or USD.
  • Empire State manufacturing index extended its gains for a sixth-consecutive month (11.9 vs. 20.7), but at its slowest pace this year.
  • Despite a weaker than expected TIC’s data (+24b vs. +57.7b), overseas demand remains relatively strong. China was seen as a net seller of US treasuries in March.
  • Governor Carney stated that recent Canadian economic data continues to support the BoC’s near term outlook, noting that employment and inflation numbers were modestly stronger, while auto-sales and retail spending were a touch weaker. The Bank next meets on May 31st to determine their interest rate policy.
  • US home construction fell unexpectedly in April, an indication that the troubled housing sector will remain a drag on ‘the’ recovery. Construction of homes plummeted -10.6% from March to a seasonally adjusted annual rate of +523k.
  • US building permits came in weaker, falling to +551k from a downward revision of +574k in March.
  • US manufacturing production fell for the first time in ten-months (+0.0%) last month, as Japans natural disaster disrupted the auto-industry. Industries used +76.9% of their capacity vs. a +77% reading in March. Manufacturing capacity utilization dropped -0.4% to +74.4%, ex-autos, then factory production gained +0.2% in April.
  • In the FOMC minutes there was little different to what Bernanke commented in his post press appearance. The FOMC meeting showed that monetary policy tightening is still far down the line. Concerns about inflation were present, but with the dominating view still being rising energy costs are ‘transitory’.
  • Canadian wholesale trade was weighed down by lower import prices (+0.1% vs. +1.2%) which provided for a disappointing report.
  • US jobless claims fell for a second consecutive week (-29k to +409k), a tentative sign that the downward trend may have recommenced. The decline is being attributed to the ‘shake out of weather related problems, and supply shortages in Japan
  • US home resale’s unexpectedly declined last month on widespread weakness (+5.05m vs. +5.20m), despite a downward revision to the previous month and the second contraction in three-months. What is also disturbing is that the month’s supply moved back above 9 (highest print in six months).
  • For a second consecutive month the Philly Fed manufacturing index plummeted, falling from +18.5 to +3.9 in May.
  • Canadian retail sales disappointed -0.1% and Canadian inflation numbers came in softer with CPI +0.3% vs. +1.1%

ASIA

  • Japan core-machinery orders rose +2.9% in March, well above consensus expectations for an earthquake-induced 10% decline. This marks the third consecutive month of increased three-month momentum, but seems unlikely to fully reflect the impact from the mid-March earthquake.
  • Australia reported that the number of home loans contracted -1.5%, m/m, in March, vs. expectation of a +2.0% rebound, to below +45k (weakest number in ten years). However, investment lending rose +2.1%, almost offsetting the -2.3%, m/m, contraction in February.
  • RBA May minutes said that an appreciating AUD was helping to contain inflation pressures. However, the minutes also noted that higher interest rates may be required at some point if inflation was to remain consistent with medium-term goals.
  • Australia reported weaker than expected wage cost growth in Q1 of +0.8%, q/q, vs. +1.1% expected.
  • New Zealand input and output PPI rose to +2.2% and +1.7%, q/q, respectively. Consumer confidence rose to 103.2 from 101.4 in March, arresting the slide in confidence year-to-date.
  • Japan Q1 GDP fell by -0.9%, q/q, weaker than the -0.5% consensus. The decline was even larger when taking into account that Q4 GDP growth was revised down to -0.8% from -0.3%, q/q, previously. This would suggest an increasing divergence in BoJ and other G10 monetary policy.
  • New Zealand reported a larger budget surplus projection than the previous forecast easing concerns of sovereign rating downgrades.
  • BoJ left their monetary policy and its asset purchase plan unchanged. Stable BoJ policy leaves the yen vulnerable as US front-end rates rise.

WEEK AHEAD

  • Heads up for inflation and expectation reports from New Zealand and the UK
  • We get revised and preliminary GDP releases from the UK and US
  • Witness borrowing and expenditure data from the UK and Australia
  • Economic and business indicators from the German ifo and KOF in Switzerland
  • The US will deliver the volatile New Home Sales at the beginning of the week and we shut out the week with US Pending Home Sales

February 4, 2011

Week’s Review

Filed under: OANDA News, Uncategorized — Tags: , , , , , , , , , , , , , , — admin @ 5:13 pm

A messy NFP report has many scratching their heads. When Canada can create twice the number of jobs than its much bigger cousin we could be in big trouble. A Trichet ‘balanced inflation’ statement coupled with geopolitical risk premium being applied has taken the wind out of the EUR bulls sails this week. Below, we have some of the highlights of the week.


EUROPE

  • Manufacturing PMI releases across Europe surprised to the upside with Ireland (+5.6pts) and Italy (+4.2) posting sharp increases, driven by strong forward looking orders components. Elsewhere in the Euro periphery, Spanish new orders also improved but Greece remained the weak spot with January manufacturing PMI still deep in contraction territory. The Euro-zone final manufacturing PMI printed slightly better than flash estimate at 57.3 with the German index holding at an elevated level. The data supports ECB tightening prospects, but the financing stress, especially through March and April, will undermine ECB pricing again in the weeks ahead.

  • German joblessness fell further than expected last month (-13k) sending the German unemployment rate down to its lowest level since March 1992 (+7.4%).

  • In Switzerland, retail sales were particularly weak at -0.4% in December from revised +1.8% in November. Manufacturing PMI fell slightly in January, but orders and employment components were more resilient, posting a smaller rise for the month. Overall, leading indicators point to fairly robust growth in 1st Q.

  • Sterling all week got its bid from surprising headline prints. In the UK, January manufacturing PMI hit a record high at 62. New orders rose to 65.6 from 59.3 and employment rose to 58.8, from 57.8. Both indicators are at their highest levels in history and suggest that the manufacturing sector’s share of the private sector is creating jobs. Inflationary pressures are also strengthening as input prices surged to 84.9 from 80.3 and output prices to 62.8 from 58.6. The market anticipates that there is an increasing risk that MPC rhetoric continues to shift in a hawkish direction, especially after the UK services PMI rebounding sharply last month to 54.5 vs. 51.3. UK data this week suggests that the weaker 4th Q GDP growth had been largely weather related.

  • Spain is committed to achieving a fiscal deficit of +3% in 2013 and their deficit target in 2010 is in no doubt.

  • Ireland was downgraded one notch to A- by S&P’s, and a further downgrade is possible as the government tries to contain bank-rescue costs.

  • Germany is making its agreement to an expanded rescue effort for Europe’s most-indebted countries conditional on tighter finance controls.

  • Trichet did not disappoint, as expected kept base rates on hold at +1%. Most of the EUR’s early week gains had come on the back of investors believing that the recent hawkish comments from Trichet warrant a Euro-zone rate hike sooner rather than later. His communiqué was less hawkish even after a firm January CPI. ‘Inflation risks are balanced and could shift to the upside which would require careful monitoring’.

AMERICAS

  • The first of US job indicators got off on the correct foot, ADP +187k. The second, weekly jobless claims remain volatile, retreating -42k to +415k and reversing nearly 80% of the prior week’s gain.

  • The composite manufacturing and non-manufacturing ISM picked up in January, adding +2.3pts to 59.6.

  • The US service sector continues to accelerate, unexpectedly picking up last month (59.4 vs. 57.1). January marks the fifth consecutive month of accelerating activity and the highest index in six-years. It’s worth noting that the services sector accounts for two-thirds of the economy, a third of exports and 80% of all private-sector jobs. Most of the subcomponents posted gains, including new-orders, backlog of orders, current ‘production’ and employment. US momentum continues.

  • Canadian employment numbers blew analysts estimates out of the water, beating them by four times (+69.2k vs. +18.2k). The unemployment rate jumped two ticks to +7.8%. Just less than 2/3rd of the report was supported by the Public sector. Is that sustainable? The gain was split between full-time (+31.1k) and part-time jobs (+38.0k). Less of the headline job rise will flow through to an expansion of hours worked given the 55% weighting on part-time jobs.

  • The market witnessed a messy NFP release, with a disappointing headline print (+36k vs. +136k) and a market appealing unemployment rate (+9% vs. +9.5%). It was not a weather report despite headlines on the massive number of people who could not make it in to work due to snowstorms. Making it to work or not is not the relevant issue. It’s whether you were still counted on payrolls for any part of the reference period that matters. There are 43.8% of Americans or 6.2m been out of work for six-months or longer. It solidifies Bernanke’s QE2 agenda.

ASIA

  • A moderation in China’s PMI (-1 to 52.9) is reducing fears of an aggressive PBOC tightening cycle. Stronger European PMI’s are helping to support the EMEA currencies because of their dependence on core European growth. Historically, PMI on average rises slightly in the month of January, however, analysts believe that the Chinese New Year holiday may have been somewhat distorting.

  • Cyclone Yasi, the perfect storm, hit already flooded Australia, managing to miss many of the major centers. The cyclone will probably further dent March quarter GDP following the floods.

  • AUD has found some support from a surprisingly hawkish Statement of Monetary Policy from the RBA. The Central Bank has tweaked this years forecast, but, crucially, left its medium-term forecasts for inflation and GDP unchanged at rates that point to further policy tightening over the next year. Policy makers are ‘looking through the near-term flood affect, focusing on continued tightening in the labor market and the investment surge. Pricing for the RBA over the next year rose another +5bps to +37bps Geopolitical reduced risk sentiment has pared the AUD advance.

  • BOJ officials are trying to ‘jawbone’ Yen lower. Hidetoshi Hamezaki said they are watching the FX markets ‘carefully’ for they are having a toxic effect upon Japanese corporate profits.

  • Chinese New Year holidays

WEEK AHEAD

  • The US Treasury department will sell $72b new bonds next week, matching market consensus ($32b-3’s, $24-10’s, $16b-30’s).

  • UK will be the focus of the week in Europe with its production numbers, Asset Facility and the BOE rate announcement.

  • We will get building permits and housing starts out of Canada, ending the week with its Trade number.

  • Bernanke is due to testify on the economic outlook and monetary and fiscal policy before the House Budget Committee. We will finish the week with the US’s Trade Balance and Preliminary UOM Consumer Sentiment release.

  • Down-under, the market will focus on the Aussie job numbers out mid-week.

July 30, 2010

Tough Love finally for the EUR

Filed under: OANDA News — Tags: , , , , , , , , , — admin @ 10:14 am

Month-end requirement is distorting some of the price action, especially when it comes to the JPY. Economic releases O/N showing that Japan’s growth slowed and unemployment rising should not be capable of pushing the currency to trade at new yearly highs vs. the dollar. Even the bond market was busy, selling the belly of the curve to the Japanese, again pushing prices out of whack. Price action involving month end requirements is always confusing. The market is caught flat-footed. It had been anticipating further broad based dollar selling for US hedge rebalancing. The EUR nosedive will be attributed to the markets nervous reaction to global bourses back peddling. Will the US 2nd Q GDP confirm the markets bearish view of their economy? No matter what, the color red is prominent on dealers trading books already this morning.

The US$ is weaker in the O/N trading session. Currently it is lower against 111 of the 16 most actively traded currencies in another ‘whippy’ trading range.

Forex heatmap

Yesterday’s US jobless claims came in bang on market expectations (+457k). Many had believed that ‘the seasonals’ would push claims slightly above the trend last week. The four-week average for claims (a stronger gauge of employment trends) fell -4.5k to +452.5k, the lowest level in three months. Even continuing claims came in line with expectations. The seasonally adjusted series for claims happened to advance by +81k to +4.565m vs. a forecast of +4.6m. Digging deeper, the Fed benefits fell by -269k vs. a projected decline of -300k. It’s worth noting that initial claims are about -21% below last years level, while continuing claims is about -26% less. After yesterday’s claims data analysts expect the labor force participation rate will increase, which should push the US unemployment rate higher to +9.7% vs. +9.5% next week. Market consensus for payrolls stands at +110k thus far.

The USD$ is higher against the EUR -0.18% and lower against GBP +0.14%, CHF +0.40% and JPY +0.55%. The commodity currencies are mixed this morning, CAD +0.17% and AUD -0.17%. Yesterday’s Canadian Industrial Product Price Index (IPPI) unexpectedly slipped -0.9% last month, led by petroleum and coal products (-2.3%) and primary metal products (-2.9%). The Raw Materials Price Index (RMPI) also happened to decline -0.3%, largely due to lower prices for non-ferrous metals and animals products. It was the second consecutive monthly decrease. For the IPPI, the 3-month moving average suggests that core-producer prices (ex-food and energy) continue to trend sideways.
The CAD weakened vs. its southern neighbor as equities and crude happened to reverse its earlier advances and in turn temporarily reduced the appeal of higher-yielding currencies. For most of this week the loonie has performed better on the back of stronger commodity and equity prices. Last week the BOC tightened rates 25bp. The interest rate differential scenario seems to be getting the biggest support for now, despite it being a ‘dovish hike’. Governor Carney stated that there was no pre-ordained path for interest rates in Canada. According to his dovish communiqué ‘the global economic recovery is proceeding, but, is not yet self-sustaining’. The 25bp hike last week will ‘leave considerable monetary stimulus in place’, with both the core and total inflation to advance at about a +2% annual rate through 2012 (within their target zone). Some will argue that with signs of a significant slowdown underway in the US, it’s possible that the BOC may be persuaded to move back to the sidelines on the Sept. go-around. Carney has given himself the latitude to step back and assess global growth for the 3rd Q. Medium term momentum points to a stronger loonie, but, that all depends on whether the big dollar is coveted for risk aversion trading strategies again. On dollar rallies there are CAD buyers.

It seems that the JPY has dominated all trading sessions thus far and the higher yielding commodity currencies have managed to be included. The AUD happened to pare more of this weeks gain on future reports expected to show that China’s growth is slowing and on last nights data showing that bank lending grew last month at the weakest pace in seven months. China is Australia’s largest trading partner. Overall, there is still a sign of concerns that the world economy is in a fragile recovery phase. The Kiwi has been under pressure since and falling against all its major trading partners. Earlier this week and after a surprisingly weaker than expected CPI headline print (+0.6% vs. +1%), the AUD was pressurized as the futures traders priced out an RBA tightening next week. This does not rule out the possibility that Governor Stevens will not hike further in the calendar year. Recently, policy makers stated that they are ‘reinstating their view that domestic growth will be about trend’ and are ‘not alarmed by the global demand backdrop’. In retrospect, policy makers remain ‘very upbeat’. Because of equities actions, the market is a cautious buyer on pullbacks, wary that the recent strong rally technically may be overdone (0.8987).

Crude is little changed in the O/N session ($77.76 down -60c). Crude prices happened to ‘too and fro’ yesterday. At one point it aggressively advanced on the back of a weaker dollar and an upbeat equity market. But, that scenario changed and pared the commodity’s advances caused by the signs that a slowing economic recovery in the US will limit fuel consumption in the world’s second-largest energy user. The weekly EIA report happened to add to the commodity’s bearish sentiment. The inventory data stumped all market expectations with its surprising increase. The headline print had stocks increasing +7.3m barrels vs. a market expectation of +1.7m. Couple this with last weeks +3.1m gain and we have a market flushed with the ‘black-stuff’. Despite global demand slowly improving it’s currently have little effect on supplies. Somewhat of a surprise was the lower than expected fuel inventory gains. Gas stockpiles rose by +100k barrels, below expectations for a build of +500k, while distillate fuels advanced by +900k barrels. Analysts had been expecting an increase of +2.1m barrels. The refinery utilization rate also happened to fall to 90.6%, below the expected 91%. The build in inventories even with some weather related production shut downs continue to paint a bearish fundamental picture for the energy sector. Of late, the commodity has been trading in a tight $5 range. The ‘historical’ US summer driving season is over, coupled with a lack of tropical activity in the Gulf are ingredients for justifiable weaker energy prices.

Gold gained for a second consecutive day on speculation that prices near a three-month low will spur increased physical and investment demand. Technically some believe that this week’s decline has been overdone. All week investors have been caught wanting higher risk and seeking higher returns, and owning gold is currently not the answer. With the EUR continuing to stabilize against most of its trading partners had the market selling the asset class. Bigger picture, technically, the bullish sentiment had been on hiatus with profit taking testing the medium term support levels. Fundamentally, in the short term the metal will find it difficult to rally as this is the ‘slowest’ season for physical demand. Technical analysts are trying with might to convince the market that these levels provided a good buying opportunity. The current problem is that the market has built in a large insurance premium over the past few months and with some market stability nervous investors will want to lighten their positions even more. Year-to-date, the commodity has gained +5.8% and is in danger of further losses ($1,171 -60c).

The Nikkei closed at 9,537 down -159. The DAX index in Europe was at 6,112 down -22; the FTSE (UK) currently is 5,295 down -19. The early call for the open of key US indices is higher. The US 10-year eased 4bp yesterday (2.97%) and is little changed in the O/N session. The last of this week’s $104b auctions disappointed. The $29b 7-year sale was 2.78 times subscribed, weaker the four auction average of 2.83. Even the indirect bidders disappointed, taking down 42% as opposed to the 50.9% four-auction average. The direct bidders happened to take down 9% vs. the 10.4% average. Historically, the 7-year basket is always a difficult sell and lying on top of historical low yields does not make it any easier. However, recently the 5-7 year basket has been somewhat attractive to risk adverse trading strategies as traders do not want to be caught too far out the curve. Demand is there if equities underperform. The market will take its cue from this mornings GDP numbers.

July 29, 2010

Dollar Bashing Favors EUR for Now

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

If you gave the EUR its head where would it go? Prior to this morning we had been witnessing an intraday carbon-copy trading range, one that gyrated around the psychological 1.3000 handle. It seemed to be a level no one wanted to get involved in. However, renewed fears of a double-dip recession in the US has pushed the dollar lower and finally helped the EUR to establish itself above the 1.3000 mark this morning. Expect upward momentum from here to be limited ahead of tomorrows 2nd Q US GDP figures. Yesterdays US data has knocked consumer confidence again, pushing treasury yields lower and losing investor support for the ‘buck’. Lack of further data this morning should limit the EUR gains unless investors all of a sudden become technically bullish at the top!

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

Forex heatmap

Yesterday’s durable goods data in the US only provided more pain for the dollar bulls. Factories posted accelerating declines last month, the second consecutive month of declines, following 6-months of gains. The headline new orders fell -1%, m/m, and the biggest dip in 12-months, while the core-new orders fared no better, ex-transport it fell -0.6%. Digging deeper, the transportation sub-categories was the culprit, retreating -2.4% over the past 3-months, led by commercial aircrafts. Analysts note, that a stronger motor vehicle print (+2.5%) was able to offset some of the negativity. Market consensus was looking for a positive print in the core-durable category (+0.4%). However, declines in computers (-1.9%), machinery (-0.7%) and primary metals (-2.0%) pushed the headline print into the red. Analysts note that looking at the 3-month moving average has core-orders very much trading sideways. Than been said, various reports like leading indicators and business surveys suggest that orders are expected to recover and strengthen in the medium term.
An interesting note and a proxy for business sentiment is the booking print for non-defense, ex-transport capital goods increasing +0.6%, m/m. Finally, with the inventory to sales ratio languishing in the mid 1.55 range is calming fears that inventories are running ahead of shipments.

There were no marked surprises in yesterday’s beige book. The Fed collectively reaffirmed that the recovery, while still moving forward, ‘is progressing at a slower pace than earlier in the year’. The report recorded improvements in the service industries, an increase in tourism, an expansion of manufacturing and progress in labor markets. Capital markets were probably taken back by the ‘lack’ of emphasis on stress, supported by the recent discouraging economic data. There were no suggestions of further deterioration. Last week, Bernanke said policy makers ‘expect continued moderate growth, a gradual decline in the unemployment rate and subdued inflation over the next several years’. What can we take away from the report? The US economy is in a ‘very slow recovery mode and in some districts it got even slower’.

The USD$ is lower against the EUR +0.32%, GBP +0.22%, CHF +0.20% and JPY +0.14%. The commodity currencies are stronger this morning, CAD +0.45% and AUD +0.88%. The CAD by day’s end yesterday weakened vs. its southern neighbor as equities and crude happened to reverse its earlier advances which have temporarily reduced the appeal of higher-yielding currencies. This morning’s market has given up on that trading concept. The loonie certainly has support in its corner. For most of this week the CAD has performed better on the back of stronger commodity and equity prices. Last week the BOC tightened rates 25bp. The interest rate differential scenario seems to be getting the biggest support for now, despite it being a ‘dovish hike’. Governor Carney stated that there was no pre-ordained path for interest rates in Canada. According to his dovish communiqué ‘the global economic recovery is proceeding, but, is not yet self-sustaining’. The 25bp hike last week will ‘leave considerable monetary stimulus in place’, with both the core and total inflation to advance at about a +2% annual rate through 2012 (within their target zone). Some will argue that with signs of a significant slowdown underway in the US, it’s possible that the BOC may be persuaded to move back to the sidelines on the Sept. go-around. Carney has given himself the latitude to step back and assess global growth for the 3rd Q. Medium term momentum points to a stronger loonie, but, that all depends on whether the big dollar is coveted for risk aversion trading strategies again. Currently, some M&A GBP/CAD activity is temporarily underpinning the currency.

In the O/N session, the RBNZ hiked rates by +25bps, albeit with a more dovish statement than expected. The hike was fully priced into the market. The RBNZ noted that while it will continue to remove accommodative policy conditions, the ‘pace and extent of further increases is likely to be more moderate than was projected in the June Statement’. Overall, there is still a sign of concerns that the world economy is in a fragile recovery phase. The Kiwi has been under pressure since and falling against all its major trading partners. Unlike the AUD which has grinded higher as investor’s technical risk attitude increases. Earlier this week and after a surprisingly weaker than expected CPI headline print (+0.6% vs. +1%), the currency happened to fall as the future traders priced out an RBA tightening next week. This does not rule out the possibility that Governor Stevens will not hike further in the calendar year. Since then the currency has rallied after regional bourses advanced. Recently, policy makers stated that they are ‘reinstating their view that domestic growth will be about trend’ and are ‘not alarmed by the global demand backdrop’. In retrospect, policy makers remain ‘very upbeat’. Because of equities actions, the market is a cautious buyer on pullbacks, wary that the recent strong rally technically may be overdone (0.9026).

Crude is higher in the O/N session ($77.17 up +18c). Crude prices fell for a third day on signs that a slowing economic recovery in the US will limit fuel consumption in the world’s second-largest energy user. China is now the newly crowned number one consumer. Yesterday’s weekly EIA report happened to add to the commodity’s bearish sentiment. The inventory data stumped all market expectations with its surprising increase. The headline print had stocks increasing +7.3m barrels vs. a market expectation of +1.7m. Couple this with last weeks +3.1m gain and we have a market flushed with the ‘black-stuff’. Despite global demand slowly improving it’s currently have little effect on supplies. Somewhat of a surprise was the lower than expected fuel inventory gains. Gas stockpiles rose by +100k barrels, below expectations for a build of +500k, while distillate fuels advanced by +900k barrels. Analysts had been expecting an increase of +2.1m barrels. The refinery utilization rate also happened to fall to 90.6%, below the expected 91%. The build in inventories even with some weather related production shut downs continue to paint a bearish fundamental picture for the energy sector. Of late, the commodity has been trading in a tight $5 range and failing to break out on the top side last week coupled with this week’s stock report will have traders reluctant to buy the dip short term. The ‘historical’ US summer driving season is over, coupled with a lack of tropical activity in the Gulf are ingredients for justifiable weaker energy prices.

It took its time. The technical support levels for gold gave in (the 100-day moving average $1,181) earlier this week. Once through, the market aggressively dumped some of their weaker long positions. Yesterday, the commodity fell to its lowest price point in 3-months, as the rally in global equities this week has eroded demand for the precious metal as an alternative investment. Some investors have been caught wanting higher risk and seeking higher returns, and owning gold is currently not the answer. With the EUR continuing to stabilize against most of its trading partners has accelerated the selling of this asset class. Bigger picture, technically, the bullish sentiment had been on hiatus with profit taking testing the medium term support levels. Fundamentally, in the short term the metal will find it difficult to rally as this is the ‘slowest’ season for physical demand. Technical analysts are trying with might to convince the market that these levels provided a good buying opportunity. The current problem is that the market has built in a large insurance premium over the past few months and with some market stability nervous investors will want to lighten their positions even more. Year-to-date, the commodity has gained +5.8% and is in danger of further losses ($1,169 +$7).

The Nikkei closed at 9,696 down -57. The DAX index in Europe was at 6,214 up +36; the FTSE (UK) currently is 5,353 up +34. The early call for the open of key US indices is higher. The US 10-year eased 5bp yesterday (3.00%) and is little changed in the O/N session. As to be expected, dealers will use any excuse to cheapen up the curve ahead of an auction to absorb product. This week the market is taking down $104b’s worth of product. With the benign 2-years already completed, yesterday’s $37b 5’s was better received, perhaps on the belief that the beige book was to report, as expected, that the US economy is weakening, reinforcing expectations for the Fed to keep interest rates at a record low. The bid-to-cover ratio was 3.06 vs. the four auction average of 2.65. Notes were sold at 1.796% and below the 1.806% WI’s. Indirect bids took down 47% vs. the 41% four auction average. Direct bidders took 11%. The market will now have to brace itself for the last of this week’s auction, $29b of 7’s. Demand is there if equities underperform.

February 12, 2010

European banks have a $2.3 trillion PIIGS stake, EUR cannot fail

Filed under: OANDA News — Tags: , , , , , , , , , , , , — admin @ 3:50 am

Let’s put some things into perspective. According to the BIS, banks in Germany and France have a combined exposure of $119b to Greece and $909b to the other four members that make up the acronym PIIGS. Collectively, European banks have $253b at stake in Greece and a whopping $2.1 trillion with the other troubled sovereigns. The net effect, Greece is not the problem. It’s the whole European banking sector that’s the concern. It is no wonder that European finance ministers are supposedly ‘stabilizing the situation’. How does one reach ‘an accord’ with figures like these?

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

Forex heatmap

Some bright news on the US jobless claims front yesterday played second fiddle to the EU’s summit objectives. It was a pleasant surprise to witness fewer Americans than anticipated filing claims for unemployment insurance. First-time claims dropped by -43k to a seasonally adjusted +440k, the lowest total in over a month. With some of the backlog administrative issues out of the way, the headline print indicates that companies are possibly nearing the end of their major cuts as the economy starts to show signs of sustainable growth. The number of people claiming benefits for more than a week fell by nearly -80k to +4.5m (the fewest in 12-months). This sub-category does not include individuals receiving extended benefits. Also surprising was the number of individuals collecting extended payments had also dropped, by -171k to +5.68m. With the fastest pace of growth in 6-years last quarter is a strong indication that the US economy may be on the verge of adding jobs as companies will need to replenish inventories to keep pace with future sales forecasts. In the big picture of things, a pessimist will try and convince others that the job scenario ‘is not deteriorating nor is it improving’.

The USD$ is currently higher against the EUR -0.41%, CHF -0.52% and JPY -0.49% and lower against GBP +0.13%. The commodity currencies are mixed this morning, CAD +0.03% and AUD -0.13%. For a third consecutive day and the longest winning streak in 5-week’s yesterday, the loonie experienced ‘one way traffic’ as speculators coveted growth currencies on the tentative support by EU officials for Greece. Technically any positive news from Europe had risk appetite returning to the market. On a cross related basis, the currency has certainly outperformed most of its other G7 members. One gets the feeling that the domestic currency may be overbought, despite commodities also advancing. Yesterday, it was the strongest performing currency and the intraday technical charts indicate that there is strong support for the greenback at we approach ‘parity’. Despite some of the European uncertainty being lifted, a definitive proposal for Greece will probably endorse some domestic currency profit taking. The old adage of ‘buy the rumor sell the fact’ tends to be a good percentage bet.

Australia added three times as many jobs expected last month earlier this week (+52.7k vs. +15k) and lowered their unemployment rate by 2-ticks to +5.3%, a new 11-month low. Australia’s ‘hiring boom’, the largest in 5-years is expected to pressurize the RBA to resume their policy of hiking borrowing costs to prevent wage increases from feeding inflation. Futures traders have doubled their bets that the bank will raise the O/N lending rate by +0.25% to 4% at next month policy meeting. This week’s surprising release indicates how tight the employment market is down-under, since last Aug. the economy has managed to add +195k new jobs. The AUD remains better bid on the back of the Governor Stevens stating that ‘holding down interest rates (3.75%) for too long may help create asset bubbles’. Coupled with Chinese bourses finding some traction has given growth currencies a leg-up this week. With a 44% chance of a rate hike priced in for Mar. 2nd, expect investors to be better buyers on pull backs.

Crude is higher in the O/N session ($74.82 up +42c). After today we will be back on track with the weekly EIA report. The Government shutdown in Washington, due to weather related issues, delayed the previously scheduled release to this morning. Like most commodities, prices have found some positive traction on stronger global fundamentals. Crude managed to advance for a fourth consecutive day yesterday after the IEA raised its forecast for global demand for the remainder of this year. They increased their estimates for world consumption by +170k barrels a day to +86.5m ‘on accelerating growth in emerging markets’. This is a net +1.8% increase over last year’s consumption levels. As expected by most analysts, they did not revise higher consumption in the OECD region, but ‘adjusted emerging market growth up in China and the rest of Asia on higher GDP’. This morning’s delayed report is expected to show that stockpiles of crude grew by +1.5m barrels. The already released weekly API reported that US crude inventories climbed to its highest level in nearly 4-months (gained +7.2m barrels to +337.6m), however, this has not been a reliable bellwether chart recently. Last week’s EIA headline recorded a surprisingly large build, crude stocks advanced +2.3m barrels, beating expectations for a ‘little change’. Again, for a second consecutive time, the crude print was the only bullish component of the report. Can crude finish out the week on an upswing? Momentum is leading us that way, any significant build and profit taking will be a priority.

Yesterday, the yellow metal found some luster, climbing the most in over a week as signs of an economic recovery boosted demand for the commodity. At the same time some investors sought an alternative to holding EUR’s on concerns that the Greek budget deficits may widen. Stronger fundamentals out of both Australia and China gave gold the initial leg up from just above the week’s low, while a brokered accord, short on details, had nervous investors seeking security in the asset class. Where too from here? That depends on the convictions of one’s own risk tolerance. With the positive Australasian outlook and the remaining sovereign debt questions, one should expect better buying on dips to remain in play for the time being ($1,089).

The Nikkei closed at 10,092 up +128. The DAX index in Europe was at 5,548 up +45; the FTSE (UK) currently is 5,191 up +25. The early call for the open of key US indices is lower. The US 10-year note backed up 6bp yesterday (3.72) and eased 3bp in the O/N session (3.69%). It was like the perfect storm occurring for the last of this week’s record bond auctions. Traders certainly had the best of excuses to cheapen up the curve accordingly when European leaders publically stated that they have reached an ‘accord’ on Greece’s debt crisis. The US long bond or 30-year treasuries touched a four-week high as a record-tying $16b auction yielded lower-than-average demand. All three-issues this week came with a ‘larger tail’. The indirect bids (proxy for foreign demand and Cbanks) was low at 29% vs. 40.7% in Jan and 40.2% in Dec. On the flipside, direct bids were high at 24% vs. 4.9% in Jan. The bid-to-cover ratio was 2.36 vs. 2.68. Again it seems that nervous investors want to stay away from the ‘expensive’ long end of the US curve, perhaps apprehensive about tying money up for so long. In hindsight, this week’s auctions are an expensive issue to own, expect better selling on upticks.

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