Dean’s FX 6th June|Employment D-Day!

The USD$ is stronger in the O/N trading session. Currently it is higher against 11 of the 16 most actively traded currencies in another ‘subdued’ trading range ahead of North American employment reports.

FX Heatmap June 6th, 2008

Trichet remains hawkish and thankful to Bernanke that he was supporting a stronger greenback. As anticipated by most, both the ECB and BOE kept rates unchanged yesterday (4.00% and 5.00% respectfully). Trichet went a step further than Bernanke and implied that policy makers may raise interest rates as soon as July after increasing the inflation forecast for this year and next. He said it ‘was possible after having carefully examined the situation that they could decide to move their rates for a small amount at the next meeting’. To date the ECB has remained independent from both the FED and BOE easing policies. Euro-land economy is expected to grow in the range of +1.5-2.1% (mid-point 1.8%) and between 1.0-2.0% in 2009. This is an upside revision compared to the previous Mar. forecasts mainly due to the stronger than expected growth in 1st Q. Despite the EUR strength which is hindering exports and the tighter lending conditions and weaker consumer morale at home, the ECB’s view that both domestic and foreign demand will support ongoing growth in 2008 remains unchanged and provides the basis for the consideration of a rate hike. But, is not the inflation headline been driven by oil and food prices, and manipulating rates cannot do too much to the CPI headline. It seems obvious now that Bernankes speech re-dollar being weak and a problem for inflation was calculated as a precursor to Trichet (otherwise the USD$ would have been in freefall). The million dollar question of course is if the masses believe that the ECB will hike and will the Fed be far behind?

The BOE has its own political issues; it seems that the ‘main event’ will be an ailing unpopular PM Browne vs. and independent BOE governor King and an ailing UK economy. Despite an economy slipping rapidly into a recession, an autonomous King has kept rates unchanged (5.00%) to do battle with inflation, while a weak PM would have most likely preferred an easing bias to boost party popularity. Earlier this month King signaled that the UK economy may face a recession. Policy makers can do little to prevent as he predicted inflation is to exceed 3% for ‘several quarters’ (well above the BOE band).

In the US, mortgage delinquencies continue to rise, surging to 6.35% for the 1st Q (already passing the record high in 1985). Probably more frightening was that the pace of deteriorating accelerated. Digging deeper, one notice that prime mortgages are starting to deteriorate more rapidly, while adjustable rate mortgages continue to be worse than fixed rate. Conclusion, excess supply of houses will continue to put further downward pressure on prices and erode consumer wealth even further.

Initial claims yesterday provided some support for the USD$ and prevented it being a ‘one directional gig’ for the EUR. Initial jobless claims were +357K vs. and anticipated +375k w/w, while continuing claims remained elevated at 3093k. Initial claims were the lowest in 6-weeks. While continuing claims dipped slightly from last week’s level, which was the highest since Feb. 2004. This morning we have the mighty NFP data and market consensus has another negative print in mind (>-55k).

The US $ currently is higher against the EUR -0.04%, GBP -0.10%, CHF -0.17% and JPY -0.13%. The commodity currencies are weaker this morning, CAD -0.03% and AUD -0.13%. The loonie has not received any favors from both Bernanke and Trichet being so hawkish with respect to inflation dangers. Despite stronger Canadian economic data yesterday the CAD$ has continued to under-perform ahead of this mornings employment report. To date, it has declined -2.5% so far this week on concerns that slowing economic growth will prompt the BOC to cut borrowing costs next week by -25bp (3.00%). Both analysts and traders expect a softer number at 7am EST (+10k vs. +19k). Canadian data yesterday showed that Buildings permits surprised the markets on the upside, increasing by +14.5% in April vs. expectations of a +0.5% gain. While these gains suggest we will see some new housing activity going forward, some of this growth is on the back of declines experienced at the beginning of the year. Thus, despite the fact that permits surged the overall trend remains to the downside. The Ivey PMI index rose to +62.5 from +57.6 m/m, but, the index is not seasonally adjusted. Canadian positive economic data is definitely commodity export related and if one excludes this variable from the growth equation then we have an underperforming manufacturing weakened economy that requires some sort of stimulus to revive it. Week over week in Ontario further job losses continue to grab the headlines. Expect traders to continue to look for better levels to sell the currency. Economic data remains strong ‘down under’ with growth number being twice as strong as anticipated. This has investors believing that the RBA will eventually hike again (7.25%), combine this with robust commodity prices, expect traders looking to buy the AUD$ on pull back for now (0.9571).

Crude is higher O/N ($129.56 up +177c). It was not surprising to see Crude oil prices rally yesterday after the greenback fell vs. the EUR on signs that the ECB may increase interest rates as early as next month to curb inflation. The strong inverse relationship remains in tact between the black-stuff and the USD$. This year, investors looking to hedge against the USD$ weakness have helped lead commodities higher. Earlier this week the EIA report reveled larger than expected US fuel supply gains. Gas stocks rose +2.94m barrels to 209.1m last week, while inventories of distillate fuel (includes heating oil and diesel), rose +2.28m barrels to 111.7 million. But, fuel demand continues to remain down y/y. Refineries are making fuel, but no one wants to buy it. Analysts now believe that demand will be weaker than initially anticipated. Fuel consumption is averaging +20.4m barrels a day over the past month, that is down -1.1% y/y. Clearly consumers are responding to higher prices. For instance the airline industry is aggressively paring back routes and eliminating jobs to cope with higher prices. So far this year the black-stuff has appreciated close to 35%. Gold remained under pressure yesterday, but has found its legs this morning during the London session ($884). Investors are betting on a weaker NFP number and are hedging themselves via the yellow metal.

The Nikkei closed at 14,489 up +148. The DAX index in Europe was at 6,978 up +36; the FTSE (UK) currently is 6,060 up +65. The early call for the open of key US indices is higher. Yields of the US 10-year bond backed up 5bp yesterday (4.03%). Treasuries extended their losses after initial jobless claims unexpectedly dropped last week, indicating that the US economic slowdown may not be worsening. With US equities gaining some ground, investors tended to shy away from the FI asset class for surety reasons. Traders will wait for this morning’s employment data to provide more color.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell