ECB and BOE to follow suit?

Cirque du soleil type balancing acts remain the order of the day for Cbanks. This morning the spotlight will be focused on both the ECB and BOE. Consensus has them taking the path of least resistance and following the Fed’s lead of no action earlier in the week. This could be a day of ‘selling the fact’, of course depending on Trichet’s (loosely termed) transparent communiqué at 8.30EST.

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

FX Heatmap August 7th, 2008

With no economic data of note for the US yesterday, traders and investors struggled with global growth issues. Spiraling commodity prices continue to lead the way and provide support for the greenback vs. most of its major trading partners. The Fed’s decision to remain on hold this week (2.00%) highlights the tenuous balancing act that Bernanke and company are trying to maintain between growth and inflation. Standing pat for two decisions in a row was the only true option they had. If they had hiked monetary policy, then credit liquidity issues would become more heightened again. The squeeze could not be financed by the all ready depleted balance sheets of financials, thus by default affect further growth at a higher borrowing cost. A hike would have cut off any remaining circulation to the US economy body. An ease may have stimulated the weak economic growth, but, at the risk of making inflation worse. Commodity prices have aided their decision, a 20% decline from all time highs will eventually percolate throughout the economy. This will hold true if no other geo-political variables impede recent price movements. Today, we have a double header with both the ECB and BOE announcing their rate decisions. Since the last announcements, global growth has remained questionable with one country after another announcing a bleaker outlook for the remainder of the year. It is widely anticipated that both Cbanks will announce a ‘no change’ to their policies (4.25% and 5.00% respectively).

The US$ currently is lower against the EUR +0.43%, GBP +0.12%, CHF +0.43% and JPY +0.28%. The commodity currencies are stronger this morning, CAD +0.24% and AUD +0.31%. Yesterday’s Canadian Ivey PMI showed that Canadian businesses and government spending increased at a slower pace last month (65.5 vs. 69.6), as expected, but better than anticipated. It’s worth noting that the price sub-component declined from its 10-year highs (80.9 vs. 89.4), in accordance with the BOC benign inflation figures of late. The job component did not paint a rosier picture (46.3 vs. 58.2), remember the report is not seasonally adjusted. The loonie continues to trade under pressure due to its strong correlation with commodity prices. The Canadian FI market believe the BOC will have room to ease again before year end amid concerns that widening credit-market losses will weigh on global growth and prompt governor Carney to reduce borrowing costs (3.00%). With the Fed remaining hawkish about inflation, the possibility of the Fed hiking rates over the past month has hindered the loonie strength (interest rate differential). So far this year the loonie has lost nearly 5% vs. the greenback as precious metals and oil retreat. One can expect the CAD$ to remain under pressure in the short term, as investors continue to be better buyers on pull backs.

Stronger economic data from down under has provided the AUD$ some renewed strength, albeit temporarily (0.9111). Employment numbers last month rose +10.9k vs. an expected +5k. But, like all commodity currency, it continues to be susceptible to global commodity prices, which seem to have peaked (so far) ahead of this week Olympics. With commodity prices under constant pressure, short term selling of the AUD$ remains the name of the game.

Crude is higher O/N ($119.34 up +76c). Crude prices remain weak after yesterday’s unexpected jump in weekly inventory levels as reported by the EIA. Crude stocks rose +1.61m barrels to 296.9m, w/w, vs. an anticipated fall of -200k barrels. Other variable had earlier contributed to the stronger underlying bid. As pointed out here a week ago, the market was to expect Iran to remain on the radar. As anticipated, the US state department announced yesterday that a group of world powers would pursue further ‘punitive’ sanctions against Iran. It was a foregone conclusion that Iran would snub UN demands. They do not want to be dictated to in respect to their own nuclear uranium enrichment program. This remains a stalling tactic on their behalf and a ‘rising of plumage’ from a UN perspective. An explosion at a BP refinery in Turkey did not help matters, militant action was denied, but, never the less, global militant activity remains a concern. Global growth issues continue to trump all other issues. Economic data so far this week has pointed to a global slowdown, the services sectors in the US and UK contracted last month while European retail sales fell the most in a dozen years. Demand numbers remain weak in the US due to elevated gas prices. Some investors are speculating that high prices and slower US economic growth will further reduce demand in the US in the medium term (the world’s largest consumer) and hence oil prices. Technical support levels are under threat now that future prices have penetrated the $120 level. The market has come a long way rather quickly, a technical bounce is to be expected. Gold had an initial bounce in yesterdays morning’s session due to technicals, as speculators believed that the ‘yellow metal’ loosing 4% of its value in the last 3-trading sessions was a ‘tad’ overdone. But, ended up extending its slide another day ($889) as oil prices eased once again. Look for it to bounce in this morning’s session.

The Nikkei closed at 13,125 down -130. The DAX index in Europe was at 6,587 up +25; the FTSE (UK) currently is 5,516 up +30. The early call for the open of key US indices is lower. Yields of the US 10-year backed up 4bp yesterday (4.05%) and are little changed O/N. Treasuries prices initially eased as traders cheapened up the curve ahead of 10 and 30-year government product hitting the streets yesterday and today ($17b and $10b respectively). Investors continue to remain concerned that the Fed may not be able to contain inflation despite the US economy slowing, but with equities under pressure had some investors looking for cheaper yield.

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