King, Trichet expected to be aggressive this week. ‘Big Dollar’ safer heaven?

Risk aversion has been suspended, as higher yielding currencies advance overnight. European policy makers are touting a recession, will their rate cuts be swifter and deeper this week? Global optimism waits for the ‘new’ US president to be anointed tomorrow, while Capital markets reluctantly wait for the dreaded NFP this Friday.

The US$ is weaker in the O/N trading session. Currently it is lower against 10 of the 16 most actively traded currencies, in another ‘whippy’ trading range.

FX Heatmap November 3th, 2008

Have consumers thrown in the towel? On Friday, US data affirmed how negative consumer’s actions are becoming. Consumer spending took another dive in Sept., and the purchasing managers’ survey showed the biggest deterioration in 40 years. New historic records are been made and broken each week. Personal income rose mildly for the month (+0.2%), but spending dropped -0.3% as the consumer saved more to offset increased layoff fears and financial market uncertainty. Consumers saved rather than consume, as illustrated by the increase in the savings rate to +1.3% (a positive development for the future, just not now). On the other hand, consumer prices accelerated slightly but analysts expect it to ease over the coming months. Personal income only rose +0.2% vs. +0.4% in Aug., as wages and salary gains have moderated in the current deteriorating economic environment. The theme of save, save, save, rather than consume will dominate for a long period. On the inflation front, the headline PCE rose +0.1%, keeping the y/y rate at +4.5% (partly due to the effects of Hurricane Ike). While core-PCE (the Fed’s preferred measure) rose +0.2%, keeping the core anchored at +2.5%, y/y. Analysts do not expect inflation to be an issue for a year at least. Job losses, higher food and fuel costs, combined with falling property values has brought an end to the longest expansion in ‘US spending on record’ and tomorrows Presidential election will be won on themes of change and hope, not just economics. The collapse in lending and sentiment last month has seen the consumer hunker down and retreat. Obama a favorite by polls (for the longest 2-year job interview) will provide some global optimism. But, how much of the ‘good’ news has been priced in the USD and equities already?

The US$ currently is lower against the EUR +0.67%, GBP +0.75% and higher against CHF -0.04% and JPY -0.65%. The commodity currencies are stronger this morning, CAD +1.18% and AUD +1.75%. Interest rate differentials, global equities and commodities propelled the loonie to its biggest gain last week in 4-decades, but, the month saw the currency posted its worst monthly performance in 6-decades as commodities slumped. Canadian fundamentals remain weak. On Friday, the loonies’ trading range had been manipulated by year end and month end squeezes from both the long and short perspective. The Canadian GDP could have been worse, but there’s little comfort in the details, a decline for Aug. Real-GDP fell -0.3%, year-to-date four out of eight months have posted lower figures, one was flat, and only three months were up. Analysts expect the downside risks to give way to a broader weakness next year. Digging deeper, one noticed a number of sectors retreated on a price-adjusted volume of activity basis (mining and energy, construction and manufacturing etc.). While the public sector, with accommodation and food services contributed to growth. Market reaction has so far been fairly mild, given that the figures were generally as-expected. The theme of last week, too far, too fast was definitely a concern, traders continue to see better levels to own the currency despite the strength of the one directional play. Now that the Fed eased 50bp, it’s anticipated that the BOC will need to extend interest-rate cuts (2.25%) in the face of slowing economic growth. Expect the employment data to be the highlight of the week.

In recessionary times higher yielding commodity assets suffer and the AUD$ is no exception. But, in the O/N session the currency advanced as the Australian bourse advanced on anticipation interest-rate cuts worldwide will bolster global economic growth (0.6778). It’s a busy week for rate announcements, but, expect momentum to remain in tact.

Crude is lower O/N ($66.92 down -89c). Month end and year end gyrations managed to push oil higher just before the close on Friday. Traders scrambled to unwind positions on the final day of transactions for the Nov. gas and heating-oil contracts. The move was not about fundamentals or erosion of demand. Oil has fallen 33% last month (a record monthly decline), on signs that the economic slowdown in the US and Europe will spread to emerging markets and curb fuel consumption even further. The commodity continues to trade close to its 17-month low print achieved at the beginning of the week. Fundamental data combined with the recent greenback strength has investors selling oil contracts on rallies. Expect investors to concentrate on ‘demand destruction’ after last weeks US GDP numbers. Rate cuts last week by the three biggest oil users, the US, China and Japan, has failed to inspire confidence that a recession can be avoided. The threat of global equities advancing and OPEC potentially wanting to meet again before Dec. has only been able to provide temporary support. OPEC indicated that they may call a new meeting if prices fail to react to the -1.5m barrel-a-day output cut it announced last month. Growth fears continue to outweigh any cut in production. OPEC still produces over 40% of the world’s oil, but there are doubts that they can cut much more, the members also need cash, just like most economies do. So do not be surprised to see some members ‘not’ adhere to future cut quotas. The EIA last week showed that US inventories of crude oil and distillate fuel rose. Crude oil stocks climbed +493k barrels to +311.9m barrels w/w vs. a +1.55m barrel gain. Distillate inventories rose +2.33m barrels to 126.6m barrels vs. an increase of +1.05m barrels. While gas stockpiles dropped -1.51m barrels to +195m, (1st decline in 5-weeks). Overall a bullish report as inventories rose less than anticipated. But, sluggish demand continues to be the catalyst for rising inventories. Gold fell the most in a week last week as the greenback climbed vs. the EUR on signs that reductions in borrowing costs in Europe will lag behind the US. In the O/N session, the big dollar has given up some ground and by default investors have found favor with the yellow metal.

The Nikkei closed 8,576 down -452. The DAX index in Europe was at 5,053 up +67; the FTSE (UK) currently is 4,407 up +30. The early call for the open of key US indices is higher. The 10-year Treasury yields backed up 3bp on Friday (3.96%) and are little changed O/N. After the Fed easing last week, the short end of the yield curve had the largest monthly climb since Feb. A contracting economy and stumbling equities has managed to push investors towards the safety of the FI asset class despite an unprecedented amount of US debt being issued. The main focus this week will be interest rate decision announcements by both the ECB and BOE. The globe will be focusing on the US elections on Tuesday and employment data on Friday. A new month let’s see what ammunition investors have left.

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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