Investors prepare for an eye-popping NFP headline!

Since World War 1 there have been 17 recessions, with an average duration of 13-months. Historically equity indices bottom close to 9-months before the end of each recession. Do we believe that the market bottom has already been achieved? These are extraordinary times. The worst of the recessions in the last 100-years lasted 43-months (1929-33), while the shortest has been a mere 6-month’s (1980). At the moment investors are looking for any good news to ease some of the pain.

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

Forex heatmap

With no fundamental data out yesterday, FX markets took its cue from equities. Finally after a few days of ‘red’, global indices found some traction as investors speculated that CBankers will intensive their efforts to stem a deepening recession. Thus far this week, the RBA got the ball rolling after slashing O/N borrowing by 100bp (4.25%) to boost growth and hinted once again that more was to come. This afternoon we have RBNZ, and they are expected to top RBA cut and ease a 150bp to 5%. Tomorrow we have Trichet and King. The BOE is expected to be aggressive at 150bp ease while Trichet needs to but won’t, he is expected to ease by only 50bp, anything else would be a surprise to the market. So far domestic currencies have benefited from their own monetary easing. The ‘modest recovery’ of risk has weighed on the greenback. The WSJ this morning is reporting that Paulson may be getting ready to ask congress for the second tranche of the TARP as deteriorating market conditions continue to soak up existing funds.

The US$ currently is higher against the EUR -0.52%, GBP -0.86%, CHF -0.28% and lower against JPY +0.40%. The commodity currencies are weaker this morning, CAD -0.40% and AUD -0.42%. The loonie found some mild support yesterday on the back of global equities advancing. The currency currently trades within a tight trading range due to the lack of fundamental data on hand. There had been a modest recovery of risk appetite, which benefited the higher yielding asset classes temporarily. But investors should expect guidance from commodity prices and the current political upheaval that is underway in Ottawa. With commodity prices continuing to take a beating, it’s only a matter of time before the loonie again comes under renewed pressure. Last month, the currency had managed to pare 2% vs. its southern neighbor. The sharp fall off in oil prices has managed to have a negative effect on the sentiment of the Canadian dollar. The black stuffs prices are now trading at new 3-year lows. Crude accounts for approximately 10% of all of Canada’s export revenues. Governor Carney last week said ‘that the risks to the country’s economy from a global credit crisis and recession have increased in the last month and will probably lead to a further reduction in interest rates’. So far, futures traders have priced in another 50bp ease for the BOC Dec. 9th meeting, if not sooner.

The AUD dollar retreated once again in the O/N session after reports showed that Australia’s economy grew at the slowest pace in the 3rd Q in over 7-years (GDP +0.1 vs. +0.2 q/q). This has occurred despite the aggressive monetary easing by the RBA over the last few months. This week the RBA lowered interest rates by 1% to 4.25%, the 4th cut since Sept., they objective like any other Cbank is trying to avoid a recession. To date they have slashed rates 300bp and analysts expect another 75bp ease by Mar. of next year. Once again risk aversion trading coupled with weak commodity prices will have trader’s better sellers of the currency on rallies for the time being (0.6403).

Crude is higher O/N ($47.55 up +59c). Crude oil prices remain under pressure as the US (the world’s largest consumer) may be in the middle of its longest ‘slump’ in 50-years. It is believed that the US has been in a recession since Dec. 2007. Couple this with a stronger greenback and today’s weekly EIA report that expected to show for the 10th consecutive week a rise in inventories has led to demand destruction for the black-stuff. OPEC’s decided last weekend to defer reducing production until its next meeting on Dec. 17th. They are stalling and will use the time to gage October’s -1.5m barrel cut in production. All analysts expect them to trim production again by month end. They currently have their backs against a wall. They want and need higher prices, ideal level being $75 per barrel. They believe that $75 is a ‘fair price needed to support investment in new fields’. They next meet on 17th of this month and remained concerned about demand deterioration, especially in the US. With weaker global fundamentals and an OPEC decision delay can only weigh on commodity prices in the short term, there is little good news that supports commodities at the moment. Even a stronger greenback continues to pose problems for this well supplied asset class. Last weeks EIA report showed that crude supplies rose +7.28m barrels to 320.8m. It was the 9th straight increase (the longest stretch in 3-years). Refineries have increased operating rates by +1.3% to 86.2% of capacity (the highest levels in 3-months). Gas inventories rose +1.84m barrels, or +0.9%, to 200.5m barrels. Fear is destroying future demand at the moment. Gold found some traction yesterday after the greenback pared some of its weekly gains, thus boosting the appeal of the yellow metal as an alternative investment ($776). This morning the yellow metal has managed to pare some of the gains as the greenback finds a ‘toe-hole’.

The Nikkei closed 8,004 up +140. The DAX index in Europe was at 4,442 down -90; the FTSE (UK) currently is 4,082 down -41. The early call for the open of key US indices is lower. The 10-year Treasury yields eased 4bp yesterday (2.67%) and backed up 7bp in the O/N session (2.74%). Treasuries prices rose yesterday sending yields on long dated securities to a new record low as traders continued to speculate that inflation will remain ‘subdued’ and that the Fed may purchase government securities as the recession deepens. The market can expect Bernankes comments this week to keep the FI asset class better bid in the short term. With global equities finding little traction on concerns for future earnings, investors continue to seek a safe heaven asset class. The global threat of deflation will continue to provide a stronger bid for the FI asset class as Cbanks undertake to slash borrowing costs once again this week.

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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