Nothing positive this side of Christmas!

Global Civil and Economic dissension is on the rise. From Iceland to Ireland, from Russian to Greece, public protesting will once again become the norm in the developed world as some individuals lose everything. Authorities in Russia and China have quickly shifted policies to anticipate such events. Will it work? The power of the people cannot be underestimated, look at Reykjavik and Athens.

The US$ is mixed in the O/N trading session. Currently it is higher against 8 of the 16 most actively traded currencies, in another ‘whippy’ illiquid trading range.

Forex heatmap

China remains aggressive in its ‘capitalist’ nature. Yesterday, they cut interest rates for the 5th time over the past 3-months to support their economy as their trade growth data comes under pressure due to the on-going global recession. The PBOC cut their lending and deposit rates along with reducing the proportion of deposits lenders must set aside to stimulate their system. With an aid package of spending on infrastructure and low-cost housing, they will try and de-rail any potential social unrest as factories close and unemployment climbs in the world’s most populous nation. Russia is currently very much in the same situation, but because of the state of their economy, social discord has already arrived. They have devalued their currency 9-times since the middle of Nov. Since Aug. the currency has devalued 17% vs. the ailing greenback. Analysts believe that the Cbank wants and needs to devalue the currency another 2% by year end. Since Aug. a condemned war with Georgia, plummeting oil prices and the global financial debacle has persuaded foreign investors to withdraw more than +$200b from Russia. The country is now preparing itself for the return of Putin as president, sooner rather than later.

The US$ currently is lower against the EUR +0.14%, GBP +0.12% and CHF +0.08% and higher against JPY -0.08%. The commodity currencies are a tad weaker this morning, CAD -0.48% and AUD -0.45%. Yesterday, the initial reaction to the Canadian government reaching a deal with banks to restructure the insolvent $26b CP market favored the loonie. The CP market has been in limbo since Aug. 2007 and the net result will give investors access to their money by Jan. But, with commodity prices easing once again, the loonie managed to pare its early morning gains. Crude accounts for 10% of Canada’s net exports each year. The black-stuff remains under pressure on concerns that the global recession will curb demand faster than OPEC can make production cuts. By default, this will hurt commodity based currencies and in this holiday trading environment, most price movements tend to be exaggerated. Fundamental data continues to point to the BOC easing borrowing cost again next month from their 50-year lows (1.5%). On a cross related basis the loonie remains under pressure, with the holiday that’s in it; do not be surprised to see the currency trade back up towards the 1.2500 in the short term.

The AUD$ remained better bid on pull backs after the US government approved the bailout of the US auto section. Their actions have given some investors confidence to once again purchase high-yield currencies for now (0.6834). Is this sustainable? In these thin markets all directions are achievable; one can only expect weaker future data from the US, which will once again undermine investor’s confidence and risk tolerance in the short term.

Crude is lower O/N ($39.54 down -37c). Crude briefly climbed yesterday as OPEC reiterated their intent to enact record production cuts announced last week during this global economic slowdown. The Saudi oil minister al-Naimi said that all members are ‘determined’ to stabilize the oil market. Even non-OPEC member Russia is signaling that it too will trim production in the New Year. Analysts believe that this determined effort will finally provide some support to this spiraling market, but so far very little traction can be seen as negativity outweighs consumption. Year-to-date oil is down 55%. Last week, the black stuff came under renewed pressure due to oil futures contracts expiration and the unexpected build up at Cushing, Oklahoma (+21% rise w/w). Already OPEC is hinting that they may meet again next month to discuss further production cuts. It’s expected that that they will continue to reduce output as demand falls. The world is currently awash with the ‘black-stuff’. The US Energy department has provided little support when it announced late last week that consumption will be lower next year because of the global contraction. Prior to OPEC stronger sentiments, the market technically has no confidence in their ability to manipulate prices. To date, their actions have done little to elevate prices that have dropped 75% from their record highs during the summer. This deep recession has had a profound effect on global consumption. Since the last imposed cut in Oct. of -1.5b, the rate of compliance by members has been more than 85%. The weekly EIA inventories report climbing for an 11th consecutive week has not helped to boost prices. With the greenback under renewed pressure yesterday investors are happy to once again own the ‘yellow’ metal as an alternative investment ($845).

The Nikkei closed 8,723 up +135. The DAX index in Europe was at 4,654 up +15; the FTSE (UK) currently is 4,289 up +40. The early call for the open of key US indices is higher. The 10-year Treasury yields backed up 3bp yesterday (2.17%) as traders cheapened the yield curve ahead of record auctions this week. $38b 2-year product was auctioned yesterday and today we have $28b 5-years. Even with yields at record lows, investors continue to seek safety in the FI market. Their current objective at the moment for the investor is to preserve their principle balance. This will be a tough week to orchestrate auctions; with thin markets there may not be very many investors to take supply down at fair value.

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