Geithner is no fool?

It feels like receiving unwrapped Christmas presents. The PR and Marketing team of Geithner and Co. have been doing a good job disclosing ‘non-public’ stress test data so far! It seems that the grand total of $65b is warranted. Does this number take into account the conversion of preferred into common shares? If not, add another $70b and the markets are still OK with this. Perhaps its Trichet who will steal today’s headlines. It’s expected that the ECB will lower rates to 1% and announce a lengthening of the maturity of its refinancing operations to one year. It’s an innovative approach to pushing banks costs down and energizing the Euro-zones economy. This would not be the quantitative approach that the BOE and FED are taking, but by attacking the ‘root of the cause’, it gives them a more transparent exit strategy unlike any others that have ‘NOT’ been presented.

The US$ is stronger in the O/N trading session. Currently it is higher against 14 of the 16 most actively traded currencies, in another ‘whippy’ trading range.

Forex heatmap

The surprises keep on coming, yesterday’s ADP print continues to signal that job losses remain ‘extraordinarily’ high and at levels that ‘remain supportive of a deep recession’ (-491k vs. -645k), but the surprising part is that the pace of deterioration has ‘significantly’ improved. Analysts agree that the lower than expected pace of job losses can be attributed to the broad based improvements that we have been witnessing of late. Digging deeper, all of the sub-sectors (small, medium and larger employers) posted improvements, while both the goods and the service sectors recorded a slower pace of job elimination. Even the revisions were on the positive side (Mar. to -708k vs. -742k and Feb. -681k vs. -706k). It’s a step in the right direction and supports the renewed optimism theory of late. However, there is a big ‘but’ that should be applied. Firstly, the magnitude of the monthly losses is enormous and tomorrows NFP will be no exception. Secondly, the market expects the pace of growth to be ‘very’ slow hopefully starting later this year and finally, all this excess pool of labor will eventually pressurize ‘actual’ wage levels and this must have an impact on growth, which will only compound the situation we now face.

The USD$ currently is higher against the EUR -0.20%, GBP -0.13%, CHF -0.66% and JPY -0.87%. The commodity currencies are mixed this morning, CAD -0.33% and AUD +0.97%. Canadian data yesterday exceeded all expectations. Albeit volatile data, it was a strong improvement m/m. Canadian building permits exploded to the upside in Apr. (+23.5% vs. +2.3%). Residential permits rose +5.0%, m/m (the 1st-gain in 7-months), with both single-family and multi-family intentions increasing. However, the rise in non-residential permits (+48% m/m) was the dominant variable, which can be attributed to the Federal stimulus effect that is lifting the institutional component (Government and Educational buildings). With both European equities and commodities outperforming yesterday the loonie managed to pare early morning losses on stress test headlines. Like all risk related currencies, expect the loonie to seek guidance from Trichet communiqué and the much anticipated stress test announcements this afternoon. The currency rise has been fast and brutal over the last week, catching many investors off side. Technically the move has been too swift despite what ever is revealed this week. The market should expect a retracement back towards the 1.1850 level soon. Perhaps tomorrow’s Canadian employment number will be the catalyst.

Everyone it seems is full of surprises. The AUD managed to print a 7-month high after Australian employers unexpectedly added workers last month and the jobless rate dropped (+27.3k, m/m and +5.4% vs. +5.7%). Australian fundamentals have been strong going into this recession and now that global optimism is growing one should expect better buying of this risk currency on pull backs (0.7556).

Crude is higher in the O/N session ($57.62 up +128c). Oil finally broke out of its stale trading range yesterday after both the API and EIA reports reveled that supplies of crude and gas are declining or are less than expected in the US, who happen to be the world’s largest consumer. On Tuesday, API stated that crude inventories dropped by -1m barrels, and gas declined by -2.9m barrels last week. Combine this with the surprising ADP jobs report and they have been able to give the black stuff another jolt. Yesterday’s EIA release was ‘bullish’ in respect to the other reports of late. Crude supplies rose +605k barrels to +375.3m last week (a new 19-year high), but less than the forecasted +2.5m gain. This headline has been able to motivate the bulls once again. Meanwhile gas supplies fell -167k to +212.4m vs. a +500k gain. Distillate fuel (heating oil and diesel), rose +2.43m barrels to +146.5m, the highest print in 32-months. I am sure OPEC is breathing a sigh of relief, for the moment anyways. Gold continues its rally as a safe heaven alternative ahead of any surprising non-leaked stress tests results ($914). Analysts point to strong gold fundamentals that should push prices beyond their recent highs, as speculators believe that the worst of the global recession may be over.

The Nikkei closed 9,385 up +408. The DAX index in Europe was at 4,955 up +75; the FTSE (UK) currently is 4,466 up +75. The early call for the open of key US indices is higher. The 10-year Treasury’s eased 5bp yesterday (3.20%) and another 2bp in the O/N session (3.22%). We are back to trading the supply and demand push-pull by the US government and the Fed. The Fed continued its buy back program yesterday (the 16th time of its $300b program), concentrating on the shorter end of the curve in the morning, while later dealers managed to cheapen the curve as the market managed had to absorb another $22b in the 10-year bucket. With the abundance of supply and the pickup in economic activity, dealers will not support the longer end of the curve. Today we get another $14b of 7’s. How long will it be before we see 3.25% for 10’s?

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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