Don’t trust the Swiss?

Despite healthier data from Europe’s largest contributor yesterday, risk aversion trading strategies remain strong as equities continue to find it difficult to find any traction. Currently the JPY is the ‘flavor du jour’ for safer heaven status. It seems that no-one can stomach owning CHF because of the SNB antics of late. The yen has strengthened more than 4-times as much as any of the 16 most-traded currencies vs. the ‘buck’ in the last 4-weeks. The market is now in ‘wait and see’ mode for G8 comments. Lack of BRIC comments about the creation of an alternative world currency would be a surprise! In the current state of global free fall, why would we also want to introduce a USD crisis?

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

Forex heatmap

US job losses are expected to rise over the next year and put further pressure on loan delinquencies according to the American Bankers association. Late payments on home-equity loans rose to a record in the 1st Q (+3.53% vs. +3.03%) as this recession has left more borrowers unable to pay their debts. Probably more of an eyesore was the headline for delinquent bank-card accounts. It advanced at a ‘new’ record pace for the 1st Q (+6.6% vs. +5.52%). With the US economy shedding -6.5m jobs and an escalating unemployment rate (+9.5%) coupled with less hours worked by the employed will only compound this delinquent situation.

Quelle surprise! German manufacturing orders temporally caused a positive run on the EUR yesterday. The May data jumped the most in 2-years, blowing all analysts estimates out of the water (+4.4% vs. +0.1%). It’s still 29.4% lower than a year ago! Now it’s wait and see if the historically ‘slow summer’ months will continue to contribute to global economic recovery. However, a Gallup poll released yesterday shows that 44% of US consumers are willing to stop spending over the next 6-months and pay down credit-lines. This will be no good to anyone, expect the trickle down effect of fewer hours worked and higher global unemployment rates to further curtail any signs of growth.

The USD$ currently is higher against the EUR -0.16%, GBP -0.22%, CHF -0.13% and lower against JPY +0.56%. The commodity currencies are mixed this morning, CAD +0.08% and AUD -0.58%. The loonie has faltered, in line with most of the other trading partners of the US. The commodity based currency continues to feel pressurized as commodity prices tumble, especially oil, which has lost close to -16% since last week. Expect investor’s to continue to trim bets on riskier assets and carry trades on signs that a global economic recovery may take much longer than originally anticipated. Canadian data yesterday revealed that building permits aggressively advanced in May, beating all expectations (+14.8% vs. -4.4%) on the back of new condos and school projects. The housing market is still quite weak with consumer fundamentals pointing to a further deterioration ahead and a long road to recovery. The BoC estimate that housing will cut -1.1% from growth this year as further job losses undermine consumer confidence. The employment report is out this Friday. Other data showed that the Canadian Ivey PMI jumped +20% to 58.2 vs. 48.4 m/m. On the face of it looks like a screamer, but seasonally adjusted it was a modest +10% rise to 48.4 and still below that psychological 50 expansion print, but at a diminishing pace. Technically, with the currency printing a 7-week low it has opened up for it to test back towards the 1.1800 handle. Expect the currency to be sold on a USD pull back in the short term as global sentiment seeks that a ‘safer heaven’ currency.

The AUD lost ground again in the O/N session for various reasons. Firstly, with global equities retreating, it has dampened the demand for higher yielding assets as investors become risk averse in their trading. Secondly, the RBA as expected kept it O/N lending rate on hold at 3% this week, but indicated that the inflation outlook allowed room for an interest-rate cut. Finally the market is concerned about tonight’s Australia’s employment numbers. They are expected to hit a 6-year high (0.7868).

Crude is lower in the O/N session ($62.22 down -71c). Crude fell to a new 5-week low this morning on the back of plummeting global equities and on concerns that that the global economic recovery will falter, providing support for further ‘demand destruction’. Yesterday was the 6th-consecutive day of declines as the greenback remained firm vs. the EUR (longest losing streak in 9-months) and limiting investor’s appetite for commodities as a hedge against inflation. The commodity has retreated more than 16% from its recent highs just before the release of the US unemployment data last week. Prices had got ahead of fundamentals in a big way over the past few months, and recent movements seem to be filling in that gap. With ‘demand destruction’ come higher inventories and it’s speculated that this week’s inventory reports will further pressurize prices. Despite last week’s API showing the biggest decline in crude inventories in 9-months in the US, demand remains weak. The commodity had gained approximately +39% last quarter, the largest advance in 20-years as a rebounding world equity markets and a weaker dollar convinced investors to buy the ‘black stuff’ as an alternative investment. The second half of the year certainly has not started on the right foot, fundamental cracks remain persistent. The IEA lowered its 5-year forecasts for global crude demand because of the economic slump. They are cutting daily consumption levels by -3m bpd until 2013. Demand destruction remains commodities greatest nemesis and not volatile currency levels. Similar to other commodities, the ‘yellow metal’ has faltered in the O/N session as the greenback rallies, thus reducing the demand for the commodity as a way to preserve ‘store of value’ ($919).

The Nikkei closed 9,420 down -227. The DAX index in Europe was at 4,588 down -10; the FTSE (UK) currently is 4,180 down -7. The early call for the open of key US indices is lower. The 10-year Treasury’s eased 7bp yesterday (3.45%) and is little changed in the O/N session. Despite the FI market setting itself up for 2-more auctions this week (10’s today and 30-years tomorrow), investors continue to speculate that the worst recession in 50-years has ‘legs to run’. With advisors telling Obama that the economy is ‘worse than they had forecasted’ and to consider a 2nd stimulus package has investors seeking the sanctuary of the FI market. With equities in trouble finding traction this is making bonds more attractive. The market is expecting Cbanks to be around to soak up the record supply. Their appetite for product can only last for so long!

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