Canada’s Recession is over!

Consumer confidence seems to be on the rise everywhere, Canada, Australia, Germany, UK, but the market would not be surprised to see it fall State side this morning. Canada has even declared that their recession is over after 9-months! Their officials anticipate that it will take many quarters to recoup individuals lost wealth. World bourses continue to shoot higher after US earning this week surprised even the most negative of non-believers, forcing money managers to aggressively put their stock piled monies to work. No fear of a double dipping-recession as the hunger for risk appetite intensifies. This is a big pill to swallow just yet!

The US$ is weaker in the O/N trading session. Currently it is lower against 11 of the 16 most actively traded currencies in a ‘subdued’ session.

Forex heatmap

Probably the best advice I have seen regarding US jobless numbers is throw them out, again…! Yesterday, weekly initial claims advanced very much in line with market expectations (+554k vs. +524k). On the other hand, continuing claims fell for a 2nd-straight week and beat market expectation (+6.225m vs. +6.313m). Some analysts are urging markets to discount the reliability of the readings until the end of the summer. We already know on an historical basis that this month normally carries auto sector shut-downs during the retooling phase for the industry as it shifts towards gearing up for the next year’s production. Seasonal adjustment factors are based upon this normal pattern. However, we have witnessed huge lay-offs occurring throughout this year and particularly in the auto sector over the last 2-months. One can conclude by default that the improvement in claims is probably being overstated due to the ‘unreliable standard seasonal adjustment factors’. Another factor that may also be distorting the headline prints is that the unemployed who have been on extended continuing claims are now spilling into an extended benefits measure after 24-weeks, which may suggest that we are not capturing the full extent of the labor markets weakness!

Green shoot economics is starting to root. Yesterday, we saw US existing Home Sales advance and is now on a 3-month upward trend (+4.89m units vs. +4.72m, +3.6%, m/m). It’s worth noting that a small ‘unit’ change can easily distort the ‘%’ change, especially when one is working with such low volume numbers. That being said, the pessimistic view point out of the way, a 3-month uptrend is a very good sign indeed. We are now encroaching on last Oct.’s print of +5m units. Digging deeper into the report, we notice that both single and multi-family sales continue to climb (+2.5% m/m and +14.0%, m/m). By default this will put downward pressure on supply. Analysts remain weary that inventory levels remain ‘high’ (+8.9 months- single family units and +13.4 for condos) despite the increased demand!

The USD$ currently is weaker against the EUR +0.14%, GBP +0.03%, CHF +0.02% and JPY +0.22%. The commodity currencies are mixed this morning, CAD -0.13% and AUD +0.07%. No one can get enough of the loonie! Canadian Finance Minister Flaherty and BOC governor Carney continue to talk up the Canadian economy and by default the value of the loonie, to their own detriment. The currency managed to print its strongest levels in 2-months vs. its southern partner and remains the strongest G10 currency this month (+7% vs. the greenback). Yesterday’s BOC monetary report indicated that ‘the country’s recession is ending amid rising commodity prices and consumer confidence’. That being said, the pace of recovery will be muted because of the strong currency. Governor Carney does not expect the economy to be back to where it was before the recession was declared until the latter half of 2010. The difference in the currency level from their original projection will however impact the BOC policy. Is there some sort of government intervention on the horizon? Not if the rise is fundamental, however expect speculation not to be tolerated. Bottom line the Canadian economy is far better off than other economies. With equities and commodities both moving in the same direction has only increased risk appetite and by default the loonie will always benefit from that!

The AUD has managed to register a 2nd-consecutive weekly gain vs. both the USD and JPY on the back of rising global equities which has boosted the demand for higher yielding assets. In this current environment it’s possible that the AUD could print new yearly highs vs. the USD (0.8263) by summers end as the market anticipates that the RBA like the BOC will increase its estimates for GDP (0.8157).

Crude is little changed in the O/N session ($67.45 up +29c). Oil advanced yesterday on the back of global equities finding traction, the USD weakening and an increased appetite for risk. With consumer confidence creeping back into the market place, it can only push commodity prices higher. All of this despite mixed messages from the weekly inventory reports this week. The API on Tuesday afternoon reported that crude supplies gained w/w (+3.1m barrels to +349.9m). It was the firstly weekly increase since April. On the other hand, the weekly EIA report showed that inventories fell slightly less than expected (-1.8m barrels vs. -2.1m), while gas and distillates showed smaller than expected builds (+1.2m vs. +1.5m). Refinery utilization fell by -2.1% to +85.8% of capacity, more than expected. The crude numbers provided a sharp contrast to the API’s reported crude build. But, the refinery run cut of -2.1% was consistent in both reports and should provide further bearish implications for oil prices. As stated earlier, the market is relying on equities and currency trends to anticipate any directional meaning for crude prices. Technically, demand destruction should not be supporting higher fuel prices. Earlier this week, the Chinese refiners boosted their processing levels to a 16-month high and this temporarily aided the price. China (the 2nd largest oil consumer) raised their operating rates for an 8th-straight week to +85.12%. On the face of it, the Chinese economy seems to be responding positively to their economic stimulus packages. The black stuff has advanced +45% this year and +6% alone last week. Green shoot economics has led to higher equities and higher oil prices. Gold rose to a 5-week high yesterday as the ‘big’ dollar pared its gains, thus boosting demand for the ‘yellow metal’ as alternative investment. Do not be surprised to see some week-end profit taking this morning ($950).

The Nikkei closed at 9,944 up +151. The DAX index in Europe was at 5,284 up +38; the FTSE (UK) currently is 4,585 +25. The early call for the open of key US indices is higher. The 10-year Treasury’s backed up 9bp yesterday (3.63%) and are a further 5bp in the O/N session. With global equities advancing, risk appetite growing and for good measure throw in a record announcement $115b of new US debt to be issued next week has the long end of the US yield curve on the back foot. It will be the 1st time in 33-years that the US government will have three coupons and a TIPS auction in one week. Traders are certainly getting ahead of this and will want to continue to sell debt on upticks.

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