China sneezes and the World catches the Flu!

Yellen is drinking Bernanke’s ‘cool aid’. They are all on the same page when it comes to the US recession and growth. In fact most Cbanks continue to talk up the markets despite the ‘positively painful’ growth rate being predicted. Capital Markets are even betting on what Cbank will hike rates first. Currently it’s the RBA followed by the ECB, BOC and then the Fed. Imagine hiking rates as the lagging indicator of unemployment continues to rise. All bets are on China, with its 8% growth rate (so they say), to guide us out of this mess. Imagine when China sneezes the rest of us will catch the flu!

The US$ is mixed in the O/N trading session. Currently it is higher against 9 of the 16 most actively traded currencies in a ‘whippy’ session.

Forex heatmap

How is one to interpret yesterdays US Consumer confidence number? Did the surge in Apr. (+34%, m/m) and May go too far to the right? It’s worth looking at the trend. Between Mar. and May we saw gains, however the last 2-months confidence has fallen, and last month it fell -5.5%. While both the present situation and expectations components have declined, they are still above the levels posted back in Mar., which suggests that the gains in Apr.-May maybe somewhat be overstated. Nonetheless, this report still shows that consumers remain concerned with the current weak job situation and do not expect it to change over the next 6-months. The headline fell to 46.6 in July as the present situation dropped -6.4%, m/m, while the expectations component declined -5.3%, m/m. The labor market was the main influencer, the number who sees any job as ‘hard to get’ rose to 48.1% vs. 44.8%. Digging deeper, we notice that expectations for an improvement in business conditions, employment and income in the next 6-months also continued to decline. Less people have plans to buy a home, automobile and major appliances. Even inflation expectations fell further, posting at -5.5% vs. -5.9%, m/m. The Fed’s go-to variable, the consumer, is telling us how it is. A future expectation is like pinning the tail on the donkey, and that should go for equity prices as well!

Yesterday the S&P/Case-Shiller index advanced +0.5%, m/m, in May to -17.1% (the 1st-gain in 3-years!). Have we witnessed a turning point? One data point does not make a trend. There are a few variables that will continue to pressurize prices however. Mortgage resets are set to spike over the next few years and probably speed up foreclosures once again. FI yields are expected to back-up on inflation concerns, this will pressurize mortgage rates and hence foreclosures. Finally, unemployment will remain elevated as the Fed anticipate a +10% print. Do not forget that the housing headline gains can be misleading. At such low prices, m/m gains are not as difficult to obtain. But, can they be sustained? Let’s hope it’s the beginning of a new trend!

The USD$ currently is higher against the EUR -0.06%, GBP -0.37% and lower against the CHF +0.04% and JPY +0.17%. The commodity currencies are weaker this morning, CAD -0.23% and AUD -0.94%. The whip-lash came yesterday and I am sure Carney is breathing a tad easier now. After printing a 9-month high, the currency proceeded to do a U-turn and give up 1.5-cents to its largest trading partner. The loonie fell for the 1st-time in 8-days on consumer sentiment numbers out of the US, which knocked the stuffing out of commodities and equities. Investors have once again gone into risk adverse trading mode. Despite the currency being the best performer vs. the greenback this month (+6.6%), investors are willing to take some profit off the table. The currency had been getting ahead of its fundamentals. It was only last week both Flaherty and Carney were talking up the Canadian economy, however the pace of growth would be muted because of the strength of the currency. The loonies’ strength has occurred too quickly, and it was only reasonable that the currency would give up some of the gains. Imagine where the currency will be when we finally get global growth and higher commodity prices, trading at 85c premium!

As to be expected the AUD retreated from its yearly highs on the back of the Chinese equities paring recent gains (the most in 8-months) in the O/N session. The move like the CAD was probably too fast adding to concern the currencies’ gains have been overly aggressive. The decline in commodities, which accounts for 50% of the country’s exports, is also continuing to pressurize the currency (0.8199).

Crude is lower in the O/N session ($65.43 down -180c). Oil finally snapped its 9-day’s of advances yesterday and continued on that vain this morning on the back of global equities slipping and the USD index climbing from its earlier lows. Profit taking and risk adverse trading undermined investor’s need to use commodities as an inflation hedge. It was BP’s CEO who got the ball rolling, stating that any recovery from the global recession will be ‘long and drawn out’, this statement prompted stock profit taking and with demand destruction lower crude prices. Earlier this week, crude managed to print its highest level in over a month and looked set to break through the $70 resistance level. Commodities have been advancing on future expectations and not on fundamentals. Also worth mentioning, yesterday in Washington, the CFTC started its debate on speculation in the commodity markets. Is there a need to curb speculative trading? If they do proceed with stricter regulation, the market will see scaling back of risk appetite for commodities. The weaker US consumer confidence numbers yesterday should provide stronger support for future demand destruction. This morning we get the weekly inventory reports, and they are expected to continue the 2-month ‘weak’ trend and fall again. Last week’s EIA report showed that inventories fell slightly less than expected, while gas and distillates showed smaller than expected builds. Refinery utilization fell by -2.1% to +85.8% of capacity, more than expected. The refinery run cut should provide further bearish implications for oil prices. As stated earlier, investors are relying on equities and currency trends to anticipate any directional meaning for crude prices. Technically, demand destruction should not be supporting higher fuel prices. Gold prices fell close to 2% yesterday, the biggest drop in over 3-weeks, as the USD index advanced on risk adverse trading, thus eroding the demand for the ‘yellow metal’ as an alternative investment ($938).

The Nikkei closed at 10,113 up +26. The DAX index in Europe was at 5,249 up +74; the FTSE (UK) currently is 4,563 +34. The early call for the open of key US indices is lower. The 10-year Treasury’s eased 7bp yesterday (3.65%) and is little changed in the O/N session. Despite the plethora of US product this week, a record $150b, treasury prices rallied as US consumer confidence fell more than expected last month. Fears of increased joblessness will continue to hurt the consumer and prolong this recession, despite what Yellen and Bernanke say!

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