Capital Markets Trade Sideways-No Fun to be Had!

If O/N was a déjà vu, we would have at least had something to write about! Even with surprisingly strong US data, markets have decided to move sideways at a painstakingly slow pace. Technically, it’s shaping up to being the ‘calm before the storm’ with Labor Day being the official starter for volatility once again! Bring on Sept. we are due a few surprises.

The US$ is little changed in the O/N trading session. Currently it is higher against 12 of the 16 most actively traded currencies in a ‘subdued’ trading range.

Forex heatmap

US reports yesterday came and went and were full of nice surprises. However, various asset classes took it all in its lazy summer stride. Consensus for durable goods was expecting a stronger print, the report exceeded expectations on most counts (+4.9% vs. -1.35), with the one exception being an indication of a slip in core business investment. Despite a surge in transportation orders, which once again skewed the headline (+4.9% vs. -1.35), there was enough strength in the other sub-categories that kept core-orders in the black (+0.8% vs. +0.9%). Digging deeper, the letdown was the -0.3%, m/m, decline in non-defense capital goods orders (analysts use this metric as a proxy for business investment) which came after 2-months of consecutive gains in May and June. We should expect excess capacity to keep a stranglehold on this measure for the foreseeable future. A strong core-durable goods headline indicates that this is a production led expansion. The US economy needs consistently consecutive prints to overcome various categories that have a history of shut downs to start up’s and a negative impact. But the kicker, for durable goods to remain in expansionary territory, the US consumer needs to take it up a notch to have any impact!

Yesterday’s US new home sales were stronger than expected on most fronts (+433k vs. +395k). More importantly, most of the positives appeared in the ‘not-yet-started’ category, which should boost next month’s housing starts and have a positive impact for quarterly GDP. Digging deeper, sales of homes under construction were flat for June and July, while sales of completed homes fell ever so slightly. What surprised analysts the most was that they believed under current market conditions, buyers would continue to gravitate towards the foreclosed homes category, and keep the market bias in favor of re-sales than over new homes. Yesterday’s report dispelled this theory, new home sales were up +9.6%, m/m, vs. the +7% rise in re-sales. Why the change in attitude? Perhaps the cheaper foreclosures are not worth it because of potential ‘cash outlays’! The +9.6% gain in new home sales plus a decline in inventories has pushed the number of new homes down to +7.5 months supply (the lowest print in 2-years much and lower than the current level for existing sales +9.5).

The USD$ currently is higher against the EUR -0.08%, GBP -0.24%, CHF -0.11% and lower against JPY +0.54%. The commodity currencies are mixed this morning, CAD -0.19% and AUD +0.11%. The loonie weakened for a 2nd-consecutive day as investors speculated that the recent rally for higher-yielding currencies may be overdone. Falling oil prices managed to lend a hand to drag the CAD lower. The loonie has had the poorest performance vs. the greenback this month compared to the 16 most-traded currencies. Month-to-date it has fallen -1.8% vs. its largest trading partner. The BOC Deputy Governor Timothy Lane and his contradicting comments about ‘maybe’ seeing growth this quarter and at the same time seeing significant upsides and downsides to the economy has capped probably this months gains. Earlier this week he was definitely talking the BOC book and reinforced that the ongoing strength of the CAD is detriment to Canadian economic growth. Currently the market is caught long the domestic currency and expect USD pull backs to be purchased in the short term.

The theme remains the same and so does the AUD actions. Like clockwork, up one day and sidewise another! Australasian bourses advancing in the O/N session had investors coveting the higher yielding currencies like the AUD. Stronger fundamental data coupled with a tighter monetary policy debate pushed the currency +0.15% higher vs. the USD (0.8320). But, with China looking to limit the capacity of some of its industries should put pressure on the commodity currency. Investors are currently looking to sell on upticks.

Crude is lower in the O/N session ($71.16 down -27c). Crude prices again came under renewed pressure yesterday as the USD strengthened, dissuading investors from using commodities as a hedge against inflation. Oil managed to fall over -1% on rumors that China may implement various strategies to curb over-capacity. This naturally would affect the pace of global economic growth. Both the weekly API and EIA inventory reports, with their unexpected gains, have impeded upward price movements. The EIA weekly inventories rose +128k barrels last week to +343.8m vs. a forecasted decline of -1.15m barrels. This bearish report was supported by the earlier API release that showed that oil supplies climbed +1.3% (the most in 4-months), to +346.7m barrels. On the flip side, gas stockpiles fell -1.7m barrels to +208.1m vs. an expected -800k decline. Even more surprising, US total daily fuel consumed averaged +19.2m barrels over the last month, down -0.9% y/y. Fundamentals reveal there is a lot of supply in the market with little demand. Technically $75 will be difficult to breach as $70 support comes under threat again. China of course is the biggest concern. If their economic activity subsides it will definitely put a cap on this market in the medium-term. It has been alarming that we had shifted away from the demand destruction theme. Speculators have bullied crude prices higher, but now market sentiment backed by the USD should pare more of last week’s gains. We are now officially over the hump of the US driving season and just about to enter historically a weak demand month of Sept. Despite probably seeing the worst of the recession, global growth should remain subdued! Gold prices advanced as investors took this week’s decline as a buying opportunity. The questionability of sustaining economic growth continues to increase the ‘yellow metal’s’ appeal as an alternative investment ($945).

The Nikkei closed at 10,473 down -165. The DAX index in Europe was at 5,521 down -1; the FTSE (UK) currently is 4,894 down -4. The early call for the open of key US indices is higher. The 10-year bonds eased 1bp yesterday (3.44%) and are little changed in the O/N session. Dealers have managed to keep yields close to their lows despite all this weeks supply as the market debate the inflation question. Will policy makers keep rates low for an extended period of time or will all this stimuli create rapid inflation? Yesterday’s 5-year $39b was well received with a 2.51 bid-to-cover ratio, greater than the other 10-auctions average of 2.2. Today’s 7-years ($28b) will be the last of this weeks supply.

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