European policy makers, a team consisting of individual actions. Disaster!

By now, one would have expected a vocal consensus on the ‘strengthening effects’ of the EUR from European policymakers. Earlier this week, European finance minister met and the ‘currency’ happened to be on the agenda. Capital markets were informed that they had discussed the topic and will address the market when Juncker, Almunia and Trichet travel to China later this year. Various countries within Europe have a different take on things. France believes that the EUR at 1.50 is a ‘disaster’ for industry and economy. The Spanish ‘do not’ think current levels are a worry. Germanys Economic Minister and ECB’s Weber have the same feelings. That’s Europe’s problem. It remains socially and culturally a society divided and hearing ‘individual’ opinions constantly, like a child, nobody listens! Trichet and Co. should stake a leaf out of the BOC and SNB verbal ‘intervention’ tactics. Governor Carney at the Bank of Canada eventually managed to sway the currency 2% yesterday!

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

Forex heatmap

Yesterday’s US numbers were disappointing as both housing starts and PPI were weaker than expected. Against all expectations, it was the 2nd consecutive month that ‘starts’ failed to penetrate that psychological level of +600k, it managed a print of +590 (consensus was for +610k). It’s also expected to be the norm for the medium term as permits fell to +573k vs. +595k. Digging deeper, providing more negativity was the downward revisions to the previous month. It’s worth noting that the sub-category of the single family starts grinded higher which gave some buoyancy to the final headline print. The PPI on the other hand showed a ‘broad base decline’ of prices for the headline and core print (-0.6% and -0.1% respectively). Despite gas prices declining -5.6%, other sub-categories like clothing, computers, trucks and food all contributed to the decline! This report is strong evidence that producers cannot seem to get a toe-hole on the pricing front in this recession. What will the upcoming holiday season be like?

No surprises in the rate announcement with the BOC (they remained on hold at +0.25%). But, what took both the bond and currency market by surprise was the dovish sentiment that followed from Governor Carney that provided a -2% sting in the tail for the loonie. The aggressive down turn of the loonie should not have been as much of a surprise. Everyone and their mother had been buying the currency on the back of the strength of commodities and consciously believing that the Canadian economy was on par with its commodity cousin, Australia. The export exposure from both countries is very different. Australia relies on the far-east while 75% of Canadian exports head south. Canada needs to diversify more! Policy makers directly commented on the currency effects and said that the ‘current strength in the dollar is expected, over time, to more than fully offset the favorable developments since July’. The BOC also went on to note that the output gap will now ‘not’ be closed until 3rd Q of 2011 (a whole Q later than previously indicated). They have lowered both their 2009 and 2011 growth forecast to +2.4% (2.3% in July) and 3.3% (3.5% in July), respectively and do not expect inflation to meet their 2% criteria until the 3rd Q as well. One could conclude that the BOC will be sidelined until at least 3rd Q of 2010, or maybe longer! Tomorrow’s Canadian MPR report should be an interesting read.

BOC statement

The USD$ is currently lower against the EUR +0.17%, GBP +0.72%, CHF +0.26%, JPY +0.01%. The commodity currencies are stronger this morning, CAD +0.26% and AUD +0.57%. Other Canadian data yesterday showed that wholesales sales posted a widespread loss in Aug. (-1.4% vs. +2.6%, m/m). It was the 1st loss in 2-months. Digging deeper, despite a price decline, price-adjusted trade dipped as well. Analysts note that it was the first occurrence of this in 4-months and will obviously affect real GDP for that month. It worth noting that inventories to sales ratio remained at 1.35 despite a larger decline in sales (-1.4%). With the BOC stepping up its dovish rhetoric expect the market to continue to take some of the winning premium off the table in the short term. Speculators are looking for better levels to once again own the currency.

The RBA keeps providing the ammo to lift the AUD towards parity. They said it was ‘possibly imprudent’ to keep borrowing costs at a 50-year low in the minutes of its October meeting, this week. The AUD continues to hover within striking distance of it it’s newly printed 14-month high earlier this week. The RBA’s Governor Stevens said that policy makers ‘cannot be too timid in raising its benchmark interest rate now that the threat of an economic crisis in the nation has passed’ (3.25%). Futures traders are betting on a 30% chance the rates will be hiked another 75bps by year-end (0.9276). Governor Bollard from the RBNZ also indicated last night that the Kiwi strength will not be an impediment for policy makers to raise interest rates (2.50%).

Crude is lower in the O/N session ($78.41 down -71cc). Finally, for the 1st time in nine trading session, crude prices fell. All on weaker fundamentals after US housing starts disappointed yesterday. Mind you weaker equity prices and the USD finding some traction did not help its plight. The market is somewhat concerned that today’s inventory report will reveal higher stock levels. The black-stuff did manage to make an $80 print, but alas, it was short lived after OPEC Secretary- General El-Badri said that ‘prices above $80 would hamper economic growth’! Technically, prices have been aggressively mobile on pure ‘speculation’. Last week’s EIA report showed that inventory levels for gas unexpectedly declined as refineries idled units for maintenance. Stocks plummeted -5.23m barrels w/w, and the largest drop in over a year. Consensus expected a +1.13m barrel weekly increase. With refineries operating at 80.9% of capacity, the lowest level in 6-months, gas output declined 10%, the most in 13-months. To put that in prospective, refineries have reduced their output by -964k barrels a day to +8.45m! The decline has left inventories at +209.2m barrels. On the flip side, inventories of crude rose + 334k barrels to +337.8m vs. an estimated weekly increase of +1m barrels. When floating storage is eliminated then demand destruction will end!

Rock solid, that’s gold, despite it erasing early morning gains yesterday after the ‘big’ dollar rebounded somewhat, albeit temporarily. The commodity remains well sought after on pullbacks as long term inflation worries continue to concern the investor ($1,057). For now, every pull back remains a buying opportunity.

The Nikkei closed at 10,333 down -3. The DAX index in Europe was at 5,799 down -12; the FTSE (UK) currently is 5,239 down -4. The early call for the open of key US indices is lower. The 10-year bonds eased 3bp (3.34%) and are little changed in the O/N session. The longer end of the US yield curve managed to advance the most in over a week yesterday. All on the back of disappointing housing starts and lower wholesale sale prices. The resulting data gives the Fed further leg room to keep the status-quo on rates. 2’s/10’s managed to flatten 4bp to 241 and the lowest level in over a week! With global equities softening, expect the front end to find support on pull backs as investors become more risk averse.

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