Greece is cancerous for the EUR

Now that everyone’s back, we can get on with further pressurizing the EUR. Greek bonds, this morning, are trading under pressure due to speculation that ‘the’ plan for EU and IMF assistance in reducing the nation’s budget deficit may falter. How is that a surprise to Capital Markets? The architects were capable of keeping investor confidence high enough so that the Greek Government could at least get their first round of refunding off. There are reports that Greece wants to bypass the IMF involvement should it require assistance, as their conditions would be too stringent. Papandreou will have ‘hand in cap’ again to the EU partners trying to prevent his own domestic civil unrest. Greek Capital from wealthy individuals is been moved to offshore accounts at record pace. More than 3b EUR’s of deposits held by Greek households and companies left the country in Feb. while in Jan. about 5b EUR’s of deposits were moved out. Even internally there is no investor belief. Greece is the only one ‘public’ eyesore amongst the PIIGS thus far.

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 ‘whippy’ trading range.

Forex heatmap

Not surprising, but yesterday’s US data continues the bullish trend of late. The services sector managed to expand at its fastest pace in nearly four-years. The ISM non-manufacturing index advanced to +55.4 vs. +53.0, reinforcing the US’s V-shape recovery. Digging deeper, analysts note that with business activity and new-orders now at, or above, 60.0, is a strong signal to the Fed that ‘the recovery’ is occurring at a faster pace than originally anticipated. The new-order gains are partially due to an uptick in foreign demand. These are all positive signs for stronger future production growth that’s expected to aid GDP. A tad disappointing, but on a positive trend, was the employment sub-category. It is improving, but remains in its contraction phase. The prices paid component also expanded, printing +62.9 (third consecutive month moving higher). Price pressures exist and the Fed will have to act sooner rather than later to reduce stimulus. Not to be left out, the manufacturing and service sectors are expanding at its fastest pace in four-years. Finally, inventories remain in contraction mode. More importantly, this sub-category is not seasonally-adjusted.

Yesterday’s US pending home sales blew all analysts expectations out of the water (+8.2% vs. -1.0%). Analysts note that adverse weather conditions had no effect, despite expectations that they could have disrupted housing sales. It’s believed that with the expirations of the ‘homebuyer’s incentives’ at the end of this month is putting the heat on pending headline print. In order to qualify for the incentives, a contract must be in hand by May 1st and the sale must close by July 1st.

The USD$ is higher against the EUR -0.50%, GBP -0.60%, CHF -0.60 % and lower against JPY +0.49%. The commodity currencies are a tad stronger this morning, CAD +0.25% and AUD +0.40%. Forget infinity, forget parity, Canada is staring at a ‘premium’ to its southern neighbor. Commodities, equities and every piece of economic data cannot trip up the currency’s momentum presently. The CAD dollar rose to its strongest level in 24-months yesterday vs. its southern neighbor as crude oil continues to push to the topside. Year-to-date the loonie has appreciated just over +5% vs. the greenback, making it the second strongest currency move after the MXN. It seems that NAFTA currencies rule. Everything the global economies want, Canada has it. This Friday we get Canada’s employment report and analysts expect a third-consecutive monthly gain. Domestic data continue to surpass all expectations. Growth rates are coming in much stronger than Governor Carney and his policy makers expected. In Jan. they pegged 1st Q growth at +3.5%, the market is looking for something in the range of +5.5%. It’s taken nearly two years for Canada to perhaps finally adjust to living with parity. To date the USD rallies have been shallow and are met with strong resistance. The trend remains your friend.

Australians are divided ‘no more’ after last night’s RBA announcement. Governor Stevens raised its benchmark interest rate to +4.25% and signaled further increases, ‘dismissing warnings that higher borrowing costs are already eroding consumer spending’. It was the fifth increase in borrowing costs in six-meetings. Governor Stevens said that ‘it was a further step in returning yields to average levels’. In reality the RBA is getting ahead of the curve, as the move indicates policy makers have concerns that ‘inflation and house-price increases will surge without greater monetary restraint, even after retail sales and home construction dropped last month’. Last week, Governor Stevens said that Australian house prices are ‘getting too high’, signaling that he wants to minimize the ‘danger of a housing boom and bust in the aftermath of the US example’. ‘Interest rates to most borrowers nonetheless have been somewhat lower than average,’ the governor said in following communiqué. ‘With growth likely to be around trend and inflation close to target over the coming year, it is appropriate for interest rates to be closer to average’. The market should expect the AUD to remain better bid on any pull backs (0.9202).

Crude is lower in the O/N session ($86.25 down -37c). There seems to be nothing stopping this commodity, not even a bearish headline print from the EIA report last week. There are many economic reasons that have kept crude prices afloat these past two weeks. Most global fundamentals reports have beaten market expectations, which always favor commodities. Probably the granddaddy of them all is the US employment report showing signs of gathering momentum and giving the consumer the confidence that economic growth is sustainable. Last week’s EIA report revealed that crude stocks rose by +2.9m barrels to +354.2m. The market had been expecting an increase of +2.4m. The surprising factor in the report was that gas inventories recorded a modest gain, unlike the previous couple of weeks. Stocks increased +313k barrels to +224.9m w/w vs. a forecasted decline of -1.85m barrels. Other reports showed that OPEC’s crude-oil production slipped from a 14-month high last month. Technical analysts have their eye on $90 by year end.

There is nothing like stronger fundamentals to give commodities a boost. Global equities are expected to push higher as economic report after economic report exceeds most analysts’ expectations. So far this month, speculators are taking more cash off the side lines and finally putting it to work. This quarter fundamentally, it’s been expected that the ‘yellow metal’ would find stronger traction as investors seek an alternative to an ‘on going weakening’ of the EUR and low interest rates. Commodities prices remain contained despite the strength of the dollar. It is firm in terms of the EUR, GBP and JPY. However, over time the dollar’s direction will be the strongest indicator to wanting the metal or not ($1,126).

The Nikkei closed at 11,282 down -57. The DAX index in Europe was at 6,259 up +24; the FTSE (UK) currently is 5,782 up +37. The early call for the open of key US indices is lower. The US 10-year backed 5bp yesterday (3.99%) and again managed to ease 4bp in the O/N session (3.95%). Treasury yields rose to the highest level in 10-months as reports on US service industries and pending home sales added to signs their economic recovery is gaining traction. Last week, the NFP report added the most jobs in 3-years. All economic data of late have increased expectations that ‘the’ recovery is sustainable and will make it interesting for the $82b of new issues in the US this week. Expect supply to continue to dominate trading as traders prepare to make room to take down the auctions (Today 3’s-40b, Tomorrow 10’s-21b and Thursday long-bond-13b). Last month, the government supply was a bearish factor for bonds as interest waned at lower yields. Ten-year yields are now technically eyeing 4.25%, however the 4.00% psychological level needs to be firmly broken first!

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