HUF dog and pony show stops EUR bleeding

Until this morning there has been confusing rhetoric from the new Hungarian government. Details of their economic and fiscal plans are now only emerging from a government that took power two weeks ago, as they try to stop the bleeding from a rumored filled session on Friday which sent the HUF to its biggest drop in two years. After an emergency session this weekend they have indicated that they will be sticking to the EU and IMF imposed 3.8% budget deficit target without implementing an austerity or a fiscal stimulus plan. They believe there is already a 4% of GDP’s worth of austerity measure in place. Again, the questionable economies have to perform the ‘dog and pony show’ to convince investors and Capital Markets not to squeeze them deeper into a recession. Weaker global growth data is not helping peripheral economies from having capital markets take a run at them. Investors have been implementing risk aversion trading strategies until the confusion is sorted out.

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

Forex heatmap

We all know that this month’s employment report was a big disappointment (+431k headline with a much-weaker-than-expected +41k rise in private payrolls). Digging deeper, the overall weakness was broad-based apart from manufacturing and temporary positions which continue to add jobs (+29k). Construction, retail and financial all suffered job losses, but on a decelerated pace from the previous report. The unemployment rate fell to +9.7%, a better-than-expected outcome, but the drop was concentrated in the 20-to-24-year-old age bracket. More importantly and disappointingly was unemployment in the key 25-to-54 category holding steady at +8.7%. The median duration of unemployment jumped +1.6 weeks for the second straight month to stand at +23.2 weeks. The average hourly earnings jumped +0.3% along with the overall workweek (third straight month, +34.2 hours), and the factory workweek was up +0.3 hours for the third straight month, leaving it at 40.5 hours. It’s a worrisome report that suggests that the recovery in private labor demand is possibly stalling. This will only make it more difficult for the unemployment rate to retreat, in the short term and providing more of a headache for Bernanke’s recovery.

The USD$ is higher against the EUR -0.14%, GBP -0.01%, CHF -0.07% and lower against JPY +0.23%. The commodity currencies are weaker this morning, CAD -0.38% and AUD -1.05%. Despite a stronger than expected Canadian employment report (+28k vs. +17k), the currency underperformed vs. its largest trading partner on concerns that the Europe’s sovereign-debt crisis will worsen. However, with the dollar dominating most currencies, the CAD on a cross related traded basis certainly outperformed most other currencies. When it comes to risk aversion, growth or commodity currencies are normally the most affected, but on the whole the loonie is certainly holding its own after stronger domestic data and BOC hiking rates last week. Governor Carney hiked the key overnight rate by +0.25%, making Canada the first G7 country to see a rate hike. The tone of the statement suggests that this is not necessarily the ‘first step on a long march towards a normalization of interest rates’. This is probably the best move for Governor Carney under current market uncertainties, and signals a fairly ‘neutral bias’ that keeps the BOC’s options open going forward. The loonie will find some bids close to this months lows, as the market is seen using the CAD as a safer way to play an economic recovery in the US with linkage to commodities and less banking or fiscal noise to be concerned about. We are back to risk on and off again and commodity prices dominating the loonies short term direction.

Eventually European debt contagion questions were bound to catch up with commodity currencies. The AUD has felt the pinch for a second consecutive day as global policy makers seem to be heading for a collision over strategies for a recovery. This is naturally damping demand for ‘growth-sensitive currencies’. Not containing Europe’s debt issues could lead to a global double dip and an aggressive sell off in commodity currencies. So far it seems that the crisis in Europe has not had a material impact on the Australian economy. Depending on equities and commodities, some investors are looking to sell AUD on upticks for now (0.8130).

Crude is weaker in the O/N session ($70.93 down -58c). Crude prices on Friday tumbled the most in four months on the back of a weaker than expected NFP report and on the EUR dropping below that psychological 1.20 handle for the first time in four years. Fundamentally, there’s been a change in the perception of how solid the rebound is, as questionable growth is just leading to weaker commodity prices. Even the softer than expected weekly inventory report has done little to bolster the demand for the black-stuff. Weekly oil inventories reported a decline or -1.9m barrels vs. an anticipated -1m. Not to be outdone, total gas inventories fell by -2.6m barrels. The market had expected an increase of +750k. On the flipside, distillates stockpiles increased by only +500k barrels whereas capital markets were expecting to double the headline print. Technicals continue to believe that the market is currently overbought short term. Sellers remain on upticks as the market is becoming more overtly risk averse.

Again the ‘yellow metal’ remains in demand as an alternative to the EUR. Technically, it becomes the benefactor when all other currencies fail. Rumors that another EU member is suffering from the Greek effect stemmed the decline and provided a reversal of fortunes for the commodity. The threat to global growth from Europe’s debt crisis and weaker global bourses tends to increase the demand for the commodity as a haven on pull backs. The currency concern’s is only promoting a case for owning the yellow metal. Europeans are content in using the commodity as some sort of hedge against their European holdings, believing that the EUR will just keep going lower. GSNY has a month-end target print of 1.1700. Also lending support is India, who’s gold import numbers have been stronger than the markets been calculating (+$6.9b vs. +0.71b, y/y) and surpassing China as the world’s largest user of the commodity. For now, the market is a better buyer on deeper pull backs ($1,215).

The Nikkei closed at 9,520 down -380. The DAX index in Europe was at 5,893 down -45; the FTSE (UK) currently is 5,069 down -57. The early call for the open of key US indices is lower. The US 10-year eased 15bp on Friday (3.20%) and is little changed in the O/N session. Treasuries happened to pare earlier losses as equity markets saw red on rumors that Hungary is experiencing ‘Greek type symptoms’ and a weaker private sector NFP report. Expect dealers to push yields back up somewhat so as to take down this weeks supply at a reasonable rate (3’s-$36b, 10’s-$21b, and 30-years-$13b). The short term bigger picture has treasury yields remaining under pressure on EU efforts to contain Europe’s debt crisis. At the moment, the market seems happing entertaining risk-off trading strategies.

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Dean Popplewell

Dean Popplewell

Vice-President of Currency Analysis and Research 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