Greece provides an opportunity to sell the EUR

Moody’s paranoia of being forgotten decided to downgrade Portugal two notches to A1 this morning. This has given the Euro-zone sovereign debt crisis top-billing again, surpassing the disappointing ZEW Business survey from Germany, which did not fall, but plummeted from 28.7 to 21.2. All this negative news has hit a market that was already looking for safer heaven trading ideas after China made it clear that it will halt any property speculation and on fear that their GDP report on Thursday will show that their economy is slowing down. Global sentiment again has taken a hit. Will earnings season save the day? Solid demand for the Greek bill auction has given the EUR some support, but sellers are lurking.

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

The market yesterday felt motionless ahead of this week’s earnings report and tomorrows US sales data. Investors are looking for some ‘concrete’ guidance before they go out on a limb again. The US trade deficit has been virtually unchanged for the last three months and analysts do not expect much movement in the May report either. Consensus is pegging this morning’s headline print just above the -$40b mark again, as a price related decline in petroleum imports will be negated by an increase in the non-oil deficit. The market is anticipating solid gains in both the import and export non-petroleum gains, but with a greater weighting on the imports category. Digging deeper, the ‘nominal deficit is expected to be restrained by lower oil prices, while the ‘real’ should rise.

The USD$ is higher against the EUR -0.44%, GBP -0.24%, CHF -0.15% and lower against JPY +0.21%. The commodity currencies are mixed this morning, CAD +0.12% and AUD -0.52%. All good things temporarily come to an end and that includes the loonies advance after stellar fundamental reports of late. Last weeks unemployment report blew all analysts estimates out of the water (+93k), but with equities floundering temporarily reduced the appeal of growth based currencies. Any dollar rallies will only give speculators a better ‘average’ opportunity to own the CAD. It’s difficult to find any technical or fundamental reason to ‘not’ own the currency, whether it’s growth, the BOC attempt to normalize rates (+0.50%) somewhat or as a safer-haven proxy. Couple this with commodities has speculators wagering bets that the CAD will outperform other economies whose monetary policy is expected to experience a prolonged period of near-zero benchmark rates. For most of this month, the loonie has followed equities, in fact, the currency has a +85% correlation with the Dow. If the BOC remains in a ‘normalizing’ rate mood then the currency will be more sought after. The futures market has priced in a 0.25% hike by the BOC next week. On the crosses, CAD is holding its own and under normal conditions is seen as a safer way to play a global economic recovery with links to commodities and less banking.

The AUD has continued its slide for a second consecutive day, retreating from its highest level in three weeks amid speculation that the recent rally was overdone and before Chinese GDP reports that analysts expect will show that their growth is slowing, thus damping demand for higher-yielding assets. Currently the AUD is running out of momentum, and the market expects to see more of the same this week. Last week we saw that there was nothing better to drag a currency higher that strong employment numbers. This week, economic sentiment seems to rule the coop. Fundamentally, with a strong domestic growth base it is buffering the economy from any outside negative influence at the moment. Last week, Governor Stevens left the cash O/N rate unchanged for a second consecutive month (4.50%). In his following communiqué, the RBA stated that consumer spending and business investment are expanding. Policy makers are ‘reinstating their view that domestic growth will be about trend’ and are ‘not alarmed by the global demand backdrop’. In retrospect, policy makers remain ‘very upbeat’. However, that been said, the currency pressure is coming mostly from investors who want to own safer heaven position. On the crosses especially, like AUD/JPY one can expect further pressure being exerted. For now, speculators will be better sellers on upticks (0.8753).

Crude is little changed in the O/N session ($74.94 -1c). Crude prices felt the heat yesterday, declining from a one week high as investors locked in profits. Earlier, the commodity rose on the back of China’s import fuel data (net imports +2m-metric tones to +22.14m), setting up the market nicely to offload winning positions ahead of an anticipated softer US sales data tomorrow. Last week, the black-stuff had a + 5.5% gain, the biggest rally in six weeks, as a drop in jobless claims ‘bolstered speculation the country would sustain its economic recovery’. The earning’s season and an equity market finding it difficult to maintain traction will pressurize commodities, as will cooler weather being predicted coupled with no threats of hurricanes in the Gulf of Mexico. Last week’s EIA report revealed a drawdown of -5m barrels, somewhat inline with market expectation because of hurricane Alex, but, it was the other subcategories that were capable of reining in the price advance. Data showed an increase of +1.3m barrels for gas stockpiles and an increase of +300k for distillates stocks (heating and oil). While the headline for crude is bullish, the numbers for gas was bearish. Analysts believe that the gas markets numbers continue to show ‘lackluster demand and will put pressure on the entire energy complex in the days to come’. The EIA revealed a larger than expected increase in natural-gas stockpiles to +78 bcf vs. +60 bcf’s. Currently there are too many negative variables that support the bear’s short positions with speculators preferring to sell on rallies.

The ‘yellow metal’ had the largest rally on Friday in three week’s as investors demanded the commodity that had been trading close to its technical lows for a few day’s. Investors continue to weigh ‘the signs of hope in the US labor market against concerns of impending European bank stress-tests (July 23). Yesterday, with consolidation the name of the game, the metal pared some of its advances on speculation that a strengthening dollar will erode demand for the precious metal as an alternative asset. Technically, the bullish sentiment has been on hiatus with profit taking testing the medium term support levels. Fundamentally, in the short term the metal will find it difficult to rally aggressively, as historically, this is the ‘slowest’ season for physical demand. India, the world’s biggest consumer, expects imports to plunge as much as -36% this year. Despite this, longer term view, market concerns over global economic growth is supporting the ‘yellow’ metal, at least until the technical support of $1,175-80 is broken. Year-to-date, the commodity has gained +11.5% as investors have been content in using the commodity as a hedge against any European holdings, believing that the EUR has not bottomed out just yet ($1,204 +$5)!

The Nikkei closed at 9,537 down -11. The DAX index in Europe was at 6,149 up +72; the FTSE (UK) currently is 5,230 up +63. The early call for the open of key US indices is higher. The US 10-year backed up 3bp yesterday (3.05%) and are little changed in the O/N session. Debt prices remain soft on the back of investors diminishing concerns that the US will slip back into a double dip recession and also on investors radar, is the US governments auction of $69b’s worth of new product this week (3’s $35b, 10’s $22b and Bonds $12b). Throw in a revised IMF forecast for global growth, +4.6% vs. an April estimate of +4.2, warrants dealers to cheapen up the curve and keep 10-year yields above the +3% level to take down product. With the current market sentiment dealers will want to sell product on up-ticks.

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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