Da Bears EUR offside

It’s back to the drawing board for ‘da bears’ as the EUR has gained +6.6% against the dollar since hitting a four-year low in the first week of June. Sitting on its recent highs, glancing back, the lows are looking further and further away. The EUR buoyed by seasonal earnings, stronger European debt auctions and weaker US data seems to want to test its upper technical resistance levels of 1.2950-1.3000. The market remains apprehensive about today’s data. Will this morning’s US retail sales print and the FOMC minutes detract from the latest optimism about growth? The sales figures are expected to provide further evidence that the economy lost momentum towards the end of 2nd Q. While the FOMC communiqué did provide a more downbeat statement, reflecting the weaker tone of the incoming economic data, most likely did not warrant a discussion on quantitative easing. After this, the focus is back to China and its GDP print this evening.

The US$ is mixed in the O/N trading session. Currently it is higher against 9 of the 16 most actively traded currencies in a ‘subdued’ trading range.

Forex heatmap

Yesterday’s widening in the US trade deficit from -$40.3b in Apr. to an 18-month high of -$42.3b in May was all due to an increase in the non-petroleum deficit. The real trade deficit, which is what matters for real-GDP growth, widened from $44.2bn to $46.0bn. Analysts project that if it were to remain broadly steady last month, net trade would subtract more than -1% from annualized GDP growth in the 2nd Q. That print, would certainly throw a ‘cat amongst the pigeons’ on the market’s estimate of a -0.2% decline. That been said, analysts will wait for this morning US retail sales data before laying claim to any predictions. One should remember that the trade data was for May, and does not reflect the slowdown in activity that other indicators have highlighted of late.

The NFIB (National Federation of Independent Businesses) small business survey reported a decline in the headline optimism index, from 92.2 to 89.0 in July. This has reversed most of the gains witnessed over the past two months. Digging deeper, the weakness was widespread, with the expected capital expenditure, inventories, earnings and sales sub-categories all falling. Consumer confidence is the key component in driving growth. Of late, global confidence indicators are experiencing a weakening bias.

The USD$ is lower against the EUR +0.01% and GBP +0.42% and higher against the CHF -0.33% and JPY -0.46%. The commodity currencies are stronger this morning, CAD +0.33% and AUD +0.38%. Owning the loonie is like a winning lottery ticket. It continues to pay out. Stellar fundamental reports of late have traders increasing bets that the BOC will hike rates for the remainder of the year. It seems to be a done deal that Governor Carney will raise +25bps next Tuesday and perhaps another +25bps in Sept. At +1%, Carney has the latitude to step back and assess global growth for the 3rd Q, which in fact could persuade policymakers to ‘skip a beat’ and pause, so that they do not get too far ahead of their southern neighbors. With risk appetite being better than it has been over the last trading week favors growth yield sensitive currencies like the AUD and loonie. 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 somewhat (+0.50%) 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. 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 is trading within proximity of its three week high on the back of buoyant regional bourses and confidence reports. Thus far, stronger reported earnings in the US is pressurizing the ‘must have’ risk-aversion currencies and promoting the growth sensitive, higher yielding and commodity based ones. It seems that the only immediate concern for the currency could be the looming federal election to be called by new PM Gillard. Currently, there is little evidence that the overall positive sentiment is running out of momentum. Last week we saw that there was nothing better to drag a currency higher than strong employment numbers. This week, economic sentiment seems to rule the coop. 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’. Because of equities actions, the market is a cautious buyer on pullbacks, wary that the recent strong rally technically may be overdone (0.8833).

Crude is little changed in the O/N session ($77.10 -5c). Crude prices rose yesterday, erasing some of this weeks earlier declines on earning’s optimism that is fuelling an equity rally that may signal an economic recovery in the US. With the dollar also declining vs. the EUR has increased the appeal of commodities as an alternative investment. Last week, the black-stuff had a + 5.5% gain, the biggest rally in six weeks, as a drop in jobless claims ‘bolstered speculation that the country would sustain its economic recovery’. Later this morning the market expects another weekly draw down on stocks, however, the headline print is ‘not’ expected to be as negative as the last report. It 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 was 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. We continue to remain range bound with the price action as the market is looking for stronger evidence to tackle the technical support and resistance levels.

A number of factors are supporting the ‘yellow metal’s’ largest rally in over a month. Gold is rallying on the heels of positive sentiment expressed by a rally in the equity market, a weaker dollar and finally a Portuguese 2-notch downgrade by Moody’s. Strength in commodities has a positively strong correlation with equities. Pick your poison, as every excuse is legitimate to wanting this commodity to be a part of ones portfolio. Technically, the bullish sentiment had 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. Despite this, longer term view, market concerns over global economic growth is supporting the ‘yellow’ metal prices on pull backs. Year-to-date, the commodity has gained +12.5% as investors have been content in using the commodity as a hedge against any European holdings ($1,213 +40c).

The Nikkei closed at 9,795 up +258. The DAX index in Europe was at 6,207 up +16; the FTSE (UK) currently is 5,272 up +1. The early call for the open of key US indices is higher. The US 10-year backed up 7bp yesterday (3.12%) and are little changed in the O/N session. Treasuries extended their losses to a fifth day as the market prepares to take down the last of the $69b’s worth of new product this week (3’s $35b, 10’s $22b and Bonds $12b) and on the back of a global bourse rally, reducing the demand for the safe heaven asset class. Throw in a revised IMF forecast for global growth, warrants dealers to cheapen up the curve and push 10-year yields to threaten the 3.15% resistance level. Yesterday, the 10-year note sale came in at a yield of 3.119%. The bid-to-cover ratio was 3.09, compared with the average of 3.06 over the past 8-auctions. Overall, the auction generated a healthy demand for the benchmark. The indirect bid (proxy for foreign buyers) was 42% compared to an 8-auction average of 38.3%. The direct bid (non-primary dealers) was 10% vs. an average of 15.5%. Current market sentiment has dealers wanting to sell product on up-ticks.

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