Market wary of Stress Tests before betting Farm

Helicopter Ben, today, will confirm that the Fed is concerned about the deterioration in the economic outlook and again indicate that they are probably a long way from implementing any further policy stimuli. His semi-annual testimony, this afternoon and tomorrow, in front of the US House and Senate, is unlikely to create big waves throughout the Capital Markets. That will be left to this Friday’s Euro-zone stress test releases. The dollars is looking as if it’s running out of steam to the downside. Are we turning the corner? Its weakness has been partly due to a lower level of concern about the European fiscal crisis. It’s logical that doubts about sovereign defaults and the longevity of the EUR will increase again (Hungary, Ireland, Portugal Greece etc.). Market will soon realize that US growth is only slowing and not stalling!

The US$ is weaker in the O/N trading session. Currently it is lower against 11 of the 16 most actively traded currencies in a ‘whippy’ trading range.

Forex heatmap

US housing data was not as bad as the headline suggested yesterday. Housing starts (+549k down -5%) did disappoint the weaker expectations camp, however, on the flip side, building permits advanced (+586k vs. +575k). Digging deeper into the underlying variables, the starts was ‘focused on lower value-added multiples’, one could interpret it as somewhat of a plus for the headline print. Analyzing the sub-components, singles fell -0.7% from a run rate of +457k in May. It was the multiples sub-category that accounted for the headline drop in total starts (-21% m/m). Building permits advanced +2.1%, its first increase in 4-months. It was the multi-family units that led the gain (+19.6%-the most in 8-months). This happened to offset the -3.4% decline in the single-family print. It’s worth noting that starts are back to its lowest level in 10-months. Analysts expect that the housing category again will burden the 2nd Q GDP growth. That been said, keep an eye on the business investment print, it has triple the weighting than housing in GDP and it’s on an upswing.
Perhaps the next eyesore will be on the resale side of things as the data has yet to record the drop in pending home sales and mortgage purchase applications. Expect this do so over the next few months.

The USD$ is lower against the EUR +0.00%, GBP +0.30%, CHF +0.19% and JPY +0.33%. The commodity currencies are stronger this morning, CAD +0.94% and AUD +0.15%. It’s done. It’s over with, no surprises from Governor Carney at the BOC yesterday. Policy makers raised its benchmark lending rate for a second consecutive month (25bp to +0.75%), and said that slower economic growth through next year means any future moves will be ’weighed carefully’. The growth forecast was cut to +3.5% from +3.7% for this year and to +2.9% from +3.1% for 2011. In the following communiqué he stated that ‘given the considerable uncertainty surrounding the outlook, any further reduction of monetary stimulus would have to be weighed carefully against domestic and global economic developments’. ‘The global economic recovery is proceeding but is not yet self-sustaining’ according to Carney and the rate increase will ‘leave considerable monetary stimulus in place’, with both the core and total inflation to advance at about a +2% annual rate through 2012 (within their target zone). Some will argue that with signs of a significant slowdown underway in the US, it’s possible that the BOC may be persuaded to move back to the sidelines on the Sept. go-around. Carney has given himself the latitude to step back and assess global growth for the 3rd Q. Longer term speculators continue to wager bets that the CAD will outperform other economies whose monetary policy is expected to experience a prolonged period of near-zero benchmark rates. For now, speculators prefer to be buyers of CAD on dollar rallies.

The AUD continues too trade near its strongest level in two months vs. the dollar on speculation that the Fed will announce steps to ‘spur lending to boost growth in the world’s largest economy’. However, vs. the JPY, the currency is struggling on speculation that the slowing global economy will deter the RBA from raising interest rates next month. Fundamental analysts believe it would take another rate hike for the currency to trade again in the 90’s and technically it’s a sell on approaching these levels. Already this week, the minutes of the RBA’s July meeting showed that policy makers plan to use the results of EU bank stress tests and local inflation figures to decide whether to resume the most aggressive round of interest-rate increases. Governor Steven’s indicated that the election, called by PM Gillard, would not impact the Aug. 3 interest-rate decision and that the medium-term picture for Australia is ‘fairly positive’. 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 (0.8854).

Crude is little changed in the O/N session ($77.82 up +24c). Crude happened to pare its initial losses yesterday, ending the day in the black, despite the weaker US housing data. The turnaround occurred on the back of China’s expanding economy and on expectations that the weekly US inventories declined last week, proof perhaps of improving fuel demand. We will get to see if it’s true later this morning in the EIA release. With the dollar continuing its problems vs. the EUR is boosting speculator demands for energy futures as an alternative investment. All last week the market was hung up on the growth concerns of the world’s two biggest consumers as China’s economic growth eased and the Fed said that the ‘US outlook had softened’. Bigger picture, the market is concerned about the fuel demand tapering off. Last week’s EIA report fell -5.06m barrels, or -1.4%, to +353.1m (the most in 10-months) vs. an expected decline of only -1.5m barrels. This has left crude supplies +7% above the five-year average for the period. The headline print certainly looks bullish, but, with +350m barrels, supplies are not that tight. Digging deeper, gas supplies climbed +1.6m barrels to +221m, w/w, and not unlike the stocks of distillate fuel (heating oil and diesel), increasing +2.94m barrels to +162.6m, almost three times the size of the gain forecasted. Analysts believe that crude will soften after government reports again this week will signal that the US economic recovery is stalling, which in effect will stain fuel demand. Technically, the gas markets numbers show ‘lackluster demand and will put pressure on the entire energy complex’. We continue to remain range bound with the price action, as the market is looking for stronger evidence to tackle its support and resistance levels.

The safe-haven interest that happened to push gold to record prices last month failed to materialize again yesterday, as investors liquidated their holdings of precious metal amid uncertain markets. The metal is fighting its technical 100-day moving average. Dealers expect investors to pull the trigger and liquidate their remaining long positions on a break of the moving average. The rebound in the EUR has reduced, somewhat, the demand for the ‘yellow metal’ as a haven against European-debt concerns. A number of factors have been supporting the ‘yellow metal’ over the past month, however, the reason are beginning to fall by the way-side. Firstly, a positive equity market, bullied by the seasonal earning’s reports initially helped the commodity. Now, equities are having trouble of their own. With Moody’s downgrading Ireland and Portugal, it was expected to highlight the fragility of the sovereign debt issues, but, that has not materialized. Big picture, 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 should support the ‘yellow’ metal prices on much deeper pull backs. However, that been said, weaker longs firstly need to be taken out of the market. Year-to-date, the commodity has gained +7.8% and is in danger of giving up more ($1,188 -$3.40).

The Nikkei closed at 9,278 down -22. The DAX index in Europe was at 6,036 up +69; the FTSE (UK) currently is 5,204 up +65. The early call for the open of key US indices is higher. The US 10-year eased 1bp yesterday (2.93%) and is little changed in the O/N session. Treasuries prices remain better bid on the back of softer US housing starts, proof perhaps that it’s a sign that economic growth is ‘fading’. The shorter end of the yield curve happened to print record low yields again. With the softer economic data and growth targets being revised has investor’s grabbing yield as the market prices in an increase to the ‘extended period of low interest rates’ promised by the Fed. Current market sentiment has dealers wanting to be better buyers on pull backs, as the market foresees a flatter yield curve for the remainder of the week. Various dealers are looking for 10’s to yield 2.75% by year end, if so, we have a lot of pain to get through!

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