EUR bulls have their tails between their legs

People are still inclined to shun riskier assets as the faithful dollar rules the roost this morning. Speculation that next week’s data will add to the evidence that the world’s economic recovery is losing momentum has the JPY buyers testing the BOJ’s resolve. The market is calculating a 51% chance that the BOJ will intervene soon, the first time in 6-years. If the BOJ happens to eases monetary policy further, selling of the yen, not only against the dollar, but also against broader cross currencies will happen. How much of an impact will they have? The SNB is under water on their ‘intervention’ policy position, to the tune of $500 dollars per capita (7.6m), a whopping -$3.8b forex loss and climbing everyday. The dollars momentum, mixed with a little illiquidity and spiced with the summer doldrums should continue to lean on riskier positions today.

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 ‘sloppy’ trading range.

Forex heatmap

US data yesterday delivered the one two-combo and hit us with more bad news. Weekly claims continue on the downward trend, striking the psychological +500k, w/w mark. This is the third consecutive weekly rise and is now pointing to an Aug. NFP disappointment. Analysts are wary of some distortions occurring, like various benefit extensions maybe bringing people back to the front of the line after exhausting their earlier benefits or the unusual timing of the auto sector historical shutdowns. However, that been said deteriorating readings for ‘consumption growth, trade and new manufacturing order book’ are weaker fundamentals that are indeed trumping any distortions. Digging deeper, the weekly report shows that claims are up +12k, w/w. That has pushed the 4-week moving average higher to +482.5k, the largest print in 9-months. Continuing claims softened to +4.48m and below market consensus. Its moving average remains somewhat static at +4.53m, the lowest in 18-months. Brace yourself for Sept 3rd.

If that was not a downer, then the Philly Fed was able to do that for you. The report has taken a turn for the worst and signals slower growth ahead (-7.7 vs. +7). Technically, manufacturing activity in the district has re-entered ‘contraction territory’. It is the first time in over a year and is expected to be a drag on the GDP 3rd Q growth. Digging deeper, some of the sub-categories appeared as an eyesore. The new-orders continued to contract, for a 2nd consecutive month and the first time in over a year. It’s difficult to superimpose this specific district scenario nationally. Not helping was the pipeline strengths evaporating, shipments retreating and delivery times falling (signaling a quickening pace of getting product out the door as new orders and the order backlog wane). More firms reported a decline in employment and even more eye-popping was the ‘massive’ drop in the average employee workweek index to -17.1 from +1.7. Supporting a deflation environment was the reported decline in manufactured goods prices and input goods they use in production. The six-month forward expectations signaled slowing activity (lowest reading in 17-months). Despite the new orders advancing (+8 points), it still is only half of what we were witnessing at the beginning of the year. Shipments remained unchanged, and unfilled orders re-entered positive growth territory. The future employment index fell -14 points and has now entered negative territory.

The USD$ is higher against the EUR -0.51%, GBP -0.28% and JPY -0.02% and lower against the CHF +0.07%. The commodity currencies are weaker this morning, CAD -0.16% and AUD -0.26%. Yesterday, Canadian wholesale trade disappointed (-0.3% vs. +0.4%), while the leading indicator posted another gain in support of continued forecast growth in their economy, but came in less than expected (+0.4% vs. +0.7%). Despite the trade number expected to be a drag on GDP growth, market expects a healthy gain for the growth report on the back of the earlier manufacturing report posting a more important gain than yesterday’s mild drop. The loonie was not immune to the weaker data out of the US. North America was sold as a unit across the board on the back of the region as a whole could be losing steam. With risk being pared, it was only natural that growth and interest rate sensitive currencies would be dumped. Dollar rallies are been sold and dealers are content to keep the currency in the limelight until they get the green light to ‘execute’ any such M&A deal. However, the Canadian economy cannot be immune to a US slowdown. It happens to be its largest trading partner with 70% of all exports heading south. Sloppy trading and lack of interest because of the summer doldrums has meant that many have missed the buying boat opportunity that they had hoped to witness on the last ‘risk aversion’ go-around. BHP Billiton hostile bid takeover of Potash in Canada should keep the loonie firm, no debt involved. Traders are happy to play the risk-aversion card. It has to be averaging up their already long CAD positions from above!

There has been quite a bit of AUD/CAD cross selling, front running M&A speculation that has pinned down the AUD for periods of this week. However, the currency is heading for a second weekly loss on speculation that the global recovery is losing momentum. This has somewhat diluted the demand for Australia’s higher-yielding assets. The commodity rich currency is not isolated, as other growth sensitive currencies are suffering the same fate. Demand for the currency is also limited on concern for this weekend’s election will result in a hung parliament. Over the past 2-trading sessions the AUD has come under pressure vs. the JPY on speculation that the BOJ are not ready to intervene on behalf of their currency, dampening the demand for riskier assets. Government data has also happened to put a lid on the recent rally. Reports, earlier this week, showed that skilled vacancies declined this month and wage growth slowed in the 2nd Q. Net result traders are adding to their bets that the RBA will leave interest rates unchanged for the next 12-months. Interest rate differential continue to play a big part of the currency’s attractiveness. No currency is immune to this ‘questionable growth’ environment. Risk aversion will likely force the bull’s hand for the remainder of today, capping rallies, as equities find it difficult to maintain traction at the moment (0.8885). Better sellers on upticks heading into next weeks data.

Crude is lower in the O/N session ($74.28 down -15c). Crude prices managed to print new monthly lows this morning after a rising US claims report and a contracting Philly Fed index boosted market concerns that the economic rebound is slowing. Even this weeks EIA report is providing fodder for the ‘bears’, aided by some ‘dubious’ hefty predictions for increased supplies in various categories for the week. Oil stockpiles declined -0.8m bpd vs. a market expectation of a -1m barrel print. Inventories fell to +354.2m barrels w/w. Not to be left out, gas stocks dropped -39k barrels to +223.3m. On the flip side, distillate supplies (heating and diesel) climbed +1.07m barrels to +174.2m. With this bearish report successfully penetrating the $75 support opens up the way to test the $72 surroundings. Prices have also gravitated towards these lows on the back of data showing that economic growth in both China and the US is slowing. The demand for oil products also fell, as gas demand hit a 2-month low, while demand for distillates is close to its lowest level in 10-months. The report re-confirms the IEA conclusion earlier this month that ‘oil demand could take a substantial hit should economic growth continue to falter’. It’s no wonder that the market continues to pressurize commodity prices. Speculators remain better sellers on up-ticks in the short term.

Gold prices are little changed in the O/N session, they happened to print a two month high yesterday after the weaker US data releases. Again weaker global equities have boosted investor support for various safer heaven assets, as investors try to avoid risky assets due to uncertainties in the markets. With a genuine fear for global growth, by default, is boosting the demand for the metal as a protector of wealth in the grand scheme of things. Year-to-date the metal has risen +11.8%. With treasury yields expected to remain low for sometime and with the Fed announcement last week of their intentions to buy bonds, could promote a quickening inflation rate, which would promote pushing commodity prices higher. For most of this year, we have witnessed a gold rally on the back of a weaker EUR ($1,232 -$3). Even with the dollar strengthening, the historical negative correlation is not holding true at the moment. It’s about preserving wealth that is driving metal commodity prices big picture.

The Nikkei closed at 9,179 down -183. The DAX index in Europe was at 6,044 down -31; the FTSE (UK) currently is 5,198 down -13. The early call for the open of key US indices is lower. The US 10-year eased 8bp yesterday (2.56%) and is little changed in the O/N session. US Treasuries prices have rallied hard after a disappointing weekly US claims report and a Philly Fed print now back in contraction. They have managed to claw back the previous two trading session’s losses as equities come under renewed pressure. Investors remain concerned for the strength of the global recovery. If the Fed does expand its balance sheet then the curve should flatten to analysts medium term projection of +200bp 2’s/10’s (+209bp). The market seems content in owning longer dated product on these deeper pull backs. Next week, the US plans to sell $102b of 2’s (+$37b), 5’s (+$36b) and 7-year notes (+$29b). This will be the smallest monthly offering of the combination thus far. Longer term buyers control the market.

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