EUR on verge of tipping

Global uncertainty continues to dominate this lackluster forex market this morning. At least the soap operas in the Asian-Pacific region have been keeping us awake. Gillard and Abbot have been scrambling, seeking the ‘winning support’, to lead their country and take the currency higher. Japanese officials have show little appetite to halt their currency’s advance, allowing the dollar to suffer. All last week, speculators have been squeezed out of their weak short JPY positions. Picking the Yen’s top has been an expensive exercise. Sellers beware as the dollar vs. the yen’s technical’s head further south. Not many want to accumulate EUR’s at these levels, it feels uncomfortable. The technicals are giving the dollar a leg up, short term at least. The EUR’s highs are getting lower!

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 ‘sloppy’ trading range.

Forex heatmap

No data again had most traders grasping for straws on Friday. North America will have to follow the unenthusiastic lead of Europe this morning, as we again lack any data of ‘conviction’.
This morning’s Aug. fall in the euro-zone PMI is a sign that the recovery might be starting to slow, although the index points to growth for now. The decline in the headline composite manufacturing and service sector index, from 56.7 to 56.1, was a tad more than expected and nearly reversed all of last month’s gain. The data continues to point to a quarterly GDP growth of about +0.7% vs. the +1.0% gain in the 2nd Q. However, the decline ‘mirrors earlier falls in sentiment in other major economies and suggests that the euro-zone’s economic cycle might simply be lagging behind those elsewhere’. The fall was driven mainly by a decline in the manufacturing index, particularly in Germany.
This will provide traders with some proof to sell the EUR on rallies in the short term.

The USD$ is higher against the EUR -0.07% and lower against GBP +0.38%, CHF +0.11% and JPY +0.21%. The commodity currencies are stronger this morning, CAD +0.06% and AUD +0.47%. The loonie ended a 2nd consecutive week on the losing side, printing its weakest print in over a month on Friday, as fundamental data trumped the potential of any large M&A activity. July inflation data rose less than expected (core +1.6% vs. +1.9%), prompting traders to trim their bets that the BOC will entertain another rate hike next month. BHP Billiton hostile takeover bid for Potash had supported the loonie for most of the week. In fact, technically, the currency should have had a much more disappointing week only for the $40b speculation bet. The loonie is 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. Canada happens to be the US’s 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 believed that they had missed the buying boat opportunity that they had hoped to witness on the last ‘risk aversion’ go-around. Traders are happy to play the risk-aversion card. It has to be averaging up their already long CAD positions from M&A activity!

Investors hate uncertainty and the outcome of the Aussi election is well documented. The result of a hung government initially pressurized the AUD in the O/N session. The currency has underperformed against all of its major trading partners and is expected to do so until there is a new Government formed. Last week, there has been quite a bit of AUD/CAD cross selling, front running M&A speculation that has pinned down the currency on rallies. The fear that the global recovery is losing momentum has also 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. 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 last 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 differentials play a big part of the currency’s attractiveness. Risk aversion will likely force the bull’s hand, capping rallies with better sellers on upticks (0.8926).

Crude is higher in the O/N session ($74.01 up +19cc). Crude prices hovers close to its 6-week lows as a rising US jobless claims and a contraction in manufacturing added to concern growth in the worlds biggest oil-consuming nation is slowing. Last weeks EIA report continues to provide fodder for the ‘bears’. 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 pared some of their recent gains on Friday as investors cashed in to raise capital. With equities under pressure, investors retained cash on mounting evidence of an economic slowdown. In the O/N session investor again supported the various safer heaven assets, avoiding risky assets due to uncertainties in the markets. With a genuine fear for global growth, by default, should boost the demand for the metal as a protector of wealth in the grand scheme of things. Year-to-date the metal has risen +11.3%. With treasury yields expected to remain low for sometime and with the Fed announcement earlier this month 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 ($1,230 +$1). 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 9,116 down -63. The DAX index in Europe was at 6,026 up +22; the FTSE (UK) currently is 5,223 up +28. The early call for the open of key US indices is higher. The US 10-year eased 1bp on Friday (2.60%) and is little changed in the O/N session. US Treasuries prices have rallied hard after disappointing US data last week. 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. This 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