Central Bank Exchange Rate fixing trumps Yuan revaluing

An extraordinary week for Cbank actions or lack of. To date, Japan’s proactive approach to weaken its domestic currency, the Yen, has met with limited success. Current levels are certainly better than where it has been, but the dollar is simply hovering at levels last seen only weeks ago. Where would the FX market be without rumors? They certainly have traders trigger happy over the last few trading sessions. Next thing you know, the market will be so focused on the BOJ that the SNB will actually instigate something. The Swiss decision to hold Libor steady yesterday, with no mention of FX in their communique, coupled with the downward inflation revisions, justifies the deflation ‘argument’ and a SNB renewed intervention policy. Take heed BOJ, unilateral currency interventions rarely work. What precedent is Prime Minister Kan setting for other nations in the region? It’s easy to follow Japan ’s lead. Look at Thailand, Malaysia and South Korea and that’s this week! Imagine all this occurring at the same time the US is trying to get China to revalue the Yuan. Congress ‘only’ wants to slap duties on Chinese imports to force their hand! Not a smart move.

The US$ is weaker in the O/N trading session. Currently it is lower against 14 of the 16 most actively traded currencies in a ‘volatile’ trading range.

Forex heatmap

Yesterday, the US Producer Prices Index happened to edge higher (+0.4% vs. +0.2%) for the tenth consecutive month. The monthly gain piggy-backed energy prices (+2.2%), while the core print (ex-food and energy) came in right on expectations (+0.1%). It was pharmaceuticals (+0.6%) and light motor trucks that contributed the most to the core headline print. Analysts note that the core-prices have remained ‘resilient throughout the cycle’. Since bottoming nearly two-years ago (+0.6%, m/m), core producer prices have since climbed +1.8%. The pace of price growth has been moderating of late. Price appreciation has been somewhat curbed by ‘constrained household balance sheets, an uncertain labor market outlook and excess economic slack’ continue to limit sub-sectors pricing power and the passthrough effect to the consumer basket. In this current environment, the market would expect the households to substitute ‘away from discretionary items’ if they were required to spend more on core-stables. There is no passthrough pricing pressure currently in the system.

US weekly jobless claims managed to record a two-month low last week (+450k vs. +453k). That being said, they remain stubbornly elevated and in an inconsistent trend for ‘meaningful job growth’. On the bright side, analysts are happy to point out that they have been trending lower from the middle of last month. Digging deeper, continuing claims fell -84k to +4.485m, happily reversing most of the previous week’s gains. This sub-sector has been hovering around the +4.5m print, ‘partly as claims push further into extended and emergency categories’.  The number of individuals receiving extended benefits (+105k to +853k) moderated for the second time in 3-weeks. It was a similar story for the emergency sub-sector (+402k to +4.1m), except the fall was for a 3rd-consecutive week. Between mid-July and mid-Aug, extended benefits have surged nearly +130%. The market has witnessed a similar fate for the emergency sub-sector. It has jumped nearly +50% since bottoming at the beginning of the summer. It’s worth noting that at the end of July unemployment assistance for +2.5m was extended to last until the end of Nov. Retroactive applications have caused a big surge in the Extended and Emergency claims categories.

Finally, not a surprise to the market was the Philly Fed being a ‘bust’ again (-0.7 vs. +0.5). The release was not too dissimilar to the Empire State manufacturers findings. The headline print signals a retreating manufacturing sector in the Philly district. Digging deeper, shipments fell for a second consecutive month, while new orders contracted for a third. This is stronger proof that points to an ongoing weakness in the districts contributions to industrial production in the short term. Inventories are also on the softer side. Combine this with shipments, and we have production levels also contracting. Manufactures bottom line continues to be squeezed, as prices received fell for the fourth straight month, while prices paid climbed for its fourteenth consecutive. That can only be negative for profit margins. However, there were some pluses, the number of firms reporting a decline in employment (+16%) was only slightly lower than those reporting an increase (+17.9%). More of a concern was the significant drop in the average employee workweek index to -21.6 from -17.1 in the last report. The 6-month forward expectations index moved up 7-ticks to 26.3 (that’s now positive for the twenty-first consecutive time). It’s worrisome that the overall index remains below levels seen in the first half of this year. Finally, despite capital expenditures softening a tad (11.6 vs. 12.3), business investment continues to hover around this year’s highs, a positive.

The USD$ is lower against the EUR +0.56% and GBP +0.57% and higher vs. the CHF -0.04% and JPY -0.09%. The commodity currencies are stronger this morning, CAD +0.40% and AUD +1.06%. The loonie lost some of its market attention luster as the forex market focused on the BOJ and SNB’s rhetoric over the past few trading sessions. The CAD continues to hover close to its 6-week high and similar to all major currencies has appreciated vs. the JPY after the BOJ’s direct intervention in Forex, the first time in 6-years. Fundamentally, the Japanese government is attempting to weaken their domestic currency to appease their export dominated trading sector. The loonie is receiving ‘three-prong’ support, a less dovish BOC, a currency being used as a proxy for growth and to a lesser extent a safer heaven investment. A higher percentage of speculators seem to have missed most of last weeks ‘move’, the market should expect to witness better buying of Canadian dollars on ‘big dollar’ rallies in the short term. It seems that parity is again back on the table.

The AUD is heading towards its fifth week of consecutive gains, rallying within striking distance of its two-year high vs. the greenback as gains in Asian bourses boosted demand for higher-yielding assets. The Aussi has gained against all of its major trading partners as the ‘vix index’ of volatility declined yesterday, boosting investor appetite for assets tied to growth. With worries about a double-dip receding day over day, the reallocation of funds back into growth currencies has begun. The currency has appreciated +1.9% thus far this week vs. the dollar, extending its advance to +5.8% over the past five-weeks. Investors continue to increase their bets that Governor Stevens will resume raising borrowing costs in the coming months. Futures dealers are pricing in a +60% chance of a +25bp hike by early Dec. Te RBA’s deputy Governor Lowe said a key change in the last decade has been the degree to which ‘the Australia’s economy mirrors changes in China’s growth, while the correlation between local GDP and that of the US has fallen’. ‘Clearly what happens in the Australian economy is now more dependent upon what happens in China’. China is Australia’s largest trade partner. Analysts believe that the market is somewhat underestimating the number of chances of further tightening over the next 6-12 months. Not helping the currency will be the forming of a minority government. PM Gillard won the backing of key independent lawmakers this month, allowing her Labor Party to retain government and pursue a ‘tax on mining companies’. Technically, ‘the fiscal outlook looks worse under a minority government and management of an economy growing at +10% in nominal-terms may increasingly rest on the RBA’ (0.9451). No matter, risk takers like the AUD in the short term.

Crude is higher in the O/N session ($75.01 +44c). Crude prices fell for a third consecutive day yesterday after the release of the neutral weekly EIA report earlier this week and on the announcement that Enbridge is prepared to start a pipeline after repairs, easing supply concerns. Inventories came in very much inline with Capital Markets expectations. The weekly headline print showed that oil inventories fell -2.5m barrels vs. a market expectation of -2.6m, w/w. Stockpiles of gas declined -700k barrels vs. a market prediction of a -400k loss, and inventories of distillates (diesel and heating oil) decreased -300k vs. expectations of an -800k retreat. At +357.4m barrels, US crude inventories remain above the upper limit of the average range for this time of year. Crude imports rose +141k barrels to +8.99m bpd and this despite an outage by Enbridge, who provides a pipeline which brings crude directly to the US from Canada. Commodity prices have also received support from a weaker greenback this morning. Week-to-date, the dollar has rallied sharply vs. the JPY after the BOJ intervened directly to halt the rise of their domestic currency. Refinery utilization slipped -0.6% to +87.6% of capacity. The market is wary that the underlying situation has not changed, the overall fundamentals remain weak and stockpiles of crude and products remain close to their record highs. Analysts expect speculators to remain better sellers on up-ticks in the short term.

In this morning’s session gold prices have managed to record its second record beating day this week as investors continue to seek protection against future market turmoil by purchasing commodities as a ‘store of value’. With the dollar currently falling to a 5-week low vs. the EUR has also aided commodity prices. The yellow metal is up +17.2% this year, and is heading for its 10th consecutive annual gain. Year-to-date, bullion has outperformed equities, treasuries and most other industrial metals. The global ‘fear’ factor now has the momentum again to push speculators back into this over-crowded, one-directional trade. Consensus has the Fed announcing as early as next month a new round of asset purchases to support a weak US economy. QE ‘tends to be supportive of asset prices and is fueling concerns about the potential longer-term inflationary impact of such measures’. The opportunity costs of holding gold are low due to falling interest rates, by default, the market should expect better buying of the metal on pull backs ($1,282 +900c).

The Nikkei closed at 9,626 up +116. The DAX index in Europe was at 6,302 up +53; the FTSE (UK) currently is 5,598 +58. The early call for the open of key US indices is higher. The US 10-year backed up 7bp yesterday (2.77%) and is little changed in the O/N session. The streak is broken. The longer end of the yield curve took rates higher, steepening the US curve (+229bp) as reports on Philly manufacturing and weekly initial jobless claims eased concerns that US economic recovery is stalling. Also impeding US debt’s advance yesterday was the prices paid component to factories and other producers climbing more than expected last month, + 0.4% in Aug., after gaining +0.2% in the previous month. The belly of the curve is well supported as dealers speculate that the BOF will want to buy shorter-term US notes after directly intervening for a weaker domestic currency by selling JPY. Deeper pull backs remain well supported as the market believes the Fed will soon announce more purchases of US debt this year.

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