To QE or not to QE that is the question

There is nothing like domestic employment numbers to get the Capital Market’s full attention. However, the remainder of this week is laden with other data that is bound to keep investors trigger happy. Any small improvement in the ADP report, coupled with stronger weekly claims, should have little or no affect on the US’s unemployment rate as it edges towards that psychological +10% mark. The ECB meeting on Thursday is likely to signal that policy makers are not in the mood for quantitative easing of their own. Unlike the BOE’s meeting, which is expected to be more of a heated encounter? The BOJ is all on its own, not sure what number QE they are on. Cutting interest rates to zero and introducing more monetary easing is not weakening the yen. The market will takes its cue from this mornings ISM non-manufacturing. Will it raise speculation for more QE in the US even more?

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’s better than expected US data had given the market something positive to chew on. With pending home sales up +4.3% in Aug. and +4.5% in July bodes well for last month’s existing home sales report out at the end of this month. Analysts believe that the collective prints should help lift resale’s back up to the levels achieved before the last two record low months. Regarding the factory orders data, one had to look beyond the headline print (-0.5% vs. -0.1%) and find solace in the July headline being revised higher (+0.5% vs. +0.4%), implying that the net effect was better than expected. The Aug. print marked the third-month of declines over the past four-months. Digging deeper, ex-transportation orders rose by +0.9% m/m, for the biggest gain since Mar. Shipments recovered some ground, up +0.2%, but at a slower pace, and following July’s gain of +1.0%, inventories came in flat. Non-defense capital goods orders, ex-aircraft (proxy for business investment) advanced +5.1%, the most in four-months. Analysts also note that last month’s steep drop in machinery investment was concentrated in the energy sector, and may have had to do with the unseasonably warm weather. Durable goods orders were down -1.5%, with most of the weakness concentrated in the commercial aircraft segment (-40.2%) and material-handling machinery (-20.4%). Finally, following four-months of declines, nondurable goods orders expanded by a modest +0.3% m/m, led by the usual suspects of drink and tobacco products (+2.6%).

The USD$ is lower against the EUR +0.68%, GBP +0.39%, CHF +0.41% and JPY +0.01%. The commodity currencies are mixed, CAD +0.31% and AUD -0.82%. The loonie softened from its six-month high print recorded last week as equities and various commodity prices eased. Also affecting the currency is the country’s proximity and economic ties with its largest trading partner whose economic growth remains questionable. The economic highlight for this week will be the jobs reports either side of the border this Friday. Analysts believe the risk is towards a stronger report from Canada, which would provide support for the market to own the CAD on USD rallies. For most of last month the market had begun questioning the ‘true’ strength of the Canadian Economy after the last few data releases came in much softer than expected. The loonie has outperformed the ‘big dollar’ on speculation the nation’s economy will benefit from global demand for raw materials, which account for half the nation’s export revenue. Currently the currency’s only supporter has been higher commodity prices that are somewhat ‘inflated’ by the weaker dollar sentiment on the back of the Fed’s potential QE2 intentions. With the BOC possibly stepping to the sidelines next month has speculators unwinding some of the CAD long trades in front of the decision.

The RBA signaled a more dovish approach to policy by leaving its interest rate unchanged for the fifth consecutive month. It was widely anticipated that they would hike. Their actions caused the biggest drop in the AUD in almost two months amid signs of cooling domestic demand. The currency had been within striking distance of its biggest monthly gain in 18-months as the market had placed their bets that Governor Stevens would increase the benchmark interest rate. It was not to be as policy makers witnessed households, which account for more than half the economy, are spending less after the previously aggressive round of interest rate increases. Until recently, the AUD has gained ground against all of its major trading partners as the ‘vix index’ of volatility softened, boosting investor appetite for assets tied to growth. ‘Clearly what happens in the Australian economy is now more dependent upon what happens in China’. Investors are better buyers on deeper pullbacks as the interest rate differential continues to be of appeal for for alternative investments (0.9595).

Crude is higher in the O/N session ($81.76 +29c). Crude happened to print a two-month high yesterday as US capital goods orders climbed and contracts to buy previously owned homes gained. Recent data is convincing investors that the world’s largest consumer of crude may just be turning that economic corner. All this is occurred despite the dollars failed attempt to strengthen from its six-month low print over the weekend. Last week’s surprise inventory report temporarily convinced the market that perhaps US demand for the commodity may be faltering. Economic data has trumped the theme that higher weekly inventories should have been enough to push crude prices lower in the short term. EIA data showed that crude supplies rose +970k barrels to +358.3m. The market had been expecting a shortfall of -1.75m barrels. Stocks of gas and distillates (heating oil and diesel) also increased unexpectedly. Gas inventories rose by +1.6m barrels, while distillates rose by +300k barrels. Until the report, higher inventory supplies had been the biggest inhibitor for a market advance over the past quarter as stockpiles of oil have recorded the highest levels in 27-years. The weakness of the dollar is now the markets biggest supporter. Investors remain wary that the underlying fundamentals have not changed all that much.

Despite everything, Gold is a commodity in demand even at record highs. After printing new record at the end of last week, the over crowded, one directional trade was sold for some profit taking reasons yesterday. Over the past two months the yellow metal has managed to climb +10%. Technical analysts are calling for some profit taking at theses lofty heights, as they believe that the precious metal is overdue for a ‘correction’. Concerns about the strength of the dollar coupled with the sustainable growth issues of the US economy have investors seeking protection in an asset with a ‘store of value’. Year-to-date, the yellow metal has appreciated over +20%, outperforming most of the other asset classes, as global sovereign-debt concerns and an ‘uneven economic recovery roil financial markets’. Metals are heading for their 10th consecutive annual gain. Global ‘fear’ has the momentum, again, to push speculators back into this overcrowded, one-directional commodity trade. With the Fed on the verge of implementing further QE programs ‘tend to be supportive of asset prices and is fueling concerns about the potential longer-term inflationary affect 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 ($1,326 +$10).

The Nikkei closed at 9,518 up +137. The DAX index in Europe was at 6,151 up +17; the FTSE (UK) currently is 5,589 +33. The early call for the open of key US indices is higher. The US 10-year eased 5bp yesterday (2.46%) and is little changed in the O/N session. Longer-term debt is the winner on the US curve, leading advances, as traders speculate that the Fed will increase their purchases of debt. Yesterday’s US Government report showing that factory orders declined more than expected has added to speculation the Fed will increase their asset buys later today and tomorrow to keep yields low. Bernanke and Co. are willing to ease monetary policy to try to boost the economy and employment. The US yield curve stands at +205bp and remains better bid on pull backs.

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