A EURO trader’s Christmas

T’is the season where analysts struggle to vindicate market movements. In reality, technical and fundamental reasons can be thrown out with the bath water when it comes to deciphering the justification of a currency’s move. Thinly staffed trading desks tend to be trigger happy and non-committal all at once, hence the wild EUR swings we have witnessed over the last three trading days. The macro view has not changed: Euro contagion exists, the Fed battles to make QE2 work and keep yields low, and China has many more rate hikes to go before the rest of the world experiences the negative trickle down effect. This is the reality that’s lost amongst holiday traders. It’s a safer bet to cheer in 2011 and start again next week.

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 ‘subdued’ O/N session.

Forex heatmap

US data yesterday disappointed, however, the thinly staffed desks seemed to have dismissed the fundamental reports and concentrated on the year end deal flows. The Standard & Poor’s/Case-Shiller composite index of 20 metropolitan areas declined for a fourth straight month in October (-0.8% vs. -0.6% y/y), pressured by supply, home foreclosures and high unemployment. The housing market has been struggling since the US home buyer tax credits expired earlier this year. All 20 cities showed monthly price declines, strong proof that a double-dip is currently in the making.

Positive consumer momentum took it on the chin yesterday with the US consumer confidence index reporting weaker than expected, falling -1.8pts to 52.5, and this after other confidence indicators showing an improved sentiment amongst consumers this month. Analysts note that both the recent US midterms and the resolutions of the tax issues continue to be trumped by a woeful labor market. On a positive note, sluggish consumer sentiment does not seem to be affecting retail sales during this holiday season. Digging deeper, both the current and future appraisals both fell. Business conditions being ‘good’ softened from +8.5% to +7.5% and that job’s were ‘plentiful’ eased to +3.9% from +4.3%. Consumer’s views on the job market have again taken a dive, falling to +14.3% from +15.1%. It seems we are back to ‘give us a job and we will spend’ mentality.

Finally, the Richmond Fed’s manufacturing general business index jumped to 25 from 9 this month and hot on the heels of NY, Philly and Dallas Fed’s showing that their activity continued to expand in December. The report said ‘manufactures assessments of business prospects for the next six-months were generally more optimistic’.

The USD$ is lower against the EUR +0.17%, GBP +0.04%, CHF +0.04% and JPY +0.37%. The commodity currencies are stronger this morning, CAD +0.23% and AUD +0.43%. Sovereign wealth funds happened to chew through most of the corporate loonie bids around parity yesterday. The currency has stalled ahead of October’s lows of 0.9975. In this holiday shortened week there has been much noise with minimum conviction. Investors and dealers seem to be happy to wait out the year and ply their wares next week with Canadian data providing support for their trading strategies. The news that China has cut back rare earth exports by +11% is boosting commodities and providing support for commodity sensitive currencies like the loonie and AUD, temporarily at least. Canadian policy makers remain weary of Europe’s funding challenges, US growth risks and with benign domestic Canadian inflation worries will not pressurize the BOC to tighten monetary policy any time soon. This month the loonie has gained +1.6% outright vs. its largest trading partner. The currency has only witnessed modest strength compared to other growth sensitive currencies as Governor Carney highlights the dangers of a persistently strong domestic currency. The market remains better buyers of dollars on dips.

The AUD is fighting it out with JPY to see who amongst the majors has been the best performing currency this year. The AUD looks like a safer bet as the carry trading strategy seems to be prevailing. The dollar has weakened again vs. commodity sensitive currencies, as rising commodity prices is boosting demand for currencies linked to raw materials exports. AUD extended gains to a fresh two month high in holiday thinned markets O/N. Ongoing M&A talks for Aussie companies is lending the currency a hand despite the PBOC hiking rates +25bp at the weekend. A higher risk appetite is spurring a shift of money to the Aussie and other commodity sensitive currencies, temporarily at least. The currency had been trading under pressure outright as US Treasury yields climb, narrowing the yield advantage of assets down-under. Year-to-date, the currency has climbed +12%, on prospects for commodity-driven economic growth and the yield advantage of the nation’s debt compared with other developed markets. The market is running into offers at 1.0150-60 (1.0132).

Crude is lower in the O/N session ($91 -50c). After peaking at its two-year high on Monday, oil prices have retreated as the market digested a Chinese interest rate hike having an impact and yesterdays mixed economic releases in the US. Colder conditions along the US east coast and throughout Europe seem to be providing a bid on pull backs in this weeks thin market action. Last week’s EIA report showed that crude inventories decreased by -5.3m barrels. At +340.7m barrels analysts note that current stocks are above the upper limit of the average range for this time of year. There was a similar scenario with gas inventories, they increased +2.4m and remain in the upper half of their range. OPEC believes that supply and demand are ‘in balance,’ and expect demand growth will slow as the global economy struggles to recover, amid ample supplies. Technically, expect the market to meet resistance all the way up to the psychological $100 limit as refiner’s actions to avoid year-end tax liabilities are priced in.

Gold prices again advanced yesterday on speculation that currency volatility will boost demand for a safe heaven investment. The dollar weakening has also come to the commodity’s aid. Year-to-date the commodity has gained +27% as Europe’s debt crisis and low US interest rates has encouraged global investment in precious metals. The yellow metal continues to garner ‘physical’ interest on pull backs despite China hiking interest rates by +25bp on Christmas Day. Even though the one direction trade feels overdone, investors continue to hold gold as a hedge against long-term inflation. The Euro-zone contagion issues continue to put a floor on metal prices on demand for a haven. The commodity is poised to record its tenth consecutive annual gain ($1,405 -30c). Technical analysts believe that gold will outshine other precious metal in 2011 and peak somewhere above $1,600 in 2012.

The Nikkei closed at 10,344 up+52. The DAX index in Europe was at 6,988 up+16; the +FTSE (UK) currently is 6,013 up+5. The early call for the open of key US indices is higher. The US 10-year backed up 10bp yesterday (3.43%) and is little changed in the O/N session. Treasuries remain under pressure, heading for their biggest monthly decline in a year, as the market prepares to take down the last of this weeks $99b of new product. Yesterday’s Richmond manufacturing gains trumped consumer sentiment concerns making it easier for dealers to cheapen the curve ahead of the 5-year auction. The second of the three auctions was ‘not’ well received (5’s $35b) and was met with weak demand in thin holiday trading conditions. Dealers took down the notes at 2.149%, above WI’s at 2.103%. The bid-to-cover was 2.61 vs. the 2.82 four auction average.

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