Buy that Rumor Sell the EUR

It’s only now that Euro officials recognize the need to forge a ‘comprehensive’ plan to contain the sovereign debt crisis? There is chatter about increasing the 440b European Financial Stability Facility fund. All eyes have been on Portugal this morning, who issued three and 10-year bonds. The auction results are seen as the risk barometer to gauge market confidence in the Euro-periphery’s ability to finance itself by going to the market directly. How did they do? The maximum amount of 3’s were sold at the upper end of the range while the 10’s wee better received with a strong bid-to-cover ratio (3.6:1). Has the product been absorbed by the street or has real money been tempted by the ECB’s activity this week? Initial EUR movement remains skeptical.

The US$ is weaker in the O/N trading session. Currently, it is lower against 12 of the 16 most actively traded currencies in another ‘whippy’ O/N session.

Forex heatmap

As the markets try to comprehend the supply onslaught from the PIIGS, Holland, Germany and the US this week, least we forget, both the ECB and BOE have their own policy meetings. Trichet has enough problems to contain policy maker’s thoughts. The BOE on the other hand has inflation worries. Inflation has been above their desired +2% target reading for 41 of the last 50 months. A decision to raise interest rates still looks unlikely for now, especially given doubts over the banking sector and overall confidence in the economy is liable to deteriorate. Any further evidence of weakening in demand will trigger substantial selling pressure for Cable given that the UK fundamentals remain precarious with a disturbing growth and debt profile. The technical charts continue to look for levels to sell the currency.

The USD$ is lower against the EUR +0.43%, GBP +0.37%, CHF +0.11% and JPY +0.21%. The commodity currencies are stronger this morning, CAD +0.29% and AUD +0.48%. Elevating commodity prices continue to support the loonie, especially on the crosses, in the afterglow from the BOC business outlook survey earlier this week and this despite the volatile December housing starts falling -13.5%, m/m. Canadian businesses remain largely upbeat about their future sales as they trade off CAD pressures against easing credit conditions. It’s encouraging that the survey has held up to further appreciation of the loonie dollar over recent months. Digging deeper, business activity remains firm. However, expectations for sales volumes are modest for 2011, with some exceptions, mostly in commodity related activity. The expectations for M&A activity remain positive. The strength of the CAD is being fueled by its cross play, especially vs. the EUR which saw the loonie advancing +4% last week as sovereign debt concerns again take hold. Dealers are pricing in a rate hike by the BOC at the beginning of the second quarter. The currency is amongst the best-performing currencies this month, as both crude and Canadian assets remain in demand for safer heaven concerns. Stronger data down south reinforces many analysts’ views that the US economy is beginning the year in upward momentum and reason enough for short term chartists to be eying 0.9750 CAD in the first-quarter. Investors continue to look for better levels to own the currency.

The AUD has had a rough and active O/N range, just falling short of 0.9800 in early trading, with news about the worsening floods dominating the headlines. Currently, the market pricing of rate cuts (4.75%) for the RBA February policy meeting and of rate hikes over latter half of the year remains broadly unchanged. Investors took some comfort from better than expected November’s home loans growth data (+2.5% m/m) and upward revisions to the October print (+2.2%), which along with more buoyant global risk sentiment has dragged the currency towards this morning’s highs. Already, RBA members are trying to put a monetary cost to the infrastructure damage, with suggestions of approximately +1% of GDP or $13b. Any significant cost will only delay any interest rate hike by Governor Stevens. Last year the currency rose +14% against the dollar which drove down the cost of imports and eroding exporters’ competitiveness. It’s all down to the employment numbers. Short term offers appear on rallies (0.9920).

Crude is higher in the O/N session ($91.52 +41c). The Alaskan pipeline closure is threatening to curb supplies to refineries and it’s this that is providing the bid for the black-stuff. Until the system is back up and running, this is the only variable currently supporting the commodity ahead of this weeks weekly supply. The system carries +15% of US output and experts are unsure when production would return to normal. Excluding this from the equation and we have a commodity that would be testing new short term lows rather than an asset class squeezing the weak short positions. Last week’s EIA inventory report revealed that oil stocks fell -4.16m barrels, three times more than expected. At +335.3m barrels, inventories are above the upper limit of the average range for this time of year. Gas inventories increased by +3.3m barrels and are in the upper half of the average range, while distillates increased by +1.1m barrels. Again, there are too many hurdles to overcome ahead of the psychological $100 barrier crude. Technically, the market is not showing a tighter supply or demand balance. 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. The market expects to meet price resistance in the $90’s as there is far more oil in storage, more fuel capacity and more idle oil wells to limit a stronger market rally in theory. The Trans-Alaskan closure will continue to squeeze the market until production clarity reemerges.

The prospect of another European bailout has Gold remaining bid. Already this week, the commodity has rallied from its biggest weekly drop in six-months, as concerns that the European peripheral sovereign-debt crisis may worsen. Investors again seek commodities as a safe haven alternative. For most of this year the commodity had fallen foul on speculation that a sustainable global economic recovery would curb demand for the precious metal, especially as the dollar grinds higher. Analysts expect currency volatility again to boost demand for the metal as the Euro contagion fears raise its ugly head. The commodity last year completed its tenth annual advance with bullion rallying +30%, it’s largest rally in three years. Even though the one direction trade feels overdone, investors continue to hold gold as a hedge against long-term inflation and have some strong technical support levels to breach before the markets witnesses a mass exodus. The Euro-zone contagion issues continue to put a floor on metal prices on demand for a haven. Technical analysts believe that gold ($1,384.30 +$0.00c) will outshine other precious metal in 2011 and peak somewhere above $1,600 in 2012.

The Nikkei closed at 10,512 up +2. The DAX index in Europe was at 7,037 up+96; the FTSE (UK) currently is 6,047 up+34. The early call for the open of key US indices is higher. The US 10-year backed up 7bp yesterday (3.36%) and is little changed in the O/N session. Treasury yields rallied from their monthly lows as dealers seek a concession for taking down this week’s US supply. Now that Japan has pledged to take 20% of European issues, used for periphery funding, has reduced some of safe heaven appetite from investors, temporarily at least. Yesterday’s three-year auction saw decent demand, they were issued 0.25% through WI’s at 1.027%. Non-dealers took 55% and the auction had a 3.06 bid-to-cover ratio compared to the 3.14 average from the six previous auctions. The US Treasury Department will auction $21b-10’s today and $13b long-bonds tomorrow.

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