It’s costly being a EURO Bear

Forget the mental anguish, one must have deep pockets to be surviving the four-cent move down, the three up, bursting through 200-DMA like butter to stay true to their conviction. Either that or have been successfully averaging all along to minimize the cost and improve their entry level. If one has deep pockets, selling these EUR rallies is a good bet with peripheral issuances in focus. Today it’s Spain’s turn to convince us or not. Another successful auction could provide some further short term relief for the EUR. However, maturity tension issue at the end of this quarter for Portugal and Spain will eventually have cause for concern. There is only so much product the market is willing to absorb until cost become the issue. Rumors that Germany may be willing to allow an increase in the size of the EFSF if it is given additional responsibilities and powers over management of Euro area fiscal positions will not be helping the weak shorts. With the peripheral stress acting as a dampener on the ECB’s tightening prospects, Trichet’s communiqué will have little affect later this morning. Let the talking begin.

The US$ is mixed the O/N trading session. Currently, it is higher against 9 of the 16 most actively traded currencies in a ‘subdued’ O/N session.

Forex heatmap

Yesterday’s US import prices data advanced +1.1% last month, mostly the fault of higher crude prices, ex-petroleum and the number was +0.4%. The headline print was very much in line with market expectations. A stronger greenback, supported by domestic data and the perception of European troubles on the horizon all have contributed to the spike in petroleum and its byproducts. Last month the category had increased +3.9%, m/m. Analysts believe that the fundamentals will continue to support oil and therefore maintain import prices as a strong contributor to inflation. This may suggest some upside risk for consumer and producer price data today and tomorrow. Yesterday’s Fed Beige Book continues to show the US economy improving with some districts reporting strong order flow in manufacturing and better than expected retail spending. Digging deeper, labour was seen as firming in most districts, with mortgage applications rising +2.2% in the beginning of this month.

The USD$ is lower against the EUR +0.20% and JPY +0.01% and higher against GBP -0.13% and CHF -0.67%. Elevated commodity prices continue to support the loonie, especially on the crosses, albeit not with the same enthusiasm as earlier in the week with investors believing that the recent euphoric rise may have gone a tad too far. Worthwhile profit taking has occurred, especially vs. the AUD and EUR cross. The Canadian Finance Minister believes that the strength of the loonie is occurring on the back of international capital controls, certainly a comment that will not dissuade global interest in the currency. Current fundamentals support the currency, the BOC business outlook survey earlier this week showed that Canadian businesses remain largely upbeat about their future sales as they trade off CAD pressures against easing credit conditions. The survey has even held up to further appreciation of the loonie over recent months. 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. Governor Carney cannot have any beef with the ‘orderly’ strengthening of the currency. 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 not had a good time of it lately. Last night, Australian employers added fewer workers to their payrolls than anticipated (+2.3k vs. +25k), as a stronger currency and higher borrowing costs slowed the economy. The good news headline saw the unemployment rate fall two ticks to +5% as the participation rate dropped. Governor Stevens kept rates on hold last month (+4.75%) as some indicators were suggesting a ‘more moderate pace of expansion’ and this was surely one of them. The disastrous flooding in the state of Queensland is expected to slow growth this quarter and a tightening policy would not be the prudent course of action. 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. Already, RBA members are trying to put a monetary cost to the infrastructure damage from flooding, with suggestions of approximately +1% of GDP or $13b. Any significant cost will only delay any interest rate hike by Governor Stevens. Offers continue to appear on rallies (0.9963).

Crude is lower in the O/N session ($91.79 -7c). Crude has pared some of its early gains yesterday after the weekly EIA data reported a larger than expected decline in oil stocks and above expectation increases for gas and distillates. Oil inventories fell -2.2m barrels vs. an expected decline of-300k barrels. In contrast, gas supplies increased +5.1m vs. an expected rise of +2.9m barrels, while distillates jumped +2.7m. Again the Alaskan pipeline leak continues to have an effect, it is threatening to curb supplies to refineries and it’s this that is providing the overall bid for the black-stuff. The system carries +15% of US output and experts are unsure when production would return to normal. Again, there are too many hurdles to overcome ahead of the psychological $100 barrel of 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 mid $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.

Portugal’s successful bond issue yesterday has taken away some of the yellow metals shine for safe-haven purposes. The prospect of another European bailout has Gold remaining bid on pullbacks despite the ability of one of the spotlight peripheries having access to the markets, at least for now. 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 with a dollar grinding higher. Analysts expect currency volatility again to boost demand for the metal on Euro sovereignty default concerns. 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 ($1,382.60 -$3.20c) will outshine other precious metals in 2011 and peak somewhere above $1,600 in 2012.

The Nikkei closed at 10,589 up +79. The DAX index in Europe was at 7,069 up+1; the FTSE (UK) currently is 6,031 down-21. The early call for the open of key US indices is lower. The US 10-year backed up 4bp yesterday (3.36%) and is little changed in the O/N session. Treasury yields rallied from their monthly lows after dealers sought a concession for taking down this week’s US supply and despite speculation that EU officials are stepping up their efforts to solve the region’s debt crisis has dampened demand for the safety of US debt. Yesterdays better than expected Portuguese auction temporarily has taken some of the nervous apprehension out of the market. Today it’s Spain and Italy’s time to be under the spotlight. Yesterday’s $21b US 10-year auction saw strong demand. Product was issued 1.2% through WI’s at 3.388%. The auction had a 3.30 bid-to-cover ratio compared to the 3.01 average from the six previous issues. The indirect’s were active, taking +53.6% while the direct took just +8% of the issue. Today we get the final tranche of this week’s $66b issue, $13b long-bonds.

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