ECB ‘exit’ safe heaven strategies

Despite the dramatic global events unfolding, Capital Markets are exuding remarkable calm. Will investors focus on the negative global sentiment or be guided by the strong hawkish comments from the ECB? Growing unrest in the Middle-East, an earthquake in New Zealand and a Moody’s downgrade of Japan’s debt will make anyone think about investing in safe heaven trading strategies. It’s the the hawkish sentiment from Stark, Weber, Bini Smaghi, Mersch and Trichet that’s keeping their currency currently afloat. The Irish general election, a PIIGS event risk at the end of the week, may convince us differently. For now, Mersch ‘exit’ statement is the giving the EUR bulls life.

The US$ is stronger in the O/N trading session. Currently, it is higher against 12 of the 16 most actively traded currencies in a ‘volatile’ O/N session.

Forex heatmap

With most of North America on hiatus yesterday, the rest of us had Euro data to digest. The German export market continues to gather speed, with the preliminary February manufacturing PMI (62.6)registering a new all time high since inception five years ago. The German Ifo Business climate also managed to post another all-time high (111.2), again further proof why Germany is the backbone of the Euro-region. Over the weekend, some German local elections administered a thumping to Merkel’s party, perhaps an expression of extreme dissatisfaction with her governments’ support of a PIIGS rescue. This week’s general election in Ireland could create another thorn in the Euro’s side. However, it’s the hawkish rhetoric from ECB members that continue to pressurize the bears positions.

The USD$ is higher against the EUR -0.78%, GBP -0.49% and lower against CHF+0.49% and JPY +0.30%. The commodity currencies are weaker this morning, CAD -0.28% and AUD -0.75%. Canadian data of late remains pro-loonie. Even Governor Carney in Paris on the weekend had to admit that it’s ‘possible’ the economy grew at a faster pace in the fourth quarter than the BOC projected last month (+2.3%). The ‘question is how much of that momentum carries over into 2011, which is not based on one report, but is based on a series of reports, analyses, industry meetings, surveys, that we do’. Recent data reveals that Canadian exports and employment is growing at a faster pace than expected, encouraging the market to raise their bets that Carney will accelerate interest rate increases later this year. Parity and premium, the new reality, is becoming well adjusted too by investors, consumers and manufactures. The implosion of commodity prices due to geopolitical pressures will support and eventually push the loonie higher against all its major trading partners (0.9854).

The AUD declined for a second consecutive day after regional bourses again come under pressure, sliding close to-2% amid turmoil in Libya. The higher yielding growth assets are being unwound in fear that event risk will push the currency value to erase all profits. Her earlier gains had also been tempered by China hiking Banks RRR another +50bps last week. Before that announcement, the AUD had strengthened to a nine month high vs. JPY with investors betting that the AUD would maintain its yield advantage amid global growth. Now we are back to applying risk aversion trading strategies (1.0102).

Crude is much higher in the O/N session ($93.65 +$7.45c). Crude prices have spiked on Middle-East geopolitical concerns. Fear that supply disruption is on the horizon continues to provide support on pullbacks. Brent prices have eclipsed their two-year high because of this event risk. If oil prices spike another $20 then global economies will fear reentering ‘another’ recession. Last week’s EIA report showed a smaller than expected increase in weekly stocks. Inventories rose +900k barrels vs. a market expectation of a rise of +2.8m. Gas fared no better, inventories increased by +200m barrels. Analysts had been expecting an increase of +1.7m. The supplies of distillates (heating oil and diesel) happened to decrease by -3.1m barrels vs. an expected decline of -1.1m. On the face of it, the report was bullish. Concerns about the Middle-East and production problems in the North Sea are boosting Brent relative to WTI and pushing the spread to a record premium. Lower-than-feared Chinese inflation tentatively supported oil prices earlier last week. Even the value of the Yuan is lending a helping hand, especially after reaching a 17-year high vs. the dollar, conveniently just ahead of the G20, making it much cheaper for them to acquire ‘their’ coveted commodities. It is the fear of a sudden reduction in supply from the Middle-East that will support commodities longer term.

Gold futures have climbed to the highest level in five months as tension in the Middle East escalates and on the back of hawkish global rhetoric. Consumer prices are boosting the demand for the precious metal as a hedge against global inflation. Last week, the market witnessed Chinese’s inflation accelerating the most in six years, and UK consumer prices the most in two years. Even US data is showing that their inflation numbers are edging higher. The commodity that every investor hated last month is very much in demand. The yellow metal is being used as a store of value. The commodity is expected to remain better bid on speculation that currency volatility will boost demand for a safe heaven investment once the Euro contagion fears raise its ugly head again over the coming weeks during the Euro-periphery refunding season and Irish elections this week ($1,397 +$9.00c).

The Nikkei closed at 10,664 down-192. The DAX index in Europe was at 7,278 down-43; the FTSE (UK) currently is 5,953 down-61. The early call for the open of key US indices is lower. The US 10-year eased 11bp since Friday (3.51%). Geopolitical pressures continue to push treasuries higher despite the uptick in US inflation numbers. This week the US Treasury will issue $99b new product (2’s, 5’s and 7’s). Expect the short end to provide some concession and allow dealers to take down the issues comfortably. Risk aversion appetite dominates all asset classes.

Get OANDA's exclusive weekly Market Pulse FX

HTML
  • HTML
  • Text
Dean Popplewell

Dean Popplewell

Director of Currency Analysis and Research 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 2007, 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