EUR could be the Joker

It use to be easy, any global shock you bought dollars. Today, we are knee deep in a myriad of reasons to buy or not to buy a specific asset class or currency. Transparency requires investors to be flexible, multitasking and fast. According to the Fed’s USD major currency trade-weighted index, the buck falls about -2.2% for every +10% rise in the price of oil. Think about it, the US runs a large trade deficit, of which about 45% is the oil deficit. The Fed’s response to oil shocks tends to be dovish whereas the ECB has historically reacted hawkishly. If this geopolitical situation is prolonged, CHF, JPY and NOK again will be loved and to a lesser extent the CAD. The EUR could become the joker, despite the hawkish rhetoric. Big picture, the market remains cautious of the Euro-regions political challenge of agreeing on managing peripheral sovereign stress. Today’s Irish election could be the first spanner thrown.

The US$ is mixed in the O/N trading session. Currently, it is higher against 11 of the 16 most actively traded currencies in a ‘whippy’ O/N session.

Forex heatmap

Despite some stronger numbers out of the US yesterday, nothing is helping the dollar. As expected, aircraft orders yesterday gave durable goods a huge lift in January (+2.7%), adding 4% to the headline. Digging deeper, the durable goods details were mixed with a sharp upward revision to December (+2.1%). The revisions offset, somewhat, the shortfall in last month’s growth (-3.6%). Analysts note that the erratic swings reflect the difficulty of capturing seasonal movements around quarter-ends. It’s the disclaimer than analysts use to deflect their miss. However, in each of the past two-quarters, the steep declines in the first-month were smoothed out somewhat in later revisions. It’s worth noting that while orders for core-capital goods provided some wild swings over ‘the turn’ (year end), shipments remain strong and steady (+2.0% vs. +0.2%). This will eventually point to a strong contribution to domestic investment spending tally that affects GDP.

It was not a surprise to see US new houses fell more than expected last month. Sales declined-13% to a +284k annual pace. This is strong proof of a very weak demand picture. To date, there has been no recovery in housing starts, permits or new-home sales. National foreclosures and shadow inventories continue to keep depressing prices. This is making distressed, previously owned properties, a more attractive investment opportunity. Having a 9% unemployment rate and tight credit standards will have the construction industry firmly on the back foot for most of this year.

Finally, the number of initial claims filed last week fell (-22k), more than expected to +391k, below the psychological +400k benchmark. This is the third time in the past two-months. The market requires a trend with a more consistent sub 400k print before it can pat itself on the back. Digging deeper, continued filings fell to +3.79m (the lowest reading since October 2008). The total number of claimants in all programs, not seasonally adjusted, fell-90k to +9.1m (-19.6%, y/y).

The USD$ is lower against the EUR +0.05% and higher against GBP -0.23%, CHF -0.24% and JPY -0.12%. The commodity currencies are stronger this morning, CAD +0.02% and AUD +0.19%. The loonie temporarily has surged to a three-year high outright this morning, on the back of commodities continuing to trade higher with the growing tensions in the Middle-East. Higher commodity prices have investors dissociating themselves away from riskier, growth linked assets and sending investors towards safer commodity linked currencies. In fact, the loonie technically straddles both trading philosophy camps. Risk aversion and not commodities had been dominating the currency’s value of late. Currencies linked to raw materials usually weaken after ‘major crude supply shocks’. Earlier this week, Canadian data dealt a blow to next Monday’s GDP print. Headline retail sales fell -0.2% in December. The only positives that are lining up for this month are coming through net trade and wholesale trade. All other influences upon December GDP growth over the prior month are negative and that include real manufacturing shipments, housing starts, and hours worked. Are we setting ourselves up for a negative print for December GDP over November? The trend is for a stronger CAD. However, investors continue to look for more favorable levels to own the currency (0.9821).

The AUD has advanced for a third consecutive day vs. the dollar after reports this week showed business investment climbed (+1.3%) to a record in the fourth final last year and an index of leading indicators increased (+0.7%) in December. Business spending was in line with RBA Governor Stevens’ comments earlier this week and supportive of higher yields and structurally higher AUD currency. The data has encouraged traders to add to bets that the RBA will boost interest rates over the next 12-months. The currency, aided by commodity prices, is having very little follow-through on a risk-aversion trade and continues to squeeze the weak short positions. Despite geopolitical uncertainties, the demand for higher yielding growth currencies on pullbacks remains steadfast (1.0108).

Crude is higher in the O/N session ($97.45 +17c). Crude prices remain elevated on Middle-East geopolitical concerns. Oil climbed to a 30-month high yesterday as violent uprising reduced supplies from Africa’s third-biggest producer. It’s been estimated that as much as +1m barrels of Libya’s daily oil production may have been shut. The IEA believes that may be a ‘bloated figure’ which has caused oil prices to back away from this week’s highs. ‘While there’s a risk of contagion, of this spreading to Iran or Saudi Arabia, the market is going to see prices elevated from these levels’. The IEA’s chief economist said that ‘higher oil prices pose a danger for a global economic recovery’. Last week’s EIA report again has provided some support for the US crude market on pull backs. The report showed a smaller-than-expected increase in supplies. Crude inventories rose by +800k barrels vs. an expected increase of +1.4m. Even worse was the gas inventory headline declining -2.8m, analysts had been expecting an increase of +950k barrels. Stocks of distillates (heating oil and diesel) fell -1.3m barrels, which was very much inline with expectations. 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. With supply the number one concern, the commodity will remain bid because of the contagion concerns.

Like most commodities, gold is heading for its longest rally in six-months, as mounting tensions in North Africa and the Middle East boost demand for a ‘safe haven’. The commodity continues to be supported by geopolitical factors, inflation threats, and from a return of investment. Prices have risen nearly +7% this month, as protests in favor of democratic reform in North Africa turned bloody. Investors have grown increasingly uneasy that the crisis could spread. Even hawkish global rhetoric has managed to give the yellow metal a leg up in February. Consumer prices are also 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 and is being used as a store of value. The asset class 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 later this week ($1,403.60 -$13.60c).

The Nikkei closed at 10,526 up+74. The DAX index in Europe was at 7,166 up+36; the FTSE (UK) currently is 5,934 up+15. The early call for the open of key US indices is higher. The US 10-year eased 2bp yesterday (3.45%) and is little changed in the O/N session. Geopolitical pressures continue to support treasuries despite the uptick in US inflation numbers last week. The US Treasury auctioned $29b 7-year notes yesterday, the final leg of this week’s $99b US Treasury requirements. The issue was taken down at 2.75% and was described as an average auction. There was a 2.86 bid-to-cover ratio, inline with the four-month average. Indirect took 50%, down from 52.2% last month. Direct bidders took 4%, less than the 6.1% average. Despite the supply, risk aversion appetite dominates all asset classes.

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