Market continues to window dress the EUR

It’s a busy week on the rate front. Trichet is expected to signal a July hike by using ‘strong vigilance’ language in his communique when keeping rates on hold this Thursday. So far, the market has fully priced in a +25bp hike for next month. This alone should provide further support for the currency heading into this weeks meeting.

In contrast, the BoE who meet the same day, seem to have no prospect to change its policy anytime soon. Dealers will prefer to wait for the minutes in two weeks time to see how the committee is ‘evolving’.

The US$ is weaker in the O/N trading session. Currently, it is lower against 13 of the 16 most actively traded currencies in a ‘subdued’ session.

With ongoing soft economic data coming out of the US, investors are becoming increasingly concerned about the possibility of the US falling back into recession. Friday’s NFP was disappointing, with total payrolls rising less than expected and private payrolls posting their smallest increase in 12-months.

According to various news sources this morning, in Portugal the Social Democratic Party (PSD) seems to have won a strong mandate in the country’s elections over the weekend. The party has already pledged that they will honor the terms of the EU/IMF bailout. This should make the markets more optimistic about Portugal short term future and support the EUR even further.

The dollar is lower against the EUR +0.09%, GBP +0.01%, JPY +0.20% and higher against CHF -0.35%. The commodity currencies are mixed this morning, CAD -0.26% and AUD +0.31%.

The Canadian dollar closed slightly weaker on Friday against its largest trading partner, paring most of the steep early losses, when investors took solace in US service growth data after the weak employment report. For most of last week, US data had been putting its trading allies’ currency under pressure. The Canadian bulls who read the BoC’s communiqué last week as being hawkish should be happy that they are getting better levels to own the currency.

Last week the BoC kept their key interest rate unchanged (+1%) and said they will raise it ‘eventually’ as the economy recovers. Policy makers indicated that the recovery is ‘proceeding largely as expected’ and that any rate increases would be ‘consistent with achieving the +2% inflation target’.

The market has interpreted Carney’s communiqué as being more hawkish than expected, particularly the language shift in the ending policy guidance. They have inserted the new word ‘some’ rate hikes. Inflation will move towards the BoC +2% targets by the middle of next year despite the growth of the current CPI exceed +3% ‘in the short term’, which has been driven by temporary factors such as higher taxes and food and energy costs.

The loonie is being subjected to the pull of either risk or risk aversion trading strategies. This week is a busy week on the data front for Canada starting with this mornings IVEY PMI and ending the week with the country’s employment report, where the market expects the job situation to have slowed. Investors continue to look for better levels to own the loonie (0.9801).

Aussie long positions are back in the game as the currency claws towards its three week high on signs of a slowing US economy supporting Asian Pacific currencies in the ‘carry’ trade play. Also, the market does not want to be caught short heading into this evenings RBA meeting. Analysts believe that if RBA provides the market with some more hawkish rhetoric and investor risk-appetite continues to stabilize, the AUD is likely to rise towards resistance at $1.09.

The market does not seem too down beaten by the recent data releases, especially after the RBA had signaled recently in the Statement of Monetary Policy that an anticipated fall in the first quarter growth is likely to be temporary and forecasts a strong rebound to +4.25% in the fourth quarter.

Providing support for the currency is the belief that the local dollar is also gaining stature as a global reserve currency, similar in nature to that of the CAD. Aussie yields are still the highest in the G10 and always look attractive. The expected mix of trade surpluses and rising capital inflows should provide support for the currency on these much deeper pullbacks for the time being (1.0740).

Crude is lower in the O/N session ($99.44 -0.78c). It was no surprise that crude prices would come under further pressure after Friday’s disappointing US employment number. The fewest number of new jobs created has increased concern that fuel demand will decline. Before the release, oil prices were performing poorly after manufacturing headlines earlier in the week showed that US growth was slowing. Earlier last week, the commodity briefly rose to a three-week high after Juncker signaled more aid for Greece will be announced this month.

Last week’s EIA release showed that supplies rose +2.88m barrels to +373.8m, the highest level in two-years. Analysts had expected supplies to fall by -1.6m barrels. Continuing the streak, gas inventories increased for a fourth-week, climbing by +2.55m barrels to +212.3m versus an expected gain of +900k barrels. In contrast, distillate stocks (diesel and heating oil) fell-976k barrels to +140.1m, the lowest level in two-years.

Big picture, the oil demand-supply situation is relaxed, and there’s no danger of any shortage. In theory, lower global interest rates should help the commodity which competes with yield-bearing assets for investors’ cash. However, the US driving season has begun and consumers will speak with their wallets. Expect OPEC to maintain production levels for an eighth consecutive meeting this week and again to resist calls to ease the pressure of $100-a-barrel oil on the global economy.

Gold prices ended last week on a high, rising the most in a week after a dismal NFP report has investors speculating that the Fed will be forced to keep rates low for a considerable time, boosting demand for the metal as an alternative asset. The weaker dollar sentiment is also creating a positive metal scenario. Low rates are going to be dollar negative and gold positive.

Strong buying recommendations from Goldman and Morgan Stanley have also been good enough reason to drag the commodity higher this month. The yellow metal is being used as a store-of-value and trades like a currency.

The metals bull-run is far from over with speculators continuing to look to buy gold on deeper pullbacks ($1,545 +$2.60c).

The Nikkei closed at 9,380 down-112. The DAX index in Europe was at 7,116 up+8; the FTSE (UK) currently is 5,847 down-8. The early call for the open of key US indices is lower. The US 10-year backed up 4bp on Friday (2.99%) and is little changed in the O/N session.

US 10’s trading sub +3% has many wondering is Q3 around the corner. Yields seem to want to print new yearly lows daily. Yields have moved a tad higher, despite a poor NFP display, ahead of the US government issuance of $66b of new product this week. They will auction $32b of three-year notes, $21b of 10-year debt and $13b of 30-year bonds beginning tomorrow.

The Market should not expect too much of a back up given the recent data and as traders increase speculation that Bernanke and company will hold its target rate for overnight lending at virtually zero into next year.

Historically the fist trading day after NFP tends to be the quietest session for the month, but who knows in this new paradigm. The market will have to wait to get some bad news on inflation before giving up on this bull bond scenario.

Content 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 Business Information & Services, Inc. or any of its affiliates, subsidiaries, officers or directors. If you would like to reproduce or redistribute any of the content found on MarketPulse, an award winning forex, commodities and global indices analysis and news site service produced by OANDA Business Information & Services, Inc., please access the RSS feed or contact us at info@marketpulse.com. Visit https://www.marketpulse.com/ to find out more about the beat of the global markets. © 2023 OANDA Business Information & Services Inc.