Pick your Poison: EURO or Dollar

It seems to be a stab in the dark. There are just too many outliers involved for anyone to bet the bank with confidence. The market expects little relief from US durable good orders this morning.

Investors have been shadow boxing with Trichet and his ‘flashing’ red comment (no green light for ECB to hike in July). They are sparring with conspiracy theorists, who believe that the US’s excuse to use the SPR was for the election and not the consumer, and Bernanke ‘anticipating’ inflation, perhaps below the mandate. They are being hit by a think tank opining on China that authorities are concerned over growth, their ‘own‘ not just global. They are being sucker punched by the EU/IMF inspectors sealing the deal on a five-year austerity plan with Greece-who have yet to vote on it and the US debt ceiling talks collapsing.This is a nervous and fickle market, illustrating the extraordinary times that currently exist and not for the faint of heart.

Mixed risk signals are giving the FX market something to think about this morning with global bourses and futures surging ahead, but gold and oil are little changed on the day. A better than expected German ifo survey (114.5) had some dealers possibly thinking of stop loss hunting above 1.4300. They have put that on hold for the time being. We can be sure that the market will try to pare its exposure heading into the weekend, what ever it is.

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

Forex heatmap

US data releases yesterday certainly did not help the risk-trade. This is the trade that has been pummeled by Greek and global growth fears. Another weak US claim’s print points to a soft NFP release in July, and another disappointing Chicago Fed index reading (-0.37 vs. -0.05) is signaling ongoing deterioration in US growth. A reading of less than -0.7% would indicate a recession!

Claims came in somewhat higher than expected (+429k vs. +415k). The Fed argued earlier this week that the US jobs situation may improve later in the year. However, the short term focus is likely to be concerned about another weak payrolls report and the market seems to bracing itself for a possible July decline. Digging deeper, continuing claims were revised higher the prior week (+420k vs. +414) and remained elevated last week, suggesting that more individuals are obtaining jobless benefits for an extended period.

Not helping the situation was both the extended (+653k vs. +591k) and emergency (+3.293 vs. +3.299m) reversed course and increased after improving for five consecutive weeks. Analyst’s also noted that the spike in extended benefits was the largest in four-months.

Not alleviating anyone’s fears was US new home sales falling last month, down -2.1% to +319k units, as weakness in prices and a sluggish economy continues to keep consumers on the sidelines. Home buying has been muted, supported by high unemployment and individuals opting for previously owned homes because the prices tend to be cheaper. The median price for an existing home was +$166k versus a new home median price of +$222k. Shadow inventories leaking onto the market continues to dissuade new purchases. It’s not all bad, new home inventories continue to fall, piggyback 6.2 months, and at a level that analysts deem ‘healthy’. This time last year supply was 9.2 months.

The dollars is lower against the EUR +0.18%, GBP +0.12%, CHF +0.32% and JPY +0.34%. The commodity currencies are stronger this morning, CAD +0.07% and AUD +0.61%.

For a second consecutive day yesterday, higher yielding growth assets were asking questions as investors risk-appetite temporarily waned with commodities softening on speculation that global economic growth may falter. Yesterday was the first time in a while that the CAD was strongly correlated with negative commodity movements, previously, the loonie seemed well supported by ‘real’ money buying. The IEA announcement has allowed the real money interest interest to temporarily back off.

Big picture, the currency has held in very well over the last five trading sessions despite the release of weaker data down-south. With close to 70% of Canada’s total exports heading south of the border, weak US data releases seemed to be having little effect on the loonie. Now it’s a period of catch up.

With the Fed cutting its growth objective for the remainder of the year has higher yielding growth sensitive currencies trading under pressure. Expect the Canadian dollar to be subjected to the pull of either risk or risk aversion trading strategies (0.9790).

The AUD has climbed from a one-month low O/N on optimism that Greece will pass the budget cuts next week needed to receive additional aid, boosting demand for higher-yielding assets. Yesterday, the excuse for selling was that Greece would struggle to pass austerity measures to avoid a default. Supporting the selling pressure was the RBA’s board minutes for June reaffirming a noncommittal Central Bank.

Governor Stevens and company cited growing concerns in Europe, downside surprises in US data and deterioration in non-mining related industries as giving the board enough reason to remain on hold until further notice. The minutes were also less explicit than RBA Governor Stevens’ speech last week on emphasizing upcoming data like the CPI report. The market is pricing a no hike in August unless inflation and employment surprised on the upside and the situation in Greece clears up sufficiently for a powerful rebound in risk appetite. Global data needs to improve before we can embrace any rate hike policy thinking. Investors remain better sellers on rallies heading into the weekend (1.0583).

Crude is higher in the O/N session ($91.68 +66c). Oil prices tumbled to their lowest price in four-months after the IEA said its members would release crude from strategic reserves yesterday. They intend to inject +60m barrels of government-held stocks in the global market, immediately increasing world supply by +2.5%. This is the third time they have ever taken this action.

This comes after OPEC failed to raise production at this months meeting in Vienna. According to the agency, ‘greater tightness in the oil market threatens to undermine the fragile global economic recovery’. After the announcement WTI lagged Brent decline as traders speculated that the reserve requirements would have a more direct affect on Brent and narrowed the spread to around $17 from this weeks high north of $20.

According to analysts this move is significant, as it ‘represents a reach by member countries for the remedy of last resort to high oil prices’. The spike in energy prices is being cited ‘as the reason for the economic slowdown and this is a reaction to that’. Analyst’s note, that from its peak this year, crude is off-20%.The technicals see strong support first appearing at around $87.

Similar to most commodities yesterday, gold prices fell out of bed, registering its largest one day loss in a month after a surprise increase in US jobless claims hit investor risk appetite and boosted the dollar. Again margin calls in other asset classes required investors to raise fresh capital by selling the yellow metal. Previously the commodity received the sell signal after the Fed offered no hope, just yet, for a more prolonged period of monetary support. Once the commodity broke key technical levels, further pressure appeared, pushing the metal to record a-2% loss on the day.

This has been a classic risk aversion trading pattern, with the dollar and gold inversely correlated. The dollar has gained on heightened concerns about slowing global growth spurred a flight to safety, following a bleak outlook by Bernanke. Gold prices are -3.5% below its early May record high as the +2% gain in the dollar is hampering any rallies.

The commodities dependency on the buck and the outlook for US rates looks likely to remain intact. This ‘one directional trade’ is far from over, with speculators continuing to look to buy the metal on these deep pullbacks ($1,523 +$2.70c).

The Nikkei closed at 9,678 up+82. The DAX index in Europe was at 7,267 up+118; the FTSE (UK) currently is 5,767 up+93. The early call for the open of key US indices is higher. The US 10-year eased 6bp yesterday (2.92%) and backed up 2bp in the O/N session (2.94%).

A flight to quality has the US curve encroaching on this year’s low yield. Fueling the demand for FI was US jobless claims climbing last week and Trichet stating that the sovereign-debt crisis threatens to infect banks. Year-to-date the ten year benchmark has fallen more than 30 basis points on concern that the US economic recovery is weakening and the Euro region is struggling to contain its sovereign-debt crisis.

The market is concerned about holes in parts of the Greek austerity package that could put their own situation in further jeopardy. Rumors that the Greek Prime minister has doubts on his party’s capability of pushing though the austerity measures next week is producing a trading environment with no sellers of product in sight.

The FI market will now be trying to set itself up to take down supply next week (2’s, 5’s and 7’s). In this environment dealers should have no problems placing product. Record monetary stimulus is still needed to support US economic recovery. With the Fed expected to remain on hold for a considerable time is creating a new paradigm of longer term lower interest rates.

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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