Lower EURO Looks the Safer Bet

This week’s highlight obviously will be Friday’s employment situation report. Before then, traders will get their chances to tweak their forecasts with ADP employment on Wednesday and jobless claims Thursday. Current estimates puts the print just over an unimpressive +50k.

The market continues to wait for any positive news about Greece, again there was little produced over the weekend. The Greek cabinet approved new budget cuts, but the overall picture is one of a ‘failing program’. Greece’s GDP growth and budget deficit targets for 2011 and 2012 are significantly above estimates produced only three months ago. With the economy contracting close to 6% and protests increasing, the further budget and forecast downgrades likely challenge the credibility of Greece’s ability to meet even these new targets.

Greece is not the only challenge this week. Trichet Chairs his final rate policy meeting. Is it a surprise cut we can expect or the usual road sign policy change? European policy makers prefer to be more transparent, they do not even like surprising themselves! Ben gets to testify midweek, before the ‘holy grail’ of data, NFP is to be released on Friday. He is expected to emphasize the economic downside risks and that all policy options remain on the table. We can only guess what NFP will give us, for such a large country, it always surprises!

Forex heatmap

All markets eyes were on China this weekend. It seems that investors have declared the country as the last line of defense ahead of another full blow global recession. China’s manufacturing PMI on the weekend rose to 51.2 in September from 50.9 in August, a second consecutive rise with export orders up and prices down. The rise is well below the pre-crisis seasonal of a bit over two index points. It’s worth noting that some analysts have pointed out that the historical observed seasonal’s have ‘significantly smoothed themselves out over the years’. It’s a strong economic break in a bearish environment.

The dollars is higher against the EUR -0.32%, GBP -0.36%, CHF -0.34% and lower against JPY +0.24%. The commodity currencies are mixed this morning, CAD +0.09% and AUD -0.46%.

The loonie was down -2.2% last week, -7.4% on the month and -9% on the quarter, capping the largest losses since October 2008 as concern that the global economy is sinking back into recession boosted the demand for the dollar as a safe haven. The month and quarter end widow dressing last week had many short term investors seeking shelter and liquidating the remaining of their risk trades ahead of a fundamentally busy week, mixed with Central Bank rate announcements and ending with North American job announcements.

Canadian data on Friday showed that GDP rose +0.3% to $1.26t in July on a seasonally adjusted basis and matching market expectations. The positive print suggests the economy has resumed growth after shrinking last quarter. Later in the week we get to see the Canadian job’s report. The market expects a positive print, close to +10k and to rebound from a -5.5k loss in August.

Since last week, the loonie has under performed and lagged against other commodity pairs on the back of BoC Deputy Governor Macklem’s comments that policy interest rates “can be reasonably expected to remain below normal for some time to come”. With riskier assets remaining vulnerable to doubts over the ability of European policy makers to stem a debt crisis that threatens to trigger a global recession is capable of pushing the loonie through 2008 low levels (1.0500).

The AUD is weaken outright and versus the JPY as Asian stocks reversed earlier gains, reducing demand for higher-yielding currencies. Australian, Chinese and South Korean financial markets are shut today for public holidays. Chinese PMI data has been less than stellar and confirms that China is showing signs of its longest contraction in two years. The country is Australia’s largest trading partner. Fitch and S&P both downgraded New Zealand’s long-term foreign currency credit rating to AA from AA+. This move has supported the AUD against the Kiwi and the market is looking for that cross to breach 1.3000 medium term.

Many analysts believe the downward pressure that has been applied to this growth currency has created a price overshoot as there is too much ‘bearishness priced into the Australian interest-rate curve’. It has been one of the worst performing currencies in the pass month, declining -2.4% outright.

Investors remain concerned that European policy makers will struggle to resolve their debt crisis. Despite domestically having all the strong fundamentals, cash-futures are showing that traders are betting the RBA will lower its key rate by at least-75bp by the end of the year. The RBA is expected to keep its benchmark overnight cash rate target at +4.75% at its policy meeting next week. This will allow investors to sell higher yielding assets on rallies with the top side becoming more contained (0.9633).

Crude is lower in the O/N session ($77.92 down-$1.28c). Oil last week posted its largest quarterly decline since the 2008 financial crisis, down-17%, as signs of slowing growth in China, the US and Germany has heightened concerns that fuel demand will suffer. With European policy makers struggling to contain their fiscal crisis is expected to put commodities again under pressure this week.

Last week’s EIA report showed a build up of nearly +2m barrels of crude. This is not bullish and coupled with the Euro sovereign crisis will further pressure commodities. Not to be out done, gas stockpiles also rose +791k barrels to +214.9m last week. Supplies of distillate fuel (heating oil and diesel) increased +72k barrels to +157.7m. Refineries operated at +87.8% of capacity, down -0.5% from the prior week.

Weaker growth predicted by the IMF, which points to lower oil demand, will have dealers thinking of shorting the market again. Expect investors to run into technically selling on some of these rallies.

On Friday, gold posted a quarterly gain of +8%, its biggest this year and this despite a drop of-11% for September, the largest in three years, from record high prints. Despite a dollar in demand, the yellow metal again is coveted for safe haven reasons.

In the last two weeks, gold had one of its “steepest corrections in history, weighed down by a sharp margin increase, the fourth hike this year and heavy liquidation by hedge funds in a technically overbought market”. Demand for ‘physical’ gold is again supporting the market as the Indian festival season helps drive buying in the world’s biggest gold consumer.

All the bullish factors for wanting to own the yellow metal, like dollar debasement economic imbalances and sovereign periphery debt, remain. To try to apply supply and demand logic in a panicked market is near impossible. The Fed’s efforts to drive interest rates lower to support lending should, by default, support commodity prices ($1,633 up+$15.70c).

The Nikkei closed at 8,545 down-155. The DAX index in Europe was at 5,354 down-148; the FTSE (UK) currently is 5,020 down-108. The early call for the open of key US indices is lower. The US 10-year eased-4bp on Friday (1.92%) and another -3bp this morning (+1.89%).

Treasuries advanced in the third quarter the most since the financial crisis of 2008 as Europe’s sovereign-debt crisis and a sluggish US economy spurred demand for the world’s safest assets.

Long dated securities remain under pressure as investors flatten the US yield curve before the Fed begins buying longer-term debt and selling shorter maturities under Operation Twist this week. Investors fear that the US unemployment report could again creep higher is also promoting risk aversion, and attracting the buying of treasuries.

In the third quarter, 30-year bonds lost-146bp, tens’s-125bp and two years fell-22bps. In a low growth and deflationary environment coupled with policy makers accommodative positions could keep global rates low for years. Last week, the three issues drew record low yields for 5’s and 7’s and record demand for 2’s. The market is hoping to be vindicated by Central Bankers rate announcements this week.

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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