Do We Ever Get To Shout EURO Event Risk?

The Euro seems resilient to bad news out of Europe. Despite the “mega” risk rally earlier this month, many still have not bought into the idea that Euro problems have been solved, and rightly so. It’s interesting that the currency pull back earlier this week did not result in major positions being wildly vacated, the downward movement was rather orderly. One gets the feeling that there are not too many outright longs playing just yet, investors seem to want to keep their positions close to home.

Negative releases like S&P’s downgrading 24 Italian Banks, like Moody’s cutting Spanish credit ranking by two levels to A1 from Aa2 is being trumped by rumors that Germany and France may be boosting the Euro rescue fund and by the EU commission clamping down on banks that may be manipulating LIBOR, fixing to cause investor and counter party panic. Are we waiting for the weekend to shout “event” risk then?

Forex heatmap

Yesterday’s US PPI sideswiped the market, and caught many dealers napping. With so much emphasis has been placed on the Euro situation, many investors were caught in the headlights on the release. The surge in PPI (+0.8%) almost entirely reflected higher energy compared to August. Strip out the most volatile components and the core increased by just +0.2%, m/m, with the annual rate steady at +2.5%. This would suggest relatively contained inflationary pressures. The release should have no influence on the Fed’s monetary policy. Capital markets and the Fed are honing in on growth indicators. The high energy cost blip is being interpreted as a once off as commodity prices have dropped in recent months. The market expects today’s CPI to also tick a tad higher.

US TICS report was strong at +$57.9b, led by +$69.7b foreign buying of Treasuries. It seems that investors stepped up to the plate once the debt ceiling standoff was resolved. However, the demand for equities by foreigners weakened-$6.6b for the same period. It was interesting to see that China was a net seller of treasuries in August. They still remain the top overall holder.

The dollar is lower against the EUR +0.49%, GBP +0.21% and JPY +0.04% and higher against CHF -0.19%. The commodity currencies are stronger this morning, CAD +0.18% and the AUD +0.41%.

The loonie seems an easy currency than most to corral. When commodities rally, the currency is very much in demand, and yesterday’s price action was no exception. The CAD strengthened against the greenback on “eased” concern that its largest trading partner may be heading into recession after a report showed US wholesale prices rose last month, more than expected. Despite the CAD appreciating +2.8% outright this month and beating its commodity peers (AUD and BRL), the consensus is for the loonie to retest its recent lows ahead of this weekends Euro summit announcements. Anymore increased rescue fund inducement ideas ahead of the weekend meeting and the loonie will not fear falling anytime.

The CAD, like any risk or interest rate sensitive currency, remains vulnerable to following the broader trends, especially what is transpiring in Europe on the verbal front. The market is a good buyer of dollars on dips after strong corporate interest ahead of parity kept the line at the beginning of the week (1.0100).

The AUD is coveted outright as global bourses extend its rally, boosting demand for riskier assets. Westpac’s leading index showed that the future economic growth in Australia advanced +0.8% in August from a month earlier to 287. With capital markets edging back to appreciating fundamentals, growth and interest rate sensitive currencies are itching to come out on top. Aussie domestic data remains robust, and coupled with Chinese inflation being well contained, provide compelling ingredients to own this growth currency.

Earlier this week, the market got the RBA minutes and the final verdict seems to be neutral. The minutes mirrored the tone of their policy statement and failed to give any additional information. Digging deeper, the key sentence “an improved inflation outlook, if confirmed by further data, would increase the scope for monetary policy to provide some support to demand, should that prove necessary”, could end up being a possible teaser, as a weaker third quarter inflation report released next week would/could trigger a cut, however, EU holds the key, as the RBA is not expected to be pro-active ahead of the G20 meeting at which Europe is due to reveal its comprehensive policy package.

With global markets embracing risk slowly, the interest to buy AUD on dips has picked up. This rally momentum is threatening the print new highs before the Euro summit this weekend in Brussels (1.0342).

Crude is lower in the O/N session ($87.78 down-$0.36c). Oil prices remain in that ‘too and fro’ relationship. During yesterday’s session, global concerns about Chinese growth weighed on commodity prices, however, a reversal in US equities, powered by financials, happened to drag the black-stuff prices higher by day’s end. Investors seem to have one eye fixated on US growth, any positives and they are happy to be bullish commodities. Today’s weekly crude report is expected to see another addition to inventories.

Last week’s EIA report was somewhat neutral for prices. It showed crude stocks rallying +1.34m barrels to +337.6m. The market had been expecting a +300k average build. Crude imports rose +386k barrels per day to +9.05m. On the flip side, gas stocks fell by -4.13m to +209.6m, more than market projections for a-100k barrel fall. Average gasoline demand in the last four-week’s fell by -0.7%, y/y. Distillates (heating oil and diesel), fell by -2.93m barrels to +154m, compared with an average forecast for a-600k barrel draw. Refinery Utilization fell by -3.5% to +84.2% of capacity. Finally, stockpiles at the Cushing rose +532k barrels to +30.6m barrels.

After this weekend’s summit release and with hopefully with no surprises, the market will begin turning its attention back to supply issue questions with Libya coming back online. Until then, expect investors to run into technical selling on some of these steeper rallies.

What’s up with the yellow metal? Where is the support? The bulls and the bears continue to ‘fight it out’, obviously for opposing reasons. Many have expected the yellow metal to climb with the European debt crisis boosting safe haven demand. Despite the narrow trading range, the dollar ride higher has been doing the metal no favors. The commodity is on track for its largest decline in two weeks, as investors worry about slowing Chinese growth, a warning on France’s credit rating by Moody’s and a dimming prospects for a solution to the euro zone sovereign debt crisis. Gold does not seem to garner the same safe-haven appeal as it did a few weeks ago. Right now, we are back to the inverse dollar-gold correlation play and the belief that a larger Euro rescue package will curb the demand for the metal as a protection of wealth.

After last months rout, investors remain very cautious about this trade. Demand for ‘physical’ gold is again expected to provide support on these pullbacks. Under normal conditions, the Indian festival season helps drive buying from the world’s biggest gold consumer.

The yellow metal has moved in line with other commodities and assets seen as higher risk, like equities, in recent weeks, now it’s the inverse relationship play. In fundamental terms, gold is trying to find a balance ‘between the two opposing forces’, a risk investment or a safe haven ($1,646 down-$6.20c).

The Nikkei closed at 8,772 up+30. The DAX index in Europe was at 5,905 up+29; the FTSE (UK) currently is 5,439 up+28. The early call for the open of key US indices is higher. The US 10-year backed up 6-bp yesterday (2.18%) and is little changed in the O/N session.

Despite US economic news improving and inflation up-ticking, treasuries continue to appeal to many. Yesterday, they rallied from their seven week high yields, as concerns that Europe may take longer to contain its sovereign debt turmoil and slower growth in China boosted demand for the safest assets.This morning’s risk adjustment to attitude has changed that way of thinking only slightly.

This week, the main focus will continue to be towards Europe. The TICS report yesterday showed that overseas holdings of US debt rose +2% in August, to a record +$4.57t. Foreign holdings have increased +3.1% in the first 8 months, the smallest gain in five years. China, the US’s largest creditor, reduced its holdings by -$36.5b or -3.1%. Treasury price gains have somewhat been capped with US PPI climbing +0.8%, the most in five months, after no change in August. This morning’s CPI is also expected to pressure the curve to back up.

Even so, asset classes remain susceptible to Euro rhetoric, and any negativity towards a Euro solution will have investors wanting to bank more of last weeks risk profit and embrace risk aversion debt once again.

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