UK Holiday results in low liquidity, USD Bulls still moving forward

The UK Holiday made the historically quiet last week of August even duller with low liquidity and questions about the USD’s continued strength. Financial Stocks brought down the Dow more than -2%, with the news that Columbian Bank of Kansas was closed by regulators, the FDIC announcing that Citizens Bank would take over the deposits. Insurer AIG is also in hot water after Credit Suisse commented it could lose up to 2.4 billion. Few market participants and low liquidity with this kind of announcements make for great volatility across the board.

FX Heatmap August 26th, 2008

Bernanke said the ‘financial storm’ in the US ‘has not yet subsided, and its effects on the broader economy are becoming apparent in the form of softening economic activity and rising unemployment.
Currently there is no fundamental reason for the Fed to move rates any time soon (2.00%); this can not be said for Europe, as some large member states head towards a recession. The Fed has already been aggressive in their easing policies and despite the negativity towards the greenback over the year; investors are once again finding comfort in owning it. Housing data has helped the USD, and on the flip side European Confidence Indices are not supporting the EUR.

The US$ currently is higher against the EUR -1.00%, GBP -0.79%, CHF -0.96% and JPY -0.41%. The commodity currencies are weaker this morning, CAD -0.17% and AUD -1.05%. The ‘market giveth and the market taketh’. The loonie lost ground on the continued fall of commodities prices
Inflation numbers last week will have done very little to influence governor Carney current monetary policy (3.00). Despite weaker Canadian fundamentals of late, investors will continue to closely monitor commodities direction for investment guidance. For now in this current climate expect traders to be better buys of US$ on pullbacks.

Credit market concerns have started a sell off of high yielding assets funded in JPY. The AUD (0.8512) has hit four month lows as a result. Expect better selling on AUD rallies for now.

Crude is weaker O/N ($113.51 down -1.56c). A tropical storm (Gustav) is heading for the Gulf of Mexico which could disrupt the oil platforms. Weather and geopolitical events are the only support the black stuff has at the moment.

British Petroleum has restored shipments on the Caspian Sea pipeline through Turkey. The Baku-Tbilisi-Ceyhan pipeline (Azerbaijan through Georgia to Turkey) resumed normal flows after a fire shut it earlier in the month. The hijacking of a supply vessel in Nigeria will also affect the price of oil, given the importance of security in the area.

Of late, geo-political concerns combined with the overdue technical bounce against the US$ have driven the markets. The Russian/Georgia conflict continues to be played out, especially after the Russian Parliament support of Georgia’s breakaway provinces. Russia continues to be one of the worlds biggest oil producers. Russian invasion of Georgia had temporarily cut off some export routes for Caspian Sea crude.

The Iranian Oil Minister commented that he expects OPEC to work on preventing the falling trend in crude prices at the next meeting in Vienna on September 9th. Lower Consumer Confidence numbers in Europe have reduced demand of crude, an traders continue to speculate about further depreciation if Financial Institution losses remain in the forefront.

Gold fell ($ 823) as the US$ rebounded vs. the EUR, thus eroding the appeal of the ‘yellow metal’ as an alternative investment. The stability of the USD and the fall of the EUR and oil will continue to pressure Gold, which is expected to break the $800 level if this scenario continues.

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.

Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza