Obama’s honeymoon will be short lived as Global recession deepens. Is it time for the USD to shine again?

Obama euphoria is over; a reality check has investors continuing to sell equities as earnings once again underperform. But, at least libor rates are starting to work again. Markets are waiting for King and Trichet this morning. Already futures have priced in aggressive cuts to stem the global meltdown. For more fun we still have NFP tomorrow!

The US$ is stronger in the O/N trading session. Currently it is higher against 10 of the 16 most actively traded currencies, in a ‘subdued’ trading range.

FX Heatmap November 6th, 2008

Today’s focus will be on King and Trichet and how deep will they go. Euro-land data continues to lag that of the US. It now time for Trichet especially, to change policy makers focus from their fixated inflation bias to one of future growth concerns. The market has priced in a 50bp ease for ECB and 100bp for the BOE. Yesterday’s US data is at least consistent, and that’s consistently weak. The -157k job cuts that the Oct. ADP registered, and the downward revisions to the previous month, offer up the worst reading on US job markets so far in the credit crisis (worst reading since Nov. 2002). But, historically the report understates the risks for tomorrows NFP headline (consensus is leaning towards a -250k loss headline and an unemployment rate of 6.5%). Why the divergence between the reports? NFP includes government hiring in the headline, unlike the ADP which looks at non-farm private sector hiring. Of course different sampling and sources are used. Digging deeper, the goods-producing sector accounted for the majority of losses (-126k), while the services sector saw losses of -31k. Do not be surprised to see an eye popping NFP tomorrow. As expected, the ISM non-manufacturing composite index fell below 50 last month. But, the depth of the decline caught the market by surprise. The composite index fell -5.8 points to 44.4. The sub-components too remain dire; the services employment fell to the lowest level in 11-years adding to the already weak manufacturing employment witnessed this week. The report also contained more evidence that inflation is retreating, as the prices paid component dropped by 30% over the past 5-months (very much in line with Fed Fischer thinking). New orders are falling, and the backlog of orders continues to be worked off.

The US$ currently is higher against the EUR -0.30%, CHF -0.65% and lower against GBP +0.19 and JPY+0.05. The commodity currencies are weaker this morning, CAD –0.12% and AUD -0.25%. The loonie managed to print a three week high earlier in the week, as a positive move in equities managed to convince investors to ‘strap on more risk’. Well, the reverse occurred since then as the currency pared some of its gains as traders were comfortable to move away from ‘riskier’ positions. Traders are waiting patiently for this morning’s rate announcements in Europe. With the credit markets continuing to unclog themselves, renewed optimism is favoring the loonie after printing last weeks technically oversold levels. Interest rate differentials (ECB and BOE), global equities and commodities are expected to provide a glimmer of support for the currency. But, beware of tomorrows North American employment data. Talk of the Teck- Cominco/ Fording Canadian Coal Trust being covered piecemeal has managed to keep the currency range bound at the moment. Many Canadian corporations missed the boat last week to own the currency and are said to be chasing the market this week.

In the O/N session, with global equities retreating on earning announcements, investors have been happy to unwind some of the AUD$ carry trades entered earlier this week. Investors continue to be better buyers on pull backs and will wait to see what both the ECB and BOE have in store for the market this morning (0.6782).

Crude is lower O/N ($64.94 down -35c). Crude has reversed earlier weekly gains on the back of weaker US fundamental data and yesterday’s unexpected EIA report. Surprisingly gas supplies rose +1.12m barrels to 196.1m w/w vs. an expected +650k. Inventories of crude rose +54k barrels to 311.9m. Analysts had forecasted a rise of +1m barrels. Weaker ADP employment data provided stronger evidence that the US economy continues to contract and by default impede future demand of commodities. US fundamentals are weak and will remain weak for many a quarter. Combine this with ‘woeful’ global economic news and investors will again pressurize crudes prices in the medium term as destruction of global demand will continue. Euro-land has already declared the region’s economy has already entered a recession and will stagnate next year. Despite the run up in prices at the beginning of the week, the black stuff continues to trade close to its 17-month low print last month. Rate cuts last week by the three biggest oil users, the US, China and Japan, has so far failed to inspire confidence that a recession can be avoided. What are Trichet and King going to accomplish today? It’s a foregone conclusion that both the ECB and BOE will trim rates, but will they be deep enough initially. Global equities and OPEC wanting to meet again next month has provided little support. OPEC indicated that they may call a new meeting if prices fail to react to the -1.5m barrel-a-day output cut it announced last month. To date we have not been able to remain above the $70 a barrel level (last month crude fell 33%). Growth fears will continue to outweigh any cut in production (OPEC produces 40% of the world’s oil and cannot cut too deeply due to consent issues by various members). Same theme but a different day, Gold found no traction yesterday after weaker US data has convinced investors that due to the state of the US economy will eventually reduce demand for commodities.

The Nikkei closed 8,899 down -622. The DAX index in Europe was at 4,924 down -242; the FTSE (UK) currently is 4,338 down -192. The early call for the open of key US indices is lower. The 10-year Treasury yields eased 5bp yesterday (3.70%) and are little changed O/N. Traders continue to unwind steepening trades (233) causing the long end to remain better bid. The Treasury announced major changes to its auction schedule, reflecting what is likely to be a record $1 trillion-plus budget deficit this year. Next week, the Treasury will begin auctioning monthly 3-year notes (last introduced in May 2007) at $25 billion in size. They will then auction $20b in10-year notes and will be reopened in each of the following two months. They did not specify the size of the 10-year reopening, but the market believes anywhere from $10 to $15b. Finally, next Feb. they will begin auctioning quarterly 30-year product. A lot of supply especially in the front end; it will be interesting to see how the market will absorb this.

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