This will be a week of reckoning for Capital markets. This Thursday we have the BOE and ECB rate announcement. Will Trichet and Co. be as bold as King and cut aggressively? The market requires a deep cut, but, historically the ECB has been able to explain in times past their more conservative moves. Despite the presence of Ã¢â‚¬ËœdisinflationÃ¢â‚¬â„¢ the committee has a knack of continuing to surprise the markets somehow. Once again we will end the week off with a bang. The mighty NFP numbers will not disappoint the Ã¢â‚¬ËœnaysayersÃ¢â‚¬â„¢.
The US$ is stronger in the O/N trading session. Currently it is higher against 13 of the 16 most actively traded currencies, in Ã¢â‚¬ËœwhippyÃ¢â‚¬â„¢ trading range.
Any neutral market observer would be impressed with the US equity markets performance last week. We witnessed the strongest rally in 35-years in this harsh economic climate, despite it also been month and year end for many US financials. Someone or something is working very hard on the investor psyche. Of course the million dollar question will be, is this Ã¢â‚¬ËœpositiveÃ¢â‚¬â„¢ sustainable? This is a heavy laden data filled week, a watershed for some countries in respect to interest rates. But, at the moment risk aversion trading strategies continue to dominate FX-land. Both JPY and CHF remain better bid as investors sell the higher yielding asset classes. Global slowdown is getting deeper and with Cbanks rates converging at very low interest rates can only be positive for JPY in the short term.
The US$ currently is higher against the EUR -0.32%, GBP -1.14% and lower against CHF +0.22% and JPY +0.82%. The commodity currencies are weaker this morning, CAD -0.52% and AUD -1.49%. The loonie despite a winning week last week, remained under pressure vs. its southern neighbor, it managed to pare another 2% vs. the greenback for the month of Nov. The sharp fall off in oil prices has managed to have a negative effect on the sentiment of the Canadian dollar. The loonie has remained under attack from a couple of fronts, firstly commodity prices lacking upward conviction and secondly, the imminent collapses of the BCE/Ontario Teachers deal. Accountants warned last week that the proposed $55b takeover in this environment and under the stated conditions may force the company to be insolvent. The transaction is Ã¢â‚¬â„¢unlikely to proceedÃ¢â‚¬â„¢ if KPMG cannot deliver a favorable opinion by Dec. 11. In all intense purposes the deal is dead, wiping 35% off share values. The black stuffs prices continue to trade close to its 20-month low. Crude accounts for approximately 10% of all of CanadaÃ¢â‚¬â„¢s export revenues. Governor Carney last week said Ã¢â‚¬Ëœthat the risks to the country’s economy from a global credit crisis and recession have increased in the last month and will probably lead to a further reduction in interest ratesÃ¢â‚¬â„¢. The newly formed government is now under threat of collapsing, and being defeated by a coalition party. Politically this week will be a testing time for the currency. Traders have priced in another 50bp ease this month, this will push borrowing costs below the psychological 2% mark as further monetary stimulus will be required to achieve the banks 2% inflation target over the medium term (2.25%).
The AUD has started the week off on the back foot, gaining no support from a weak equity market and the belief that RBA will once again slash interest rates this week to boost domestic growth. Risk aversion trading coupled with weak commodity prices will have traderÃ¢â‚¬â„¢s better sellers of the currency on rallies for the time being (0.6402).
Crude is lower O/N ($51.93 down-250c). Crude oil prices fell after OPECÃ¢â‚¬â„¢s decision this weekend to defer reducing production by 2-weeks to monitor the impact of Oct. cuts. But, at the same time their aim is to push oil prices back up towards the $75 a barrel. They believe that $75 is a Ã¢â‚¬Ëœfair price needed to support investment in new fieldsÃ¢â‚¬â„¢. They next meet on 17th of this month and remained concerned about demand deterioration, especially in the US. Many analysts still expect OPEC to once again cut back production at their next meeting to achieve a price level close enough to their desired target. Last week crude got a lift after PBOC cut interest rates by the most in 11-years to boost economic growth. Combine this with the European economic stimulus package and capital markets Ã¢â‚¬Ëœthumbs upÃ¢â‚¬â„¢ for ObamaÃ¢â‚¬â„¢s choice of economic advisors has global equities better bid and by default commodities as well. Not surprising the weekly EIA report showed that crude supplies rose +7.28m barrels to 320.8m last week. It is the 9th straight increase (the longest stretch in 3-years). But, analysts expect crude demand to climb as refineries boost processing. Refineries have increased operating rates by +1.3% to 86.2% of capacity (the highest levels in 3-months). Gas inventories rose +1.84m barrels, or +0.9%, to 200.5m barrels. Fear is destroying future demand at the moment. Speculation that the recession will further curb demand will push prices lower. Gold is under pressure this morning as the greenback rallies and oil declines, diminishing the appeal of the Ã¢â‚¬Ëœyellow metalÃ¢â‚¬â„¢ as a hedge against the USD ($800).
The Nikkei closed 8,397 -115. The DAX index in Europe was at 4,558 down -111; the FTSE (UK) currently is 4,212 down -75. The early call for the open of key US indices is lower. The 10-year Treasury yields eased 5bp on Friday (2.92%) and another 4bp in the O/N session. Weaker US economic data last week helped drag US Treasury prices higher. The 10-year note managed to print a new record low, as US durable goods orders fell coupled with the consumer spending dropping the most in nearly a decade, convincing investors that the current recession is deepening. With global equities remaining under pressure, investors continue to seek sanctuary in the FI asset class.
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