Early Seasonal gift from President Elect Obama!

To start the day on such a firm footing shown by the rally in global equities is refreshing. This quarter has been ‘large pill’ to swallow for many investors. Perhaps the global economic stimulus packages combined with slashing of borrowing costs may be ‘unfreezing’ investor’s cash coffers and convincing the masses we could be in the midst of some sort of turning point.

The US$ is weaker in the O/N trading session. Currently it is lower against 13 of the 16 most actively traded currencies, in a ‘whippy’ trading range.

Forex heatmap

The markets knew North American employment data was bad, but were still surprised with last Friday’s depth and revisions. Like President elect Obama stated this weekend, the economy and job reports ‘will’ get worse before they get better. His unveiling of the largest stimulus package in over a half a century has taken some of the risk aversion strategies off the table for the moment. Combining this with last weeks coordinated Cbanks easing has finally convinced investors that the aggressive steps may lead economies back to some sort of normality eventually. There is no doubting it, further global contraction will occur, must occur and needs to occur. This ‘deep’ recession will be longer than most analysts believe.

The US$ currently is lower against the EUR +1.32%, GBP +1.69%, CHF +0.74% and higher against JPY -0.87%. The commodity currencies are stronger this morning, CAD +1.06% and AUD +3.31%. The loonie on Friday managed to continue its downward spiral as horrible employment data (a loss of –71k vs. -15k) combined with a federal political fiasco and weaker commodity prices convinced investors that the currency has a reasonable chance to print new ‘yearly’ lows vs. its southern neighbor. The political and economic dynamics will push the currency towards 1.3300 in the short term. The loonie had its toughest day in 2-weeks on Friday; the unsettling political debacle in Ottawa has forced PM Harper to suspend Parliament to stave off a no confidence vote before he introduces the budget to the house in late Jan. It’s unbelievable that in the worst global economic crisis in our lifetime, the Canadian Government effectively in on hiatus for two months. With commodity prices continuing to take a beating, it’s only a matter of time before the loonie again makes a major assault on the yearly highs. The 6-month fall off in oil prices has managed to have a negative effect on the sentiment of the Canadian dollar. Crude accounts for approximately 10% of all of Canada’s export revenues. With the recent deep cuts by CBankers, futures traders are pricing in a 75bp by Governor Carney tomorrow.

The AUD dollar rallied aggressively as global equities climbed on the back of a potential economic stimulus package for the US auto industry. The currency has remained better bid on pull backs as investors continue to speculate that Cbank interest rate cuts around the world will bolster economic growth. Similar to other Cbanks, the RBA lowered interest rates by 1% to 4.25%, the 4th cut since Sept (0.6636).

Crude is higher O/N ($43.45 up +254c). What a brutal trading week for commodity traders and OPEC. Crude lost ground every day last week, the biggest losses in 17-years as global data convinced investors that the world is slipping deeper and deeper into a ‘longer than anticipated’ recession. Over the past 10-trading days oil has lost 25% of its value. North American payroll numbers last Friday was just another nail in the coffin of short term optimism. Since the record highs achieved at the beginning of the summer crude has managed to decline nearly 72% and technically there is nothing stopping prices from falling much further in the short term, and that even includes OPEC heavy handedness. Crude oil hit it lowest levels in 4-years as traders bet that a deepening recession in Europe, Japan and the US will erode future consumption once again. Imagine where we would be trading if China started to curb their demand, perhaps we would be sub $25? With risk aversion trading strategies taking precedence, there is currently noting capable of slowing down the negative price action and than even includes the widely anticipated OPEC cut later this month. With overall demand remaining weak, refiners are making a concerted effort to reduce stocks. Technically they are slashing deliveries to keep stocks from accumulating. Refineries are operating at 84.3% of capacity, down -1.8%, w/w. Last week we witnessed the biggest one week declines since Sept. Consumption averaged +19.6m barrels a day, that’s up +0.6% from the week before and down -5.7%, y/y. Comments from Qatar oil minister has done little to boost prices. Al-Attayah said that OPEC will ‘definitely’ cut output at its next meeting in Algeria on Dec. 17, after postponing a decision last month. He reiterated that the group wants prices between $70 and $80 a barrel, a desired level at which one can invest. With Obama stimulus package to be implemented has given the black-stuff an aggressive lift in the O/N market. Gold prices have rallied as the greenback has pared many of last week’s gains and increased the appeal of the ‘yellow metal’ as an alternative investment ($774).

The Nikkei closed 8,324 up +411. The DAX index in Europe was at 4,623 up +241; the FTSE (UK) currently is 4,214 up +165. The early call for the open of key US indices is higher. The 10-year Treasury yields backed up 13bp on Friday (2.70%) and another 5bp in the O/N session (2.75%). Last week Treasury prices rose for a 5th consecutive week, pushing yields to new record lows, as the US economy continued to slash the most jobs in over 3-decades. Higher prices also gained support from the Fed, who is contemplating buying US debt as the recession deepens. The curve once again has flattened to record lows (currently 2-10’s are 178bp). Traders are raising their bets that the Fed will ease by 75bp on Dec 16th. Global equities finding traction has temporarily put the FI market under pressure as investors shy away from risk aversion strategies.

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