R.I.P-Detroit three!

The markets are guided by ‘fear’, nothing different. Greed has put us in this mess and greed continues to guide investors to the edge. In Detroit, management and unions asked too much and in the end, they themselves would not budge (immediate pay and benefits cuts) has forced their companies to think alternative routes, bankruptcy! NFP will surely head towards the dreaded 1m loss mark.

The US$ is stronger in the O/N trading session. Currently it is higher against 9 of the 16 most actively traded currencies, in another ‘violent’ trading range.

Forex heatmap

Yesterday, US jobless claims soared, forcing some analysts to predict a horrendous NFP number for Dec. (-650k loss). This will dispel any thoughts that Nov.’s number was an anomaly. The surge in initial jobless claims (+573k last week vs. +540k expectations) during the period covered by the NFP survey is just depressing by any stretch of the imagination. If one looks at the continuing claims figure, +4.4m Americans on extended unemployment benefits, in reality it’s very close to the record high +4.7m recorded 26-years ago. Historically, continuing claims are highly correlated with the unemployment rate, so an unemployment rate north of 7% is in the cards for this month! It’s frightening to think we have yet to see the deepest monthly loss of jobs for the current recession. Perhaps 1-millon job loss headline is just around the corner. Other data revealed that US real trade deficit is consistent with a gloomy 4th Q GDP print. The ‘nominal’ Oct. trade deficit came in about +$4b worse than expected at -$57 billion. But the ‘real’, volume based measure of the trade deficit is the one to watch. The ‘real’ goods balance sharply deteriorated to a deficit of – $46.4b in Oct., (down -$7b from Aug.). This data has led to a more bearish consensus for the 4th Q GDP print of -4.5% q/q annualized, followed by -4% in 1st Q. Export weakness was widespread, with goods down -2.8% while services dropped -0.7%. Capital goods (-0.3% m/m), industrial supplies (-4.3%), consumer goods (-1.2%), automotive (-2.3%) and food & beverage (-8.6%) all fell in Oct. Imports dropped -1.3% as autos plunged -5.0%, the 4th –consecutive monthly decline. However, a -3.7% decline in capital goods and a -0.2% drop in industrial supplies also helped push imports lower. On the volume side, imports rose +2.8% while exports declined -0.9%. With data like this no wonder we are tending to shy away from the greenback.

The US$ currently is higher against the EUR -0.33%, GBP -0.89% and lower against CHF +0.11% JPY +1.55% as investors seek risk aversion strategies. The commodity currencies are weaker this morning, CAD -1.29% and AUD -2.29%. The loonie advanced vs. its southern neighbor as global equities and commodities rallied and the ailing greenback declined across the board yesterday. Canada’s trade surplus narrowed to $3.8b in Oct. yesterday, less than expected ($3.4b) although Sept. trade surplus was revised down to $4.3b (previous $4.5b), as imports grew faster than exports. It’s worth noting that the gain in imports was due to higher prices as the CAD dollar depreciated by -12% during the month; import volumes declined -0.8% m/m. Exports volumes, on the other hand, rose +0.5%, this has provided some support to economic activity for the economy in Oct. This is in stark contrast to the US trade numbers, and if the loonie did not rally on this, then the currency would have been in real trouble. Another added bonus for the currency has be the weekly strength of the commodities. It’s worth asking the question, is it a natural strength in commodities or a general weakness in the USD$? Prices of commodities, which generate about half of Canada’s export revenue, have plummeted since the summer highs as a global recession has reduced demand. This week Governor Carney from the BOC delivered an unexpected ‘deep interest rate’ cut. The market expected 50bp, the economy warranted 75bp and Carney pushed rates to a new 50-year low of 1.5% vs. 2.25%. In his communiqué he signaled that more action may be needed as economic growth sputters in a ‘broader and deeper’ global slump. According to the BOC, the Canadian economy has entered a recession and his ‘dovish’ tone coupled with weaker economic data of late leads me to believe that the currency is capable of making an assault on this year lows sooner rather than later. Of course all this could change after OPEC meet next week! Traders continue to favor owning USD on any CAD dollar strength.

The AUD dollar fell from its 1-month high O/N as the US Senate rejected the Auto bail out. The failure has encouraged risk aversion trading strategies forcing investors to shy away from riskier high yielding assets. In this environment with risk being taken off the table the AUD will remain under pressure, expect traders to continue to better sellers on rallies (0.6547).

Crude is lower O/N ($47.06 down -92c). Crude prices had its strongest rally in over a month yesterday. This after the Saudi oil minister said that the Kingdom had delivered the output cuts promised to OPEC (last month). The market took this as a sign that world supplies are smaller than traders believe. The Kingdom pumped +8.493m barrels a day in Nov., in line with its OPEC production quota of +8.477m barrels. Oil this week is up 17%, that’s the largest weekly gain in 10-years. This ‘new’ policy of transparency from the Saudis has everyone looking. It basically indicates that they are serious and that more cuts will be forthcoming, in other words they mean business. Libya’s top oil minister reiterated yesterday that the recent production cuts were not enough and at next weeks OPEC meeting deeper cuts need to be implemented. He said’ that there was a consensus to reduce production’. Russia also has indicated that they could join ranks with OPEC and cut production (world’s second largest producer), by default this will be bullish for commodity currencies. This week’s weekly EIA report showed that inventories of gas and distillate fuel, a category that includes heating oil and diesel unexpectedly jumped. Gas stockpiles rose +3.7m barrels to +202.7m w/w, while distillate inventories climbed +5.6m to +130.6m barrels. They were anticipated to fall -400k barrels and distillate supplies by -1.5m respectively. Inventories of crude rose +392k barrels to +320.8m (analysts had anticipated a 10th consecutive increase of +1.3m barrels). Refineries operated at 87.4% of capacity and were up +3.1% from last week. The 4-week US fuel consumption averaged +19.3m barrels a day, that’s down -6.1% for the same period last year. Gold prices rallied to a 2-month high yesterday as a weaker greenback had successfully pared all of last week’s gains, thus by default it temporarily increased the appeal of the ‘yellow metal’ as an alternative investment ($819). Let’s see what the fall out of the Auto package will do this morning.

The Nikkei closed 8,235 down -484. The DAX index in Europe was at 4,579 down -187; the FTSE (UK) currently is 4,256 down -131. The early call for the open of key US indices is lower. The 10-year Treasury yield eased 10bp yesterday (2.60%) despite traders cheapening up the curve ahead of new issues and another 5bp in the O/N market (2.55%). Treasury prices rallied, trading near record low yields as US initial jobless claims and the number of workers staying on benefits both surged more than initially forecasted to a 26-year high. Investors continue to gravitate towards the FI asset class due to heightened risk aversion and fear of deflation. This week we have already witnessed 1-month US T-bills trading in negative territory as investors sought the safety of US debt amid the worse financial crisis in 80-years. Next up we have the Fed meeting next week. Traders have already priced in a 50bp cut.

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