The EUR benefits from the Middle-East.

One global crisis after another continues to test capital markets. It’s expected that this holiday season will not provide a life line for many retailers, despite all the deep discounting. The trickle down effect will be fast and furious and 1st Q numbers are expected to be bleaker. Welcome to 2009!

The US$ is weaker in the O/N trading session. Currently it is lower against 14 of the 16 most actively traded currencies, in another ‘volatile’ illiquid trading range.

The greenback remains under threat as the prices of commodities rose for a 2nd day after Israeli air strikes in the Gaza Strip killed at least 300 people and ignited protests throughout the Arab world. The fear of oil supply disruptions to the US, a real fear, has trader’s paring long dollar positions for now. It’s expected that the tension in the region will attract more buying of EUR’s, short term objective is 1.4600 by months end. When there is geopolitical risks in that region, the US$ historically tends to be sold. The currency is also under threat as investors continue to speculate that housing and manufacturing reports this week will show that the economy is deteriorating even further. Another holiday shorted half staffed week will surely provide some interesting trading ranges.

The US$ currently is lower against the EUR +1.75%, GBP +0.65%, CHF +1.41% and JPY +0.40%. The commodity currencies are mixed this morning, CAD -0.31% and AUD +1.29%. The loonie is trading in no-mans land at the moment. It seems to be guilty by its association with a weak US$ at the moment. Last weeks soft GDP numbers has not helped its cause. Despite oil nearly advancing 11% over the last two trading sessions and gold achieving a 3-month high, the currency has remained close to last week levels. With no data to support the currency for most of this shortened trading week, depending on how commodity prices behave, expect investors to be better buyers of the currency on any USD rallies. The market remains illiquid and choppy.

The AUD$ has aggressively gained in the O/N session, all this on the back of gold, who printed an 11-week high. The ‘yellow metal’ advanced after Israel bombed Hamas in the Gaza Strip. Other data this week should provide further evidence that the US is slipping into a deeper recession, thus increasing pressure on the greenback (0.6938).

Crude is higher O/N ($8.59 down -39c). On Friday crude had its biggest gain in 2-weeks, advancing close to 6% after the U.A.E said it would reduce output to comply with OPEC’s supply curbs. Couple this with a softer greenback has the black-stuff better supported on pullbacks. Middle East tension continues to have a similar effect. OPEC’s cohesive support should provide further traction for commodities in this shortened trading week. According to the Saudi oil-minister, OPEC is ‘determined to bring stability to the oil market’ after prices tumbled from the summers high. But, consensus believes that the crude market is in danger of reaching the psychological $25 level sooner rather than later. Fundamentally we have only corner trying to provide support and that’s OPEC. Even non-OPEC member Russia is signaling that it too will trim production in the New Year. But so far sustainable traction will be difficult to achieve as global ‘negativity outweighs consumption’. Year-to-date oil is down 55%. Already OPEC is hinting that they may meet again next month to discuss further production cuts. It’s expected that that they will continue to reduce output as demand falls. The world is currently awash with the ‘black-stuff’. To date OPEC’s actions have done little to elevate prices that have dropped 75% from their record highs during the summer. This deep recession has had a profound effect on global consumption. With the greenback under renewed pressure investors are happy to once again own the ‘yellow’ metal as an alternative investment, couple this with mounting tensions in the Middle East has gold better bid on pull backs ($882).

The Nikkei closed 8,747 up +8. The DAX index in Europe was at 4,705 up +76; the FTSE (UK) currently is 4,310 +93. The early call for the open of key US indices is higher. The 10-year Treasury yields backed up 2bp on Friday (2.15%) after a record of new issues last week. With global equities and a never ending plummeting US housing market, consumer confidence is very much being continuously tested. Even with yields at record lows, investors continue to seek safety in the FI asset class.

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