Happy New Year……..??

2008 is the Year never to be forgotten. It’s the year that brought global financial markets almost to its knees, the year that punished greed, leverage and irresponsible risk. A year that has managed to make some oligarchs much poorer and perhaps made us sit up and think about future society values a wee bit more. Brace yourselves for a historic 2009!

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

Forex heatmap

No surprises in the US housing data yesterday, the markets expected a deeper shade of ‘red’ and we got it. The S&P/Case-Shiller index declined -18%, y/y to Oct. According to analysts, this is the fastest pace on record, driven by the pace of foreclosures, plummeting sales and rabid ‘inventory’ levels. Perhaps the 1st Q of 2009 will cause us to utter the words ‘the great depression II’. To date the global financial debacle has forced institutions to curb lending severely, this action can only prolong this US housing slump for another year at least. By default, plummeting property values have eroded consumer’s net wealth, impeding spending causing global economies to contract even further. This will warrant us to call it a ‘depression’ rather than a ‘recession’ as the bear market momentum prevails. US consumer confidence unexpectedly dropped to a new record low for this month yesterday (38 vs. 44.7), as individuals become more apprehensive about maintaining their jobs in this contracting environment. This is the lowest reading in 42-years. The usual suspects continue to weigh on the consumer psyche, job security, deterioration of household wealth and increasing foreclosures. To make matters worse the International Council of Shopping Centers yesterday dimly projected that this holiday season was probably the worst in 4-decades, which will most likely lead to a increased deluge of redundancies next month.

The US$ currently is lower against the EUR +0.14%, GBP +0.12%, CHF +0.23% and higher against JPY -0.04%. The commodity currencies are stronger this morning, CAD +0.60% and AUD +0.31%. Geopolitical concerns have been pushing the USD lower across the board and providing support for oil and gold on pull backs. The Loonie remains guilty by association and proximity to its largest trading partner south of its boarder. This is a deceptive trading week as liquidity and participation remains at an all year low due to the holiday season. With no data to support the currency for most of this shortened trading week, depending on how commodity prices behave, expect investors to remain on the side lines while dealers fulfill their necessary requirements. But so far, despite oil paring last week’s 11% loss, little strength can be found favoring the currency. The currency remains vulnerable to the USD topside for now.

The AUD$ remains better bid on pull backs despite the tentative weakness of global equities questioning investors about holding higher yielding currencies. With gold climbing to an 11-week high has helped it cause this week (0.6924).

Crude is lower O/N ($38.11 down -92c). Crude prices are battling with global demand deterioration and tensions in the Middle East escalating. Speculators are paring positions ahead of today’s weekly EIA report that is suppose to show another inventory increase. With the greenback paring some earlier weekly losses has also weighed on the black-stuffs prices. Yesterdays US data continues to paint a bleaker picture than seasonally had been expected. But, Middle East tensions should provide some support on deeper pull backs, as there remains concerns that supply from the world’s largest producing region may be disrupted. Historically Hamas is backed by Iran and considered a terrorist organization by the US. Iran physically holds the 2nd largest oil reserves and any involvement by Iran will send the black-stuff prices much higher. China this week has publicly stated that they will supplement their ‘emergency’ oil reserves while prices remain close to these low levels. This stockpiling mentality will surely impede some of the ‘demand destruction’ that we have witnessed from this global economic meltdown. But, this shortened trading week and liquidity constraints is probably doing a disservice to the natural weakness of crude, prices have been incorporating an insurance premium. OPEC’s cohesive support should provide further traction for commodities in this short term. 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. Even non-OPEC member Russia is signaling that it too will trim production in the New Year. 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’. This deep recession has had a profound effect on global consumption. Thin trading markets had investors booking gold holiday profits as the greenback gained some late yesterday ($868). Expect heighten tensions in the Middle East to provide support on deeper pullbacks.

The Nikkei closed 8,859 up +112. The DAX index in Europe was at 4,810 up +105; the FTSE (UK) currently is 4,429 +38. The early call for the open of key US indices is lower. The 10-year Treasury yields backed up 4bp yesterday (2.14%) as investors become concerned about the influx of new issues to finance the growing US budget deficit. Ongoing falling house prices and record low consumer confidence provided no support for the FI asset class as investors now turn their focus towards supply. However, the short end of the Yield curve advanced as investors sought the safety of US government debt amid escalating tensions in the Middle East. This shortened trading week continues to provide liquidity constraints.

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