European Confidence falls to record low!

Policy makers continue their marketing ‘pony and trap show’, to sway consumer confidence. It seems with a few minor amendments the Canadian Government will pass their Economic budget and side step defeat. Notably, the IMF is ‘less’ optimistic with Canada and the BOC time line of recovery and we are talking a couple years in the difference! The Fed believes that the world economy will weaken further significantly, despite all the ‘proactive or reactive’ measure in place. Not a surprise to anyone, ECB’s Trichet said again that the next ‘important’ ECB meeting will be in Mar. and suggested that nothing will happen at the upcoming policy meeting next week. He also stated that ‘very, very low interest rates have some inconveniences that the Governing Council is trying to avoid’. How unfortunate!

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

Forex heatmap

Well waiting for the Fed announcement was anti-climatic, as expected they left the benchmark lending rate ‘as low as’ zero and at the same time became more transparent in they endeavors by indicating that they are prepared to purchase treasuries to resuscitate lending. The Fed’s policy of ‘credit easing’ as opposed to calling it ‘quantitative easing’! The following communiqué stated that the Fed is ‘prepared to purchase longer-term Treasury securities if evolving circumstances indicate that such transactions would be particularly effective in improving conditions in private credit markets’. The committees focus is ‘to support the functioning of financial markets and stimulate the economy through open market operations and other measures that are likely to keep the size of the Fed balance sheet at a high level’. They are concerned that the risk of inflation could fall to low, they ‘see some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term’. Using all these credit programs will benefit borrows, as long-end product will influence mortgages, corporate and muni-bonds. But, analysts continue to seek an exit strategy, there need’s to be one at hand and transparent to make these strategies being proposed by the Fed convincing!

The US$ currently is higher against the EUR -0.56%, GBP -0.46%, CHF -0.32% and lower against JPY +0.18%. The commodity currencies are weaker this morning, CAD -0.56% and AUD -1.18%. The loonie advanced for a number of reasons of late. Firstly, the M&A of Grupo Bimbo (Mexico) and Canada’s US arm of George Weston bakery for $2.3b. Apparently the FX portion had to be concluded yesterday and was probably the biggest factor for the currency movement over the past 5-days. Secondly, commodity prices have held their own while investors gravitate towards higher-yielding assets such as equities and commodity linked currencies, thus reducing the appeal of the US dollar as a safe haven. Thirdly, Michael Ignatieff, leader of the opposing Liberal party said he would not vote against Conservative PM Harper’s fiscal stimulus measures, as long as they agreed to some amendments. He stated that the proposed coalition against the current government was dead (they hold the balance of power and had threatened to defeat the government if its measures did not go far enough to counteract an economic slowdown). Fundamental data of late has been very disappointing, but the Governments announcement of their expected deficit numbers, pales in comparison with so many economies, has made the currency much more attractive over the past week. In this current market mood, traders are happy to purchase the loonie on any USD rallies until proven wrong!

The RBNZ slashed O/N borrowing costs by a surprising 150bp to 3.5% pushing the Kiwi dollar to a 6-low as the global recession takes a firm grip. Traders are now betting that the RBA will slash rates by 100bp next week which will further reduce the appeal of this high yielding commodity currency. Thus far the AUD has depreciated 7% vs. the greenback this year (0.6558).

Crude is lower O/N ($42.10 down -6c). As expected the weekly EIA report did not surprise in respect to crude inventories, they have now risen for the 16th time in 18-weeks. Weekly inventories jumped +6.22m barrels to +338.9m over the period vs. an expected climb of +2.9m. But, surprisingly gas stocks fell -121k barrels to +219.9m last week vs. an expected climb of +2m barrels. It’s this drawdown and an elevated equity market which provided crude prices a leg up yesterday afternoon. Already this week, bearish economic data has highlighted the depth of the global recession. US housing reports continue to provide stronger evidence that the on-going recession in the biggest energy consuming country is only deepening. The black-stuff is finding it very difficult to maintain any bullish momentum, all this despite investors speculating that global stockpiles would decline when OPEC fully implements its promised production cuts. It is expected that OPEC will curb supplies by -5.4% this month to +26.15m barrels a day. OPEC’s secretary general el-Badri is seeking to ‘limit the level of speculation’ by investors who buy oil without planning to use it (hoarding in Supertankers). The organization said yesterday that ‘they wanted US regulators to curtail oil trading by hedge funds and speculators who helped make last year the most volatile in crude oil markets’. Kinda like not been able to short sell an ‘overvalued’ financial stock! OPEC said that demand for its black-stuff will decline -4.2% this year as the recession in the US, Europe and Japan curbs fuel consumption. It’s expected that consumption of OPEC’s oil will shrink -1.4m barrels a day to +29.5m barrels. Profit taking of the ‘yellow metal’ remained robust yesterday. Investors continue to be happy booking some profit and selling some of their precious yellow metal. In the O/N session, the renewed strength and the lack of a need to own a safe heaven asset continues to weigh on commodities ($880).

The Nikkei closed 8,251 up +144. The DAX index in Europe was at 4,445 down -74; the FTSE (UK) currently is 4,216 down -79. The early call for the open of key US indices is lower. The 10-year Treasury yields backed up 9bp yesterday (2.62%) and a further 4bp in the O/N session (2.66%). The strength of global equities and the optimism surrounding President Obama’s speculated plans to boost the US economy has investors shying away from investing in an any more safe assets at the moment. But, longer term securities continue to remain better bid on pull backs as traders anticipate that the Fed will be in a position wishing to buy longer dated securities as a part of their long term stimulus plan.

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