Obama is following Robin Hood’s philosophy!

President Obama is hoping to take from the rich and give to the less fortunate. His new tax plan coupled with his budget deficit slashing ideas has given the buck the green light for now. Some analysts question if his administration is not being too optimistic in the numbers for the economic growth projects for next year (+3.5%). Bernanke this week said ‘we are in a severe contraction’. Today’s data is expected to show that the US economy shrank even more last Q. Take note, being the end of the month, abnormal trading ranges (not that anything is normal anymore) may occur due to fixing requirements for specific currency pairs.

The US$ is stronger in the O/N trading session. Currently it is higher against 14 of the 16 most actively traded currencies, in another ‘whippy’ trading range.

Forex heatmap

Yesterday we witnessed another bleak US report on Durable good orders. Total durable goods orders fell -5.2%, which was double market expectation, while core-durable goods orders ex-transportation fell by -2.5% and very much in line with expectations. As per usual it is the volatile defense component that has distorted headline orders and fell -35% after a rise of +45% the previous month. However, non-defense ex-aircraft orders fell -5.4%, nearly matching the prior month’s decline. Revisions remained the real killer on both headline and core. The previous month’s reading on headline orders pared back from an initially reported -2.6% to a -4.6% decline, while core orders fell -5.5% from -3.6%. It’s also worth noting that the inventories-to-shipments ratio increased again to +1.86 despite a small decline in inventories that was outpaced by the drop in shipments. Capital goods manufacturers will need to accelerating their production cutbacks in order to burn off excess inventories……….inventories is the curse of the US economy at the moment.

Yesterday’s US unemployment claims does not point to a job market stabilizing any time soon. The trend over recent weeks points to a steady, on-going deterioration in job conditions. We are kidding ourselves into believing that we have seen the worst of NFP data on either the headline or in monthly revisions. Yesterdays initial jobless claims hit -667k last week (record high remains at -695k). Analysts expect that Feb.’s job losses will be around -700k, and the further deterioration in initial claims during the post-survey back half of the month would suggest that the revisions to Feb.’s NFP cuts could yield an even worse print than the initial reading. Continuing jobless claims sailed straight through the psychological mark of +5m for the first time ever. The speed with which continuing claims are deteriorating supports a move towards a double digit US unemployment rate this year.

US New Home sales hit a new record low yesterday; only +309k new homes were sold last month. Analysts foresee that a surplus of unsold new and resale homes could halt construction to a ‘standstill’. Do not expect this theme to change for the remainder of the year. Digging deeper, one notices that the inventory balance continues to worsen again, as the stock of unsold homes on the market rose to 13.3 times the sales pace. It is worth noting that out of +341k new homes now for sale on the market only +49% are complete, +38% are stuck in the construction stage, and 13% (are for sale but not yet started). This has forced builders to slash prices with the median price dropping by the greatest monthly amount to date (-13.5% y/y) to $201k from $223k the month before.

There was an interesting piece reported in Europe yesterday from the former Bundesbank President Pohl who believes that the EUR is under serious threat to survive the current crisis. He thinks that countries such as Ireland and Greece are in danger of defaulting on their obligations to the Euro zone and admitted the EUR was under intense pressure and heavily indebted countries could be forced out of the single currency. He also went on to say that ‘some countries are considering this possibility; of course it would be very expensive and detrimental to the whole region’. He would expect to see the exchange rate plummet 50 or 60% and then interest rates would technically hyper-inflate because the markets would lose all confidence’. This global recession is the first crisis to test the 10-year old currency. In this environment culturally and socially the odd are stacking against the currency survival.

The US$ currently is higher against the EUR -0.75%, GBP -0.78%, CHF -0.91% and lower against JPY +0.58%. The commodity currencies are weaker this morning, CAD -0.33% and AUD -1.38%. Higher yielding assets got the green light yesterday after policy makers south of the border committed further financial aid to financials and by default installing much needed confidence amongst investors. Policy makers around the world are doing their best not to nationalize their own domestic financial institutions. Even the UK Labor government is extending guarantees on the distressed assets of their own banks to try and boost capital and spur lending. Currently the loonie is at the mercy of both equities and commodity prices. All three are advancing in tandem. Dismal Canadian economic data this week provide further proof for Governor Carney at the BOC to justify slashing rates another 50 bps on Mar. 3rd (1%). All we need is to see is a consistent rally in stocks to get investors interested in ‘risk trades’ once again. For now look to buy USD on pull backs.

The AUD has a good run of late (0.6388); it has been getting a considerable boost from the JPY cross. All this week reports have showed that bank lending and capital spending in Australia was stronger than expected, thus boosting investor speculation that the RBA would slow the pace of interest-rate cuts (3.25%). With Japan currently in its worse recession in 60-years, Australia has experienced a wave of new investment heading out of Japan, seeking a higher yield elsewhere. Like most commodity currency’s, it will remain at the mercy of equities and the type of risk strategies implemented by investors.

Crude is lower O/N ($44.35 up -87c). Crude aggressively advanced once again yesterday as US gas demand is now increasing. The energy commodity also got a leg up from US equities which advanced after President Obama’s budget proposed new aid for the financial industry. The black-stuff managed to peak at a 1-month high after the weekly report showed that US gas inventories fell as demand strengthened and refineries cut operating rates. Inventories plummeted – 3.32m barrels to +215.3m last week. More importantly consumption averaged +9m barrels a day over the last month, that’s up +1.7% y/y. Refineries are operating at 81.4% of capacity, down -0.9% w/w. Analysts also noted that many refineries had been shutting units for maintenance as demand slackened, now that demand is once again rising, units will have to be reopened. With gas prices so low (-54% in 9-months) it has only encouraged increased consumption. Historically oil companies often shut refinery units for maintenance in the first 2-months of the year as attention shifts away from heating oil and before gas use rises. Not unexpected, crude inventories rose +717k barrels to +351.3m vs. an expected +1.25m barrels. Year-to-date, crude is down 16%, for the past month speculators had bought into the theory that the substantial cuts undertaken by OPEC this year (who represent 40% of global supply) will eventually curb these surplus global inventories and bolster prices even further. US policy makers seem to be making an impact on the gold market; the yellow metal has managed to fall for a 4th consecutive day as investors become reassured that the recession will not be as deep or as long as previously thought, thus eroding the appeal of the commodity as an alternative investment ($943).

The Nikkei closed 7,568 up +110. The DAX index in Europe was at 3,865 down -77; the FTSE (UK) currently is 3,855 down -55. The early call for the open of key US indices is lower. The 10-year Treasury yields backed up 6bp yesterday (2.98%) and are little changed in the O/N session. There were a number of reasons for the back up in yields. Firstly, traders were taking down new issues and naturally wanted to cheapen the curve, secondly, Obama’s budget proposed as much as $750b in ‘New Aid’ to the financial industry. This had the desired effect of sending 2-years yields to a 3-month high. It seems that despite all the negative economic data, the amount of spending earmarked from Washington will only push the FI class much lower as the Government needs to raise more and more cash!

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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