The Day of our Lies?

Like an expecting Dad we are waiting for the delivery. Anxiety, nervousness are definitely heightened, but, it seems with these tight trading ranges of late and lack of conviction has Capital Market’s fairly square on their positions heading into ‘Stress Test’ and G7 day. The US Fed will announce the methodology for the tests and there ‘may’ be preliminary results today. Beyond any headline announcement on banks that may be judged short of capital, the market will be looking at the base and worst case scenarios assumed in the tests. How much additional Capital will be required? Who amongst the 19-Banks will leak what? Publicly we will not get the full picture until May 4th, and this sets it up for a frustrating and rumor mongered week ahead!

The US$ is weaker in the O/N trading session. Currently it is lower against 9 of the 16 most actively traded currencies, in a ‘subdued’ trading range.

Forex heatmap

As anticipated yesterday, US jobless claims reversed last week’s anomaly, advancing from the decline which was somewhat distorted by seasonal adjustments caused by the Easter holidays. Initial claims came in at +640k w/w, as anticipated and after an upwardly revised +613k print for the previous week (+610k). However, the eyesore continues with continuing claims soaring from one record high to another. There are now +6.14m Americans on extended claims. This print does not bode well for the unemployment rate in May. At this pace, the US economy is barreling towards a double digit reading, well ahead of previous analyst’s estimates. Initial claims again support a decline in the magnitude of -600k to -700k job losses for April’s NFP reading. Analysts expect these types of major job losses to continue for at least the next several months and the double-digit handle to occur by June or July. Surprisingly some are calling for the unemployment rate to remain at a very deflationary double-digit level though to the end of 2010!

US existing home sales declined last month after posting a record 5-year monthly increase in Feb. This is further evidence that the housing market will remain in a depressed state for the remainder of this year. Purchases fell -3% to an annual rate of +4.57m lower than expected from the record advance in Feb. +4.71m. Its worth noting that the median price has plummeted -12% y/y and that distressed properties accounted for about 50% of all sales. Despite record low mortgages and an aggressive uptick in foreclosures, this by default push prices even lower, the fear of job losses will continue to damper any recovery in this sector for the medium term.

The USD$ currently is weaker against the EUR +0.38%, CHF +0.46%, JPY +0.88% and stronger against GBP -0.73%. The commodity currencies are little changed this morning, CAD +0.10% and AUD +0.09%. Well Governor Carney finally managed to truly surprise the market yesterday. With no immediate quantitative easing or credit comments, he single handedly managed to push the loonie to its largest win in 3-weeks. In effect it was a relief rally because of the absence of further aggressive monetary policies at this stage. The BOC said its ‘ready to purchase debt if the outlook for the economy worsens further, a situation they do not anticipate’, and said ‘any specific moves would be announced at regular policy meetings starting June 4’. Also yesterday we witnessed a greater than expected rise in the ‘dollar’ value of retail sales (+0.2% vs. -0.2%), which was all on price effects and narrowly based. In price-adjusted terms, real-sales fell as expected (+0.6% vs. +1.4%) and expect that to be a drag on growth in real-GDP. For now look for better buying of USD on much deeper pull backs. Be weary of Stress tests!

Japanese and Australian fundamentals have pressurized the AUD this week. With Japan being one of Australia’s largest trading partners and a government report showing exports dropping for a 6-month (-45.6% y/y) has only increased concerns that the global recession continues to deeper. Couple this with an Australian inflation report, which fell to the lowest level in 18-months (+2.5% vs. +3.7%) and its concern the countries jobless rate will rise may give the RBA legroom to cut rates again. Investors risk appetite remains fragile. For now investors are happy to sell AUD on upticks (0.7154).

Crude is higher in the O/N session ($49.93 up +31c). Crude prices stayed close to home yesterday, while the greenback floundered ahead of today’s anticipated ‘stress tests rumors’ and the Washington G7 meeting. Analysts are on a 29-week hitting streak as they correctly predicted that this weeks EIA report would show another reading of rising inventories. Stocks rose +3.86m barrels to +370.6m (the highest level in 19-years) vs. an expected increase of +2.5m. It was a very bearish report revealing that supplies were up in every category. The 4-week total average fuel demand slipped -6.5%, y/y to +18.5m barrels. Gas stockpiles rose +802k to +217.3m vs. an expected decline of -700k barrels. Finally, the supply of distillate fuel (heating oil and diesel), climbed +2.68m barrels to +142.3m, the biggest increase since the 1st week of this year. On the whole another ugly report that is dominated by demand destruction as global economies continue to contract. The IMF revised predictions yesterday certainly will not help to support the black stuff prices anytime soon. For a number of weeks we were getting ahead of ourselves, a strong USD and so-so equity market combined with record inventory levels does not justify higher oil prices. OPEC next meets on May 28th to review production quotas. Until we see inventories decline substantially and sustainable demand destruction, there will not be a sustainable price gain. Gold continued its rally yesterday, with the fear of further bank losses to be announced and the IMF negative assessment has strengthened the demand for the ‘yellow metal’ as alternative investment for safer heaven reasons ($912).

The Nikkei closed 8,707 down -139. The DAX index in Europe was at 4,588 up +51; the FTSE (UK) currently is 4,065 up +48. The early call for the open of key US indices is lower. The 10-year Treasury’s eased 2bp yesterday (2.93%) and are little changed in the O/N session. Treasury prices were little changed, but managed to print the highest yield since the buy back’s were announced in the middle of last month. The market remains overwhelmed with supply announcements. Next week the US treasury will sell another $101b of 2’s 5’s and 7’s! The $300b buy-back program is doing very little to keeps rates low. Let’s see what the G7 and stress test leakages have in store for us!

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