The appetite for US Treasuries is difficult to digest!

The US treasury market came under intense pressure yesterday. Even with Moody’s confirming the US’s Aaa debt rating, despite a higher debt load. Investors are skeptical on who is capable to take down this record amount of issues. It seems that too much debt is being issued by various G7 governments as a result of dramatically wider budget deficits-the US alone has a deficit of 12% of GDP! The race is on to see whose auction will fail first. Perhaps these higher yields will provide support for the greenback now!

The US$ is stronger in the O/N trading session. Currently it is higher against 12 of the 16 most actively traded currencies in a ‘whippy’ trading range.

Forex heatmap

Yesterday, US existing home sales showed that it is aimlessly contained in a trendless range (+4.68m vs. +4.66m). Sales were up +2.9% last month, including minor revisions, sales were down -3.4% in Mar., up +4.9% in Feb., down -5.3% in Jan. and so on. There are probably two ways to interpret the results, an optimist would say the ‘bottom is in’, while the pessimist could conclude the data dismisses the fact that falling house prices and low mortgage rates are attracting buyers. In reality depressed sales occur because of wealth erosion and tighter mortgage terms or the ‘house price deflation’ mindset has kicked in with potential buyers unwilling to take the plunge just yet because they expect cheaper houses in the future. Imagine, no-one has even mentioned job-security that would finance these purchases! Digging deeper, the sales gain was seen mostly in condos (+6.4%). A bit of an eye sore was that listings grew +8.8%! Thus, driving inventory’s at current selling rates up to +10.2-months vs. +9.6 in Mar. Perhaps this is a seasonal impact? It probably more prudent to believe it’s due to increased foreclosures because of job-losses. Once again, expect inventory levels to be the scourge of this ongoing recession no matter the product.

ECB governing council member and Finnish Cbank head Liikanen said yesterday that ‘the ECB’s interest rate level is appropriate, taking into account the additional innovative measures soon to be deployed by policy makers’. He believes that the worst may be over for the Euro-zone, but reiterated that ‘realities cannot be talked away with soft indicators’. These realities include ‘declining global trade and a contraction in production in the industrialized world’. His comments are ‘dovish’, confirming the marked differences of opinions between ECB policymakers. His comments and innuendos is leaving the door open for further rate cuts.

The USD$ currently is higher against the EUR -0.14%, GBP -0.46%, CHF -0.19% and JPY -1.48%. The commodity currencies are mixed this morning, CAD -0.08% and AUD +0.31%. The loonie accompanied most other major currencies and appreciated against its southern and largest trading neighbor again yesterday. However, most pairs have managed to give up some of this week’s gains in the O/N session. All of the gains were on the back of stronger commodities and global equities. There is nothing fundamentally supporting the currency, even the Canadian finance minister this week said that the proposed national deficit will balloon to $50b from the $34b announced in Jan. The longer term fundamentals certainly support a much stronger CAD, however investors have plenty of time to add to their positions at more favorable levels. Look for the USD to rally from these here, it has appreciated too far too quickly.

The AUD and NZD are the best performers vs. the USD this month, supported by 10-year government bonds that offer premiums of +1.65% and +2.3% vs. Treasuries. The AUD continues to rise on speculation that investors will buy the nation’s higher-yielding assets on optimism that the global economy is improving. The country’s fundamentals remain strong and with commodities nudging forward, one should expect buying on pull backs ((0.7812).

Crude is lower in the O/N session ($63.13 down -32c). Crude prices renewed its upward trajectory yesterday as the USD ‘waffled’ and the Saudi oil minister saying that oil is likely to touch $75 by the end of the year. Dealers also expect today’s weekly EIA report to print another decline for inventories. Technical analysts say that with oil rising above its 200-day moving average for the 1st- time in 8-months is a signal that prices will rally even further. Capital markets believe that OPEC will not adjust any production quotas at today’s meeting, because the global recession is curbing fuel consumption. It is anticipated that they will likely keep daily output quotas unchanged at 24.845m barrels. Some OPEC members believe that fundamentals are strengthening and it does not warrant a cut to production. To date, they have probably collectively complied with 77% of the agreed upon cuts implemented last Sept. If they ever fully complete the cut-backs then perhaps the black stuff will manage to achieve OPEC’s desired target level by year end. Algerian oil-minister, Khelil said ‘the group will be careful about harming the global economic recovery’. Some analysts believe that with record 19-year high inventory levels combined with the contraction in activity in advanced economies, the market should expect another large correction from these elevated prices’. Last week’s EIA report showed that US inventories declined more than forecasted. The 4-week monthly demand is averaging at +18.3m barrels a day, that’s down 8% y/y. Gold has not swayed too far from yesterday’s prices as the uncertainty of the USD continue to influence direction flow. It’s not inflation, nor a technical or fundamental reason that’s influencing prices, but the value of the USD ($951).

The Nikkei closed 9,451 up +12. The DAX index in Europe was at 4,940 down -60; the FTSE (UK) currently is 4,367 down -50. The early call for the open of key US indices is lower. The 10-year Treasury backed up 23bp yesterday (3.68%) and are little changed in the O/N session. With the US treasury having just one more auction left this week (today’s 7’s-$26b) and no other buy-backs, dealers will be expected to keep the curve cheap to absorb this entire record product. Yesterday the Fed bought-back $6b of 2012-2013, and issued $35b 5’s with a strong foreign Cbank demand. Sooner or later, with record issues no-one will be able to own any more of this product! Be aware of strong month-end demand over the next few days.

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