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Say it ain’t so Joe?

Back to regular business today. Regional instability remains front and center. Over the weekend, we saw Iranian clerics question the legitimacy of the ‘election’ and defying their Ayatollah. We have North Korea testing the patience of Asian and the rest of the world. Ex-Honduran President trying to get back into the country with the support of Chavez. All of these are regional powder kegs. This ‘summer of discontent’ may not bring this recession to its knees, perhaps it will be H1N1. The WHO cannot contain the spread of this virus and they expect a daily rate of 100k victims by next month. This will cripple the already battered global tourist industry, the deeply troubled airline sector, productivity and handcuff any national health sector. After last week’s US employment numbers we are starting to see Governments back peddle on their time lines of growth. What a surprise!

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

Forex heatmap

Yes, the NFP was worse than expected (-467k), yes, the unemployment rate went up (+9.5%). The pace of job losses has slowed from the extremes we witnessed at the beginning of the year. However, it does remain high! From the start of recession to date -6.45m jobs have been lost. Do not look at the headlines or the unemployment rate, but concentrate on the number of hours worked by the employed. It’s falling faster than the ‘body count’ (-0.8% vs. -0.35%). With the US government relying heavily on the consumer, their cash flow is being restricted. Earning less and they will spend less, this formulae will not kick start any economy. From the Dec. 2007 peaks, total hours worked have fallen by a hefty -8.2%, vs. a -4.7% drop in jobs. No wonder consumers are hoarding, it has helped them to insulate the sharp drop in hours worked! VP Biden said that the Obama administration had ‘misread the economy’ when they expected unemployment to peak at 8% after the +$787b stimulus package. On the plus side, the administration remains optimistic on the employment front, they have only paid out +$120b of the funds so far. What’s with the hold up?

Yesterday, the ultra conservative ECB president Trichet said he is ‘concerned that a lack of co-ordination of economic policy around the world will allow the imbalances that led to the financial crisis to persist’. He does bring up a good point, ‘there is a very big danger that major countries internalize their problems’. He believes that a return to ‘a picture of internal and external deficits that led to this crisis, we’ll have the recipe for a new crisis’. One gets the feeling that Cbanks and Governments are back peddling aggressively as they have miscalculated this whole recession. The sign of global recovery may be faltering, unemployment in Europe is rising, inflation is benign, similar to the US and Japan. The cracks remain persistent!

The USD$ currently is higher against the EUR -0.23%, GBP -1.17%, CHF -0.26% and lower against JPY +1.02%. The commodity currencies are weaker this morning, CAD -0.26% and AUD -0.73%. The loonie has faltered, in line with most of the other trading partners of the US. The commodity based currency continues to feel pressurized as commodity prices tumble, especially oil, which has lost close to -15% since last week. With no Canadian data this am, markets will be dominated by G8, new reserve currency talk. Expect the currency to be sold on USD pull back in the short term as global sentiment seeks that ‘safer heaven’ currency!

The AUD remains under pressure in the O/N session, extending last week’s decline, as commodity prices stumble coupled with speculation that a government report this week will show that the jobless rate climbed to the highest level in 6-years. If so, this may convince the RBA to keep rates low longer than had been speculated (0.7904).

Crude is lower in the O/N session ($64-06 down -267c). Crude has in two trading sessions managed to retreat more than 14% from its recent highs after the US unemployment jumped to a new 26-year print, solidifying their recession. With ‘demand destruction’ come higher inventories and it’s speculated that this week’s levels will further pressurize prices. Last week the greenback posted a weekly gain against most of its major trading partners and by default this makes oil less attractive as a hedge against a weakening currency. Despite the weekly API showing the biggest decline in crude inventories in 9-months in the US, demand remains weak. The weekly supplies fell -6.8m barrels to +349.7m. The bearish report was supported by the weekly EIA release which recorded a bigger than expected weekly drop of –3.7m vs. -1.8m barrels. US consumer confidence unexpectedly declined last month which obviously had an impact on prices, but positive news that China’s manufacturing continues to expand had temporarily given the ‘bulls’ the upper hand, pushing prices towards their highs . The commodity had gained approximately +39% last quarter, the largest advance in 20-years as a rebounding world equity markets and a weaker dollar convinced investors to buy the ‘black stuff’ as an alternative investment. The second half of the year certainly has not started on the right foot, fundamental cracks remain persistent. The IEA lowered its 5-year forecasts for global crude demand because of the economic slump. They are cutting daily consumption levels by -3m bpd until 2013. Demand destruction remains commodities greatest nemesis and not volatile currency levels. The ‘yellow metal’ found technical support under $923 from ‘physical buyers’ (jewelers etc) and may gain as rising global unemployment could boost the demand for the ‘yellow metal’ as an alternative investment. However, the strength of the USD may once again put it on the back foot.

The Nikkei closed 9,680 down -135. The DAX index in Europe was at 4,640 down -68; the FTSE (UK) currently is 4,187 down -48. The early call for the open of key US indices is lower. The 10-year Treasury’s eased 5bp on Friday (3.50%) and is little changed in the O/N session. US FI prices managed to rise for a 4th-straight week after NFP data points to the recession, the worst in 50-years has much further to run. European and US employment has tempered talk of ‘green shoot economics rooting. With global equities under pressure and despite on going funding requirements, expect treasuries to be better bid on pull backs in the short term.

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 [5]

Vice-President of Market Analysis at MarketPulse [6]
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
Dean Popplewell

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