‘Green Shoots’ and Pesticides don’t mix!

Both the Yen and the USD are back in the driving seat. Is it really a surprise? Yesterday’s price action provided us with the classic scenario where we could exit ‘bad’ trades. G8 has had little effect on market sentiment. The ‘sell in May and go away’ thinking maybe working in equities, but volatility in the ‘third asset class’ is providing some wonderful opportunities to make money if you focus on the ‘macro’ side of things. Next on the agenda will be to see how Cbanks will react. We all know how the SNB will operate, but this market is pushing the BOJ to the limits. Do not be surprised to see both oral and physical intervention on their behalf as investors continue to covet safer heaven currencies. This market continues to speculate that the global recovery may be delayed. Even ‘Joe’ and the IMF is lending weight to that argument. The US VP said government measures to stimulate the economy may take 18-months to work. Everyone seems to be trying to temper our optimism levels and move the goal posts. Even the IMF is supposedly discussing aid programs for at least 10 Eastern European governments!

The US$ is stronger in the O/N trading session. Currently it is higher against 15 of the 16 most actively traded currencies in a ‘whippy’ O/N session.

Forex heatmap

Is it a pleasant surprise? Initial jobless claims fell to +565k, the best headline print in just over 5-months. Did the July 4th holiday skew the data? Some analysts believe that early auto plant closures may have added to the normal amount of claims, which would suggest that the pace of cuts may be slowing. One week’s data does not make a trend, thus next week’s release will give us a better gauge. Capital Markets should continue to put more emphasis on the continuing claims print which surged to +6.883m w/w, with the previous week’s results revised upwards as well (+6.724m vs. +6.702). The results point to the US reaching that psychological unemployment rate of +10% sooner than anticipated. A slower pace of job cuts is a positive for the economy but the US situation is counter balanced by the number of people who can still not obtain a job. It’s worth remembering that continuing claims measures unemployed workers to 26-weeks at which point they are rolled off and put into another sub-category. This would suggest that the current unemployment situation is even worse than the continuing claims numbers suggest!

The USD$ currently is higher against the EUR -0.85%, GBP -0.44%, CHF -1.03% and lower against JPY +0.24%. The commodity currencies are weaker this morning, CAD -0.13% and AUD -0.57%. Canadian housing data yesterday surprised to the upside (+141k vs. +134k) and brought some temporary relief to the loonie during the morning trading session. Of course any advance in the housing starts is an improvement from the dismal 13-year low we managed to achieve in April. But, on reflection, starts are down -30%, y/y, still not much to be proud of. Analysts expect that low mortgage rates and falling home prices will give some much needed support, however continuing deterioration in the labor market, moderating incomes and rising savings rates point to a slow recovery ahead. Consumers will concentrate on reducing household debt just like any rational thinking family would want to do. This morning we have Canadian unemployment to play with. Already yesterday the Federal Finance Minister expects the unemployment rate to keep rising. The loonie has faltered, but not at the same pace as other G8 currencies trading vs. the USD. The commodity based currency continues to feel threatened as commodity prices remain under pressure, especially oil. Expect investor’s to continue to trim bets on riskier assets and carry trades on signs that a global economic recovery may take much longer than originally anticipated. The market continues to look to sell the currency on a USD pull back in the short term as global sentiment seeks that ‘safer heaven’ currency. Mind you all bets are off if we get any positives from the Employment reports. Instinct calls for a disappointing headline.

Higher yielding currencies like the AUD are heading for the doors and are now completing another week of losses on the back of weak Asian equity bourses. This will be the 4th consecutive week of losses, as a 2-week slide in equities has convinced speculators to sell higher-yielding assets. Risk averse trading strategies will continue to undermine the currency for now (0.7765).

Crude is lower in the O/N session ($60.12 down -12c). Crude has managed to solidify its longest losing streak since Dec. on the back of equities finding it difficult to maintain any positive traction and on weekly industry reports showing an increase in US fuel inventories. Investors seem to be skeptical on the performances of global economies and the US demand for the black stuff next year. Gas inventories rose +1.9m barrels to +213.1m, w/w, vs. expectations of an increase of +900k Distillates (which include heating oil and diesel), jumped +3.74m barrels to +158.7m barrels. Crude on the other hand came in very close to expectations, falling -2.9m to +347.3m. The market had expected a -2.8m decline. Recent fundamental data have led to concerns that the US stimulus program may not be working. Oil has retreated more than 16% from its recent highs printed last week. Prices had got ahead of fundamentals in a big way over the past few months, and recent movements seem to be filling in that gap. With ‘demand destruction’ come higher inventories and it’s speculated that this week’s inventory reports will further pressurize prices down towards that $55 a barrel level. Already this week OPEC released a report cutting its 2013 forecast for global oil demand by -5.7m barrels to +87.9m barrels a day and expects developing countries consumption to drop -1% next year to +45.5m barrels a day and remain at that level through 2013. Gold prices managed to grind themselves higher from its 2-month lows as the greenback faltered yesterday, however now that the buck has done a complete u-turn, expect all dollar priced commodities to hemorrhage ($911).

The Nikkei closed at 9,287 down -4. The DAX index in Europe was at 4,626 down -4; the FTSE (UK) currently is 4,147 down -12. The early call for the open of key US indices is lower. The 10-year Treasury’s backed up 3bp yesterday (3.35%) and is little changed in the O/N session. Despite the FI dealers setting themselves up for the last of this week’s auctions yesterday ($11b-30-yrs), investors managed to pare some of their ‘own’ positions and book profits believing that this week’s rally (the largest since Mar.) was overdone and not sustainable. However, with equities in trouble finding traction will only make bonds more attractive on pull backs.

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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