‘Roubini Recession, Bernanke Depression’- a new Dylan title?

‘Too much, too fast’, that sounds like a movie title and nothing associated to personal wealth (if you had any). Nouriel Roubini is favoring a U-shaped recovery, forget the V! There is no victory to be gotten soon as US data points to much slower growth. In the good times and the bad, we tend to get ahead of ourselves. G7 were predictable this weekend, they issued a similar communiqué 5-months ago! ‘Excess volatility and disorderly movements in exchange rates have adverse implications for economic and financial stability’. Another spineless statement that has pressurized the ‘big dollar’ again! Perhaps Trichet will have to say something at the ECB meeting this week?

The US$ is mixed in the O/N trading session. Currently it is higher against 8 of the 16 most actively traded currencies in a ‘whippy’ trading range.

Forex heatmap

Friday’s data surprised and brought forward more disappointing news from the US. Digging deeper, the details confirmed the disappointing NFP headline (-263k) and analysts pointed to hours worked to emphasis a greater destabilizing effect despite job losses trending downwards over the last few months. Hours worked has dropped at a faster pace than actual job losses. The knock on effect will be staggering for cash flow indicators etc. From the peak in Dec. 2007 through to Friday’s tally, total hours worked have declined by a cumulative -8.6% compared to a -5.2% drop in the total number of jobs over this same period. Disposable income and the lack of it will not be able to drag us out of this recession any time soon. Both the public and private sectors lost jobs, with private down -210k and government dropping -53k.Other sub-categories show that wages rose only +0.1% which is a renewed slow down from the +0.3-0.4% gains over the previous 2-months. So fewer hours worked and flat wages spells further set-backs! The revisions were rather insignificant. It was the larger than expected decline in the labor force (-571k) that led to a small change in the unemployment print (+9.8% vs. +9.7%). Over 90% of the job cuts were full-time employment, while part-time fell by a more modest -90k. Disappointingly, the average duration of unemployment shot up to +26.2 weeks, a new record high!

Not to be outdone, US factory orders also dropped. Both the headline and core orders were weaker than expected. Its analyst’s belief that continued ‘disinvestment’ in inventories will cause problems to the 3rd Q GDP growth. Total factory orders plummeted -0.8%, m/m, after 4-consecutive months of growth. This has basically occurred on the back of a -3% decline in durable goods orders, while non-durable goods orders have advanced. It’s noticeable that factories continue to try and eliminate inventories. Economists believe that this ‘disinvestment’ will remain, as the inventory-to-shipments ratio is 1.38 (high). Perhaps Roubini is correct, both equities and commodity prices have risen ‘too far and too fast’ and on little substance. The pace of ‘this’ recovery has to be disappointing and over inflated!

The USD$ is currently lower against the EUR +0.04% and higher against the CHF -0.07%, GBP -0.07% and JPY -0.06%. The commodity currencies are stronger this morning, CAD +0.17% and AUD +0.54%. The loonie was dragged higher by day’s end on Friday, not due to its own fundamentals. They have been mixed over the last few weeks, but, because of its largest neighbors weaker than expected employment report. Commodity prices have held their own and by default will always aid the loonie. Global equities tethering this morning could put some pressure on the currency. This week, we get to see the employment situation in Canada on Friday. For now, expect dealers to be better buyers of USD on pull backs.

With the G7 stopping short from criticizing the US dollar has given higher yielding currencies like the AUD some support. In the O/N session, the currency has managed to appreciate for the 1st time in 3-days. FI dealers are pricing in a 30% chance of +25bps hike from the RBA this evening after hawkish remarks from various financial editors down under (0.8739).

Crude is lower in the O/N session ($69.60 down -30c). Not much of a surprise to most of us that crude has remained in a tight range after weaker than expected US manufacturing and employment data last week implying that the US economy could stall. It has been prudent for investors to book some profits after reaching once again technical resistance with a $70 handle. All of this has occurred despite last weeks EIA report recording a large gas drawdown. The report revealed a -1.6m barrel drop in gas inventories, inline with the API print, but against analysts’ expectations of an increase. Over the past month, US gas demand is up +5% and this after the end of the holiday driving season! On the flip side, crude inventories happened to increase by +2.8m barrels, w/w, vs. expectations of a +600k rise. Demand destruction remains, as the increase in distillate inventories was smaller than expected and posted monthly demand down -9% from this time last year. In fact, a closer look tells us that the report remains mixed with a bias towards oil products, like heating oil and diesel, to remain weak. With energy fundamentals remaining unconvincing, it would be a safe bet that the black stuff should be confined to its $10 range of $65-$75. We can never rule out the political influence. The threat of imposing greater sanction on Iran because of its nuclear program has heightened geo-political issues over the last few weeks. Technically oil prices are inflated, they are not supported by market fundamentals, but geo-politics will always keep the black-stuffs prices artificially higher.

Gold rebounded on Friday after NFP data put pressure on the greenback. By default, this encouraged investors to purchase the yellow metal’s as an alternative investment. Geo-political tensions in the Middle East continue to provide support on deeper pullbacks ($1,006).

The Nikkei closed at 9,674 down -57. The DAX index in Europe was at 5,479 up +11; the FTSE (UK) currently is 4,994 up +6. The early call for the open of key US indices is higher. The 10-year bonds backed up 2bp on Friday (3.21%) and are little changed in the O/N session. The US yield curve managed to close the week near their lowest yields in 5-months. It seems that investors are starting to become disenchanted with the employment, manufacturing and housing reports in aiding a faster recovery from the worst recession in 50-years. Common sense seems to be questioning the speed of the recovery. This week we will have a refunding concern, China, the largest supporter of US treasuries is technically on holidays for 2 of the 3 auctions (3’s and 7’s). It will be interesting times for the dealers who may be able to cheapen up the curve more aggressively than recently. On the flip side, the world covets yield!

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