Will Trichet stand and deliver?

BoA’s intention of paying back the twice infused TARP loans to tax payers has again pushed global equities and futures higher. The $45b is renewing investors gluttonous risk appetite this morning and by default aiding the BOJ’s currency value concerns. A strong indicator for risk appetite is the EUR/JPY cross. So far this morning, ‘the indicator’ has moved a big figure higher, reversing all of the USD’s gains vs. EUR in yesterday’s afternoon session. Trichet takes center stage at a press conference in a few hours. Market expects no rate change (+1%), however it’s anticipated that in his communiqué, he will announce a gradual scaling back of its liquidity provisions to Capital Markets. Recent policy maker’s rhetoric has indicated that the present ‘liquidity framework’ would not be as supportive next year. They are also expected to confirm that this month’s full allocation auction of 1-yr fixed funds will be their last such operation. Perhaps an indicator of higher rates in 2010? Will the market buy the rumor–sell the fact? Or continue to covert the EUR as rate policies may be changing? With NFP out of the way tomorrow, we can do our ‘thinking’!

The US$ is weaker in the O/N trading session. Currently it is lower against 10 of the 16 most actively traded currencies in a ‘subdued, yet illiquid’ trading range ahead of the ECB rate announcement.

Forex heatmap

Yesterday’s Nov. ADP employment print fell more than expected (-169k vs. -195k). It was the 22nd consecutive monthly decline. In reality, the improvement was weaker than the market had hoped for (-150k) despite the upward revision for the previous month (-195k vs. -203k). Superimposing this on tomorrows NFP, analysts expect the headline print to be slightly weaker than initial consensus (-125k) even with the month-to-month correlation of both job indicators being somewhat ‘disjointed’ this quarter. An optimist would have us believe that the overall trend is moving in the right direction, down, less jobs being eliminated. It would be safe to say that companies are not hiring just yet, as the duration of unemployment remains at a record highs. Digging deeper, the decline was split between the service (-81k) and goods-producing (-88k) industries. Unemployment in small (-68k) and medium-sized businesses (-57k) continued to account for a larger share of the weakness. Larger businesses lost -44k!

The USD$ is currently lower against the EUR +0.42%, GBP +0.23%, CHF +0.38% and higher against JPY -0.54%. The commodity currencies are stronger this morning, CAD +0.24% and AUD +0.63%. The loonie remains in a tight trading range ahead of this week’s North American employment reports tomorrow. One story that is getting traction has to do with the Canadian lumbar industry. It’s believed that shipments to China are set to climb after Shanghai agreed to adopt a building code for wood-frame construction. Like oil, export of wood will now be another big variable that could push the currency towards parity sooner that the market and BOC expects. Lumbar accounts for +14% of the Canadian commodity index! Who knew? The market is happy to pare some of their open positions ahead of the job announcements tomorrow. Firstly, it’s prudent to take some profit or limit loss off the table and secondly, the markets are illiquid as many dealers sit on their hands. Year-to-date the CAD has appreciated +17% vs. the greenback on the back of risk sensitive securities that by default endorse the CAD. Earlier this week, the Canadian economy officially grew in the 3rd Q with GDP rising +0.4%, y/y. This is the first sign of growth in four quarters and maybe a signal that it’s the end of the worst recession in 50-years. Canadian Finance Minister Flaherty indicated this week, as the loonie encroaches on a monthly high, that Canadian policy makers are unlikely at this time to use the ‘options’ they have to manipulate the currency value. He said ‘the pressure is downward on the USD, and that has an effect on all the market currencies’.

The AUD remains better bid as demand for riskier assets is robust on speculation that US job data will record the fewest amount of job losses this year later this week. Earlier this week the RBA came and delivered, but hinted of ‘no’ further threats to raising future rates as Governor Stevens hiked rates 25bps to +3.75% on compounding fundamental evidence revealing an economy gaining strength. He also signaled that that he may now pause, stating that the board’s ‘material adjustments to borrowing costs are enough to keep inflation within policy makers 2-3% target range’. Rising consumer confidence, higher house prices and China’s demand for commodities continues to drive the ‘new upswing in the economy that will last several years’. On the face of it, the RBA statement is very bullish in respect to other Cbanks, but at the same time distancing them from any aggressive tightening cycle. The currency and commodities will continue to go hand in hand (0.9297).

Crude is higher in the O/N session ($76.97 up +37c). Yesterday, crude prices managed to reverse the last two trading session’s advances after the weekly EIA report revealed that inventories climbed as consumption dropped. Oil inventories rose +2.09m barrels to +339.9m, w/w (highest level in 3-months). Also surprising was gas supplies surged +4m barrels to +214.1m. The market had been expecting a drawdown for crude of -400k, while gas was to increase by +700k barrels. Demand destruction is alive and kicking as weekly fuel demand slipped -2.6% on the back of refineries reducing operating rates for the 4th time in the last month and a half. A very bearish report that should prevent crude prices making any assault on the $80 handle anytime soon. It was also estimated that the 4-week moving average for total US daily fuel demand was +18.5m barrels. Other factors also contributed to yesterday’s negative price action. Firstly, the USD has found some support ahead of this morning’s ECB announcement and tomorrows NFP data. Technically, the markets are paring their open positions in this illiquid market. Secondly, a report on Russian output (the world’s largest producer) showed that it remains at a record high for a second consecutive month and finally the market has erased the insurance premium of the Iran and the British sailor’s saga.

Bull investors remain in control. Gold prices have experienced wild gyrations of $20-$30 price swings over the past few trading sessions and it does not seem to want to take a breather. The yellow metal recorded new record highs yesterday as investors sought a store of value as an inflation hedge. Demand remains robust on any pull backs as the metal trades as it’s the ‘international currency’ ($1,218).

The Nikkei closed at 9,977 up +368. The DAX index in Europe was at 5,842 up +60; the FTSE (UK) currently is 5,364 up +34. The early call for the open of key US indices is higher. The US 10-year bond backed up 3bp yesterday (3.30%) and another 5bp in the O/N session (3.35%). Treasuries prices are heavy ahead of the US job’s data tomorrow. With Dubai World at the bargaining table, coupled with stronger growth data in the US, managed to back up bond yields this week. This morning we get the ‘hard’ debt auction numbers for next week’s 3’s, 10’s and 30’s issues. The market is anticipating a supply total of $74b. So basically it’s supply and job’s data that dictating price action. Big picture, if the Fed uses reverse repos, pay interest on excess bank reserves and sell securities directly to investors to withdraw or neutralize cash in the banking system, it will only pressurize FI prices further.

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