Currencies are trading in a narrow range, holding out for the Ã¢â‚¬Ëœyearly turnÃ¢â‚¬â„¢. To be fair to Bernanke, he has always impressed on us that the FedÃ¢â‚¬â„¢s would use alternative innovative exit tools. Yesterday, they touted one idea, the term deposit facility. Its objective is to withdrawn money from the monetary system, allowing financial institutions to earn interest on loans of Ã¢â‚¬ËœlongerÃ¢â‚¬â„¢ maturities at the Fed (unlike the interest on banks’ overnight reserves). One should expect exit strategies to dominate Capital Markets next year. However, for the remainder of the week we are just witnesses to various unexplained currency moves.
The US$ is weaker in the O/N trading session. Currently it is lower against 9 of the 16 most actively traded currencies in a Ã¢â‚¬Ëœsubdued, yet illiquidÃ¢â‚¬â„¢ trading range.
Interest rates dictated yesterdayÃ¢â‚¬â„¢s movements in Capital Markets. Bank of Israel hiked rates for a third consecutive time since Aug. (+1.25%) as growth accelerated (GDP-3rd Q +2.2%) and inflation exceeded GovernorÃ¢â‚¬â„¢s Fischer target range (+3.8% in Nov.-target range 1-3%). In the US, 2-year auction took center stage. Will higher borrowing costs choke the pace of global economic recovery? Some dealers do not see short term US product close to being fair value just yet. With 2-years trading at +1.02%, fair value is seen at approximately +1.15%. YesterdayÃ¢â‚¬â„¢s auction arrived with a tail, albeit small, not good news for todayÃ¢â‚¬â„¢s 5Ã¢â‚¬â„¢s and tomorrowÃ¢â‚¬â„¢s 7Ã¢â‚¬â„¢s as the street remains half-staffed and has little risk tolerance. Indirect bidders (proxy for foreign demand) accounted for +35% of yesterdayÃ¢â‚¬â„¢s demand, unlike Oct. and Nov.Ã¢â‚¬â„¢s demand averaging at +44.5%. The bid-to-cover ration was 2.91 vs. 3.16 in Nov. and 3.63 in Oct. Does the tentative global economic growth justify rates getting ahead of themselves?
The USD$ is currently lower against the EUR +0.39%, GBP +0.30%, CHF +0.47% and JPY +0.05%. The commodity currencies are stronger this morning, CAD +0.19% and AUD +0.74%. Despite the Canadian markets being closed yesterday, the loonie appreciation can be described like catching a Ã¢â‚¬Ëœfalling knifeÃ¢â‚¬â„¢. Once again, the currency managed to strengthen, recording its highest print vs. its southern neighbor in over a month this morning. The CAD strengthened against all 16 of its largest trading partners as commodities remain well sought after as we head for the yearly Ã¢â‚¬ËœturnÃ¢â‚¬â„¢. Elevated commodity prices and robust equity indices have kept the loonie in Ã¢â‚¬ËœdemandÃ¢â‚¬â„¢ territory. It has rallied higher on speculation that stronger domestic fundamentals warrant the BOC to hike rates sooner than anticipated. ItÃ¢â‚¬â„¢s not surprising that Governor Carneys policy of timing may be going step Ã¢â‚¬Ëœn step with the FedÃ¢â‚¬â„¢s. Year-to-date the currency is up 16% and the Canadian futures market is starting to price in rate hikes sooner than next May. If one prefers being long the greenback, crossing it with Ã¢â‚¬ËœthisÃ¢â‚¬â„¢ commodity sensitive currency is not the ideal answer as analysts continue to favor buying the loonie longer term. Historically, the CAD performs well during the month of Dec. In the short term, be wary of speculators wanting to short the loonie after the fortnights tentatively over exaggerated gains.
The AUD has grinded higher in the O/N session on the back of stronger commodity and equity prices. However, the currency is heading for its first losing month since last Jan. Some investors are speculating that stronger US economic data will warrant the Fed to hike rates Ã¢â‚¬Ëœsooner that laterÃ¢â‚¬â„¢ and interest differentials will pressurize the AUD. The RBA believes its monetary policy is Ã¢â‚¬Ëœnow back in the normal rangeÃ¢â‚¬â„¢ after lenders raised business and home-loan rates by more than the RBA themselves have increased (+3.75%) the overnight cash rate target. Traders have aggressively pared bets that the RBA was in a position to hike rates for a fourth consecutive time in Feb. Investors continue to look for better levels to sell despite elevated equity and commodity prices (0.8950).
Crude is higher in the O/N session ($78.96 up +19c). Crude remains better bid after Weather Derivates predicted that US demand will increase +6.7% this week due to the North American cold snap. The black stuff managed to rise for a fourth consecutive day yesterday, supported by last weekÃ¢â‚¬â„¢s surprisingly weak inventory report. Now that most Capital Markets are tentatively open, albeit with liquidity remaining an issue, the commodity will probably find stronger support on any pull backs until year end. Various surveys again expect inventories to be lower tomorrow. Crude inventories fell -4.84m barrels to +327.5m last week. This month alone we have witnessed inventories plummet -3.6%. Digging deeper, last weeks report was even more bullish for prices. Distillate fuel (heating oil and diesel) slipped -3.03m barrels to +161.3m, the biggest decline in 8-months. Gas stockpiles fell -883m barrels to +216.3m. ItÃ¢â‚¬â„¢s worth noting that this was the first drop in a month and a half. Imports of the black stuff fell -0.8% to +7.71m barrels a day and the lowest level in 15-months. The trend of demand and consumption continues to climb. Gas demand averaged +9.05m barrels a day, w/w, thatÃ¢â‚¬â„¢s +2% higher than a year ago, while consumption of distillate fuel averaged +3.99m barrels a day, +5.2% higher w/w. Year-to-date, oil has climbed +76%, the largest increase in a decade.
Gold speculators continue to be better buyers of the Ã¢â‚¬Ëœyellow metalÃ¢â‚¬â„¢ on pull backs, believing that the greenback is about to give up more of the positive ground it has managed to acquire this month. By the end of last week, the dollar showed signs of wilting which has boosted the demand for commodities as an alternative investment. Month-to-date, the commodity had depreciated just under 11% after printing a record high of $1,227.50 early in Dec. Year-to-date, it has appreciated +25%, the ninth consecutive yearly gain. Not unlike other asset classes, this monthÃ¢â‚¬â„¢s holiday swings have been somewhat overly exaggerated ($1,105).
The Nikkei closed at 10,658 up +19. The DAX index in Europe was at 6,007 up +4; the FTSE (UK) currently is 5,425 up +22. The early call for the open of key US indices is higher. The US 10-year bond backed up 1bp yesterday (3.85%) and are little changed in the O/N session. The 2-year auction came and went yesterday ($44b), resulting in the market pushing yields to their highest level in 2-months. The concession that we have witnessed in the FI market over the last seven business days will allow the market to digest the remaining issues this week with less trepidation. The fear that an accelerating US economic recovery will fuel inflation has dampened the demand for government debt and pushed the 2Ã¢â‚¬â„¢s/10Ã¢â‚¬â„¢s spread out close to a new record of 286bp. With more supply coming down the pipeline this week, 5Ã¢â‚¬â„¢s (today-$48b) and 7Ã¢â‚¬â„¢s (tomorrow-$32b), should provide further concessions. However, short term technically we are approaching some attractive yields.
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