Germany bears the weight of the EUR

What choice do they have? Reluctant German leaders by day’s end will be forced to help Greece remain solvent, or risk Capital Markets systematically attack one weak member after the next. Like piranhas, speculators will proceed to Iberia and then across the English Channel, threatening the stability of the EUR, the single identity that Germany et al have strongly supported from inception. What ever answers or remedies that the ‘solvent’ EU members can conjure up will initially be well received by the market, but at a second glance will warrant checking to see how strong the commitment truly will be.

The US$ is weaker in the O/N trading session. Currently it is lower against 12 of the 16 most actively traded currencies in a ‘whippy’ trading range.

Forex heatmap

Yesterday, we had little to chew on due to Washington being shut down for another day because of the weather. Some fundamental releases were postponed until week-end. However, it was unexpected to see the US trade deficit advance in Dec. another $4b to a 12-month high (-$40.2 vs. -$35.8), mostly on the back of the volume of petroleum surging. Ex-petroleum, the deficit was essentially unchanged (-$16.5b to -$16.7b). Stronger evidence of ‘solid gains in both non-oil imports (+3.8%) and exports (+3.3%), with the gains widespread among industry sectors as global trade flows continue to recover’. Analysts suggest that with the larger than expected negative headline print, we should expect a -0.2% decline in the 4th Q GDP running total. First guesstimates appear to indicate that US GDP will remain at +5.7% or be revised down a tad. Digging deeper, the inflation-adjusted real goods balance for the month was $43.7b, above the 4th Q average of $41.0b, may indicate to expect net-exports to exert further pressure on this years 1st Q GDP. In reality, the US seems to be on the cusp where both imports and exports are to rise, thus giving us sustainable economic growth.

In his absence due to climatic conditions, the text of Bernanke speech was released as scheduled yesterday. The copy addressed the Fed’s exit strategy and tools that the Fed could use to reverse policy accommodation. He indicated that the Fed’s outlook remains about the same as it was last month. He stated that rates are and would likely remain low for an extended period. Any firming of policy could be done by an increase in ‘interest paid on bank reserves and with significant draining if a faster exit is needed’.
Policy makers have not made a decision regarding using an alternative to the fed funds target to communicate its policy stance. He said the spread before the discount rate and fed funds rate would be ‘increased’ modestly before long and ‘that the maximum maturity of loans at the discount window would be reduced further’. The end result will lead to the ‘normalization’ of Fed lending.

The USD$ is currently lower against the EUR +0.24%, GBP +0.03%, CHF +0.21% and higher against the JPY -0.06%. The commodity currencies are stronger this morning, CAD +0.41% and AUD +1.46%. The support is there, then its not. Houdini could not do it better. Yesterday the loonie happened to advance the most in 6-weeks vs. its southern neighbor on ‘speculative’ belief that the EU and its policy makers will come to the aid of Greece. Good news promotes a bigger appetite for currencies tied to economic growth. Canada posted a larger than expected trade deficit in Dec. (-$0.2b vs. -$0.1b). It was led by auto’s and was the ‘first annual shortfall in 35-years’. The headline print reinforces the BOC belief that the ongoing low US demand coupled with the stronger loonie continues to achieve a ‘significant drag’ on the economy. It’s no wonder that that Governor Carney is adamant that the O/N lending rate (0.25%) will remain on hold for an extended period of time. Futures traders are pricing in a Sept. hike thus far. All week, and with one eye on the ‘sensitive’ currency bets against the dollar, any market rumor is having a compounding effect throughout capital markets. Not a done deal, the Greek rescue package, but a deal not worth betting against with such short odds, is providing better levels to consider shorting the CAD again. On a cross related basis, the currency has certainly outperformed most of its other G7 members. Let’s see what today’s European summit meeting has in store for us.

Australia added three times as many jobs expected last month in an O/N release (+52.7k vs. +15k) and lowered their unemployment rate by 2-ticks to +5.3%, a new 11-month low. Australia’s ‘hiring boom’, the largest in 5-years is expected to pressurize the RBA to resume their policy of hiking borrowing costs to prevent wage increases from feeding inflation. Futures traders have doubled their bets that the bank will raise the O/N lending rate by +0.25% to 4% at next month policy meeting. Last nights surprising release indicates how tight the employment market is down-under, since last Aug. the economy has managed to add +195k new jobs. Already this week, the AUD had found a bid on the back of the Governor Stevens stating that ‘holding down interest rates (3.75%) for too long may help create asset bubbles’. Coupled with Chinese bourses finding some traction has given growth currencies a leg-up after four consecutive trading days of declines. Advancing Australasian bourses also act as a stabilizer for the currency. Can the EU add fuel to the AUD strength (0.8900) later today?

Crude is higher in the O/N session ($74.74 up +22c). Crude oil fell for the first time this week after the Fed indicated that they may raise the discount rate ‘before long’ as part of the ‘normalization’ of Fed lending. This fueled market concerns that the US economic recovery will slow as stimulus programs are unwound. By default, both commodities and equities came under pressure and the dollar garnered support. This allowed the negative correlation between the dollar and the black-stuff to remain intact for another day at least. The weekly EIA inventory report scheduled release for yesterday has been delayed until tomorrow because of the government shutdown in Washington. It is expected to show that stockpiles of oil grew by +1.5m barrels. The already released weekly API reported that US crude inventories climbed to the highest level in nearly 4-months (gained +7.2m barrels to +337.6m). This has not been a reliable bellwether chart recently. Last week’s EIA headline recorded a surprisingly large build, crude stocks advanced +2.3m barrels, beating expectations for a little change, w/w. Again for a second consecutive time, the crude print was the only bullish component of the report. Look for better selling interest on upticks.

The ‘yellow metal’, week-to-date, rally from a three-month low ended yesterday. By day’s end, the precious metal made little ground as a tentative strong dollar curbed demand for the commodity as an alternative asset. With the Fed indicating future discount hikes coupled with a German official indicating that Greece is off the agenda for today’s EU summit. With the dollar entrenched in its upward trend year-to-date, technically could renew further pressure on the commodity until we witness a ‘solid’ European resolution to the Greek budget woes. Liquidation with a purpose has nervous short term ‘longs’ on their toes. With the EUR remaining questionable and the dollar the ‘go-to’ currency for surety reasons, expect to see potential selling on upticks for the time being ($1,072), at least until the ECB say otherwise.

The Nikkei closed at 9,963 up +31 (holiday). The DAX index in Europe was at 5,549 up +13; the FTSE (UK) currently is 5,182 up +51. The early call for the open of key US indices is higher. The US 10-year note backed up 5bp yesterday (3.66) and are little changed in the O/N session. Any rumblings and whispers in the market regarding guaranteed help for Greece helped traders in cheapening up the US curve yesterday ahead of the day’s 10-year auction. Even Bernanke’s testimony happened to weigh on FI prices. The $25b new 10-year note sale happened to tail similar to the 3-year paper. The auctioned yield printed higher than the WI’s and not surprisingly drew a below average bid-to-cover ratio of 2.67. It seems that nervous investors wanted to stay away from the ‘expensive’ safety of US assets. They do have appetite for FI, but not with the same urgency and certainly it seems at these elevated prices. Today we get the final week’s auction, $16b-long bonds.

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