Greece’s hiatus favors risk and love for Euro’s

The public messages coming from Europe regarding Greece are as confusing as the Greek’s budget deficit numbers. The lack of transparency and hush rhetoric seems to suit investors. Yesterday, European finance ministers turned up the pressure on the country to put its public finances in order and refused to say how they would make good on a promise to rescue the nation if it can’t contain its debt. ‘We have the solution, but it’s a secret mentality’ does not seem to worry anyone? According to Greece’s Finance Minister, the country is ahead of its own deficit-reduction targets and will not need EU assistance. Why have Capital markets been geographically carving up European and honing in on the weak, when there is no problem? With Greece ‘off the table’ for at least 30 days, the fact that Iberian countries can place new bonds at ‘reasonable’ spreads, coupled with the fact that global equity bourses are waiting for the post-Chinese-New-Year rally has triggered capital markets to embrace ‘risk’ once again. It seems that speculators are closing their short EUR’s positions and are openly encouraged to embrace the ‘long position’. Do not misunderstand me, a correction is warranted, a correction is healthy, and a correction gives us the opportunity to average EUR shorts at better levels once Greece comes back from its hiatus!

The US$ is weaker in the O/N trading session. Currently it is lower against 14 of the 16 most actively traded currencies in a ‘whippy’ trading range.

Forex heatmap

Yesterdays, US Empire State Manufacturing Index for Feb. surpassed expectations (24.91 vs. 15.92) as companies boosted payrolls in anticipation of accelerating orders and sales. Rather noticeable was companies inventory positions, they went from a sharp on-going reduction last month to being balanced this month. Optically, it seems that companies continue to take ‘a giant step’ towards re-investing in inventories after cutting them at a ‘rabid’ pace in the last quarter. With the everyday feeling that the recession has ended, confidence is building. The six-month forward expectations component continue to point toward a sustained manufacturing recovery with new-orders and shipments steadily rising, inventory investment returning, and employees being hired. This can only be good for equities, commodities and growth currencies. Will Europe’s house of cards ruin this utopia scenario?

The USD$ is currently lower against the EUR +0.03%, GBP +0.04%, CHF +0.01% and higher against JPY -0.25%. Yesterday’s Canadian Manufactured shipment data provides a boost to real-GDP (1.6% vs. +0.1%) The report showed that real-shipments, rising faster than nominal gains (2.1%), are expected to provide a huge boost to real-GDP for both Dec. and the quarter as a whole. Analysts note that with pipeline pressures continuing to mount, we should expect further future gains. While the headline was strong, results were mixed across the industries, with 11 out of 21 sub-categories posting gains. For instance, total orders soared +7.4%, m/m, suggesting there is positive pipeline pressure with durable goods orders up +15.0%, while non-durable orders advanced a more modest +0.7%, m/m. Other important sub-sectors, like inventories, continued to decline, falling -1.0%, m/m with losses in both durable and non-durable industries. The data had little impact directly on the currency value yesterday. Yesterday, the loonie managed to print its strongest price this month as crude advanced coupled with Greek rhetoric, that they have not requested a European bailout, again supported currencies tied to economic growth. The belief that ‘risk is back on’ has speculators coveting growth currencies. Last week, with commodities performing poorly, surprisingly investors demanded the CAD for ‘surety’ reasons. Technical analysts expect to see consolidation at these elevated prices until capital markets get to witness a strong transparent message from the EU itself on the woes of sovereign debt. For speculators, the ‘trend remains your friend’. The old adage of ‘buy the rumor sell the fact’ tends to be a good percentage bet. For now being a contrarian costs.

The AUD rallied to its strongest point this month O/N after the RBA said that further ‘increases to the benchmark interest rate are likely if the economy improves’ (3.75%). The currency happened to gain for a third consecutive day after Governor Stevens said in their last meeting ‘that their decision to keep borrowing costs on hold was finely balanced as they needed time to monitor events overseas’. The rhetoric looks like its giving the green light to Capital Markets to expect another hike as early as next month. So far, the futures market is pricing in a 40% chance of a hike during the Mar. meeting. Also aiding the currency last night was this weeks NAB confidence index rising 7 points to 15, the industry report showed business confidence rebounded following the RBA decision to keep rates on hold. On pull backs, expect better buying of the currency (0.9010).

Crude is higher in the O/N session ($77.38 up +37c). Yesterday, crude rose the most in more than 4-months, at one point rising +4.3%, as the greenback struggled vs. the EUR, thus boosting the appeal of most commodities as an alternative investment. Even last week’s bearish EIA headline print, coupled with reports that China is taking further steps to cool its economy, did little to impede the black-stuff’s rise. On Friday, China ordered banks to increase their reserve requirements for the second time this month. Despite signs that Japans economic growth is accelerating, a weaker Europe GDP number is expected to offset any of these other global gains in the short term. The delayed weekly EIA report, finally introduced last Friday, showed that crude supplies climbed +2.42m barrels to +331.4m (the highest level in 2-months) vs. an anticipated inventory rise of +1.6m barrels. The gas sub-category increased +2.32m barrels to +230.4m, w/w. In contrast, distillate stockpiles (heating oil and diesel fuel) lost -356k barrels to +156.2m vs. an expected drop of -1.55m barrels that was forecasted. It seems that with US industrial demand remaining weak will not to have any impact on excess crude supplies. For the time being, crude prices are expected to remain negatively correlated with the ‘big dollar’. Perhaps achieving the EUR’s 9-month low print was too rapid and this uptick in the currency is warranted.

It seems the reason for wanting to own the yellow metal has changed. Yesterday, the commodity managed to rally to a 3-month high on speculation that concern over Greece’s sovereign debt will spur demand for the precious metal as an alternative to holding currency. Mind you a struggling greenback also is justifying higher commodity prices with its negative correlation relationship. Investors believe that with so many sovereign-debt problems and too many Cbanks printing money, gold is the only hard asset they want. Last week we saw that stronger fundamentals out of both Australia and China gave commodities a leg up from just above the month’s low, while a brokered European accord, short on details, has nervous investors seeking security in the asset class. As long as investors fear a Greek default could spark a wider European debt crisis, the commodity remains coveted on pull backs ($1,119).

The Nikkei closed at 10,036 up +272. The DAX index in Europe was at 5,646 up +55; the FTSE (UK) currently is 5,274 up +30. The early call for the open of key US indices is higher. The US 10-year note backed up 2bp yesterday (3.71) and are little changed in the O/N session. Yesterday, a report revealed that international demand for long-term US financial assets grew at a slower pace in Dec. over Nov. (63.3b vs. 126.4b), mostly on the back of China selling treasuries. To date, China has cut their holdings of US debt to their lowest level in 12-months. In general, most Cbanks have also reduced their treasury exposure, reducing the 2008 and 2009 flight to quality trading practices. Last week was the first losing week this year for 10-year notes. A record tying $81b’s worth of product, coupled with Europe’s semi-pledge to help Greece, dissuaded investors from seeking the safe heaven nature of US’s FI. Technically, China has sold US product for a 5th-consecutive month. This highlights the risk that ‘waning appetite for US debt among major foreign holders could spark a selloff and send yields rising in future’. By day’s end, Kansas City Fed President Hoenig said that the ‘US must take steps to reduce spending and increase revenue so the central bank isn’t pressured to fund the deficit’. The market interpreted that the next big crisis will be over fiscal imbalance. ‘The implication is less issuance or a slowing of the increases of issuance’. This gave FI a bid by day’s end. Depending on equities and fundamental data, selling upticks is favored by investors.

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