EUR wait and see for Greece

Despite the crowded sterling trade, the expected RBA rate hike, the general malaise of the EUR, Capital markets are twiddling their thumbs in a ‘wait and see mode’. This week, barring today’s BOC rate announcement, we have the ECB and BOE to ponder on Thursday and the ‘crème de la crème’ Friday’s NFP, which technically could be a wild weather related event with a mixture of other scenarios thrown in. By Mar. 16th Greece is to show progress on its ‘austerity program’. Positions are definitely skewed with all this one way traffic, especially over the last two-trading days. It’s in times like these that a contrarian makes money when the market is stretched like an elastic band. Lemmings cease to exist.

The US$ is stronger in the O/N trading session. Currently it is higher against 13 of the 16 most actively traded currencies in a ‘whippy’ trading range.

Forex heatmap

Yesterday’s US data confirms that the consumer continues to carry the torch in the 1st Q. In ‘real’ terms, consumer spending was up +0.3%, m/m (non-annualized, seasonally adjusted) in Jan. They continued to spend despite slower income growth (+0.1% vs. +0.3%). Digging deeper, wages and salaries were not the problem (+0.4%, m/m). It’s worth noting that private, manufacturing and government had a strong gain wage wise in Jan., again solidifying the thought that the US economy is undergoing a stronger recovery. It was in fact rental income and personal income receipts that finally weighed on the monthly print. Despite Government benefits continuing to provide support, UI benefits have now contracted for 4 -consecutive months. Another plight on the savings was the +5.5% advance in personal current taxes all accumulating into a decline in disposable income for the first time in 7-months. Personal consumption rose slightly faster than expected at +0.5%, m/m, while prices remained stable, with core prices being unchanged.

Despite the ISM manufacturing reading falling short of expectations (56.5 vs. 57.7), it was a solid print with perhaps a negative weather effect. Analyst’s consensus has the manufacturing recovery remaining ‘V’ shaped with inventories now able to contribute positively to US GDP in the 1st Q. In the details, manufacturing employment expanded for the 3rd-consecutive month (+11k). Last month’s may get a surprise in this Friday’s NFP report. Despite the inventories sub-category contracting once again, contradicting most other similar reports (Philly Fed.), the pace of reduction has slowed materially and may even expand in the 2nd Q. New-orders fell below 60, from a 65 print the previous month, suggesting a pull-back in the pace of growth. However, the print remains strong and is expected to contribute to the 1st Q. New export orders dipped to 56.5 as foreign demand weakened slightly. Negatively, the prices paid component continues to advance, thus squeezing manufactures margins, which eventually will pressurize the pipeline prices.

The USD$ is currently is higher against the EUR -0.54%, GBP -0.57%, CHF -0.52% and lower against JPY +0.03%. The commodity currencies are mixed this morning, CAD +0.04% and AUD -0.15%. Yesterday’s Canadian data was like winning a gold medal at the winter Olympics. The 4th Q GDP report exceeded all market expectations. Annualized and seasonally adjusted, we witnessed a +0.6% print (+0.4%), m/m, and a +5%, q/q, headline. The data is certainly adding weight to the BOC hiking rates in the second Q. This morning we get the BOC rate decision, expected to be unchanged at +0.25%, however, be prepared for his following communiqué with rhetoric involving inflation. The pace of the recovery is now ‘materially stronger’ than the BOC’s expectations. This 1st Q, albeit may be softer, but with rates remaining low, growth and inflation exceeding expectations, it will be difficult to defend the ‘need for emergency funding’. In Governor Carney’s Jan. Monetary Policy Report, policy makers had expected growth of +3.3% in the 4th Q. Yesterday’s print greatly exceeds all expectations. Digging deeper, annualized consumer spending was up +3.65% while investment grew +6.6%. The biggest contributor was with Canadian Net-Trade, exports up +15.6% and imports up +9.1%. As one knows that the loonie is a growth sensitive currency. With stronger growth data coupled with bullish commodity prices the CAD should outperform most of its major trading partners. Most of us expected the loonie to falter after some of the technical action we witnessed last week, perhaps even making an assault on yearly lows because of investor confidence. The currency ended up rallying +1.8% in Feb. as oil, one of its largest export commodities, rallied +7%. Momentarily, it remains contained in its tight 4c trading range. Will ‘risk on’ push us towards parity or ‘risk off’ catch the market flat footed again? Let’s see what Governor Carney has to say for himself this morning.

This time around they were true to their word. The RBA hiked rates last night, telegraphing the decision, by +25bp to +4%. Governor Stevens said ‘rates should be closer to average’, which policy makers have indicated that may be 75bp higher than the current +4%. He also went on to say that the decision ‘indicated the economic figures outweighed concerns about global sovereign debt risks, which helped convince the RBA to stand pat last month’. The currency has advanced +42% vs. the USD in the past year, making it the best performer among the most-traded currencies. Analysts believe that the ‘the biggest jobs boom in more than 3-years and a surge in business confidence suggest Australia’s economy is already growing at or close to trend, after escaping recession during the global crisis’. Reading between the lines, we should expect the RBA to hike with a ‘gradual approach’. The currency managed to back away from its one week high as the RBA said inflation would likely be ‘consistent with its target this year’ (0.8991).

Crude is lower in the O/N session ($78.51 down -19c). Similar to most commodities, by day’s end yesterday, prices generally fluctuated, recording little of anything despite the US consumers increasing their spending for a fourth consecutive month in Jan., signaling perhaps that fuel demand may grow. Negating the positives was the dollar strengthening which curbed the appeal of commodities. The early morning data gave us a spike higher for crude which managed to break the psychological $80 print. However, the strength of the dollar vs. the EUR dragged crude prices lower. Opposites provide for a zero-sum game. Last week we questioned if the $80 psychological resistance level is sustainable. It seems to be providing a headache for technical analysts. It all depends on the dollar and investor’s appetite for risk. Are they convinced that fundamentals are turning the corner? With the dollar threatening to advance even further for surety reasons, the black stuff may come under renewed pressure. Last weeks EIA inventory report, on the face of it, was not that bullish for commodity sensitive currencies. A rise in imports managed to push the stockpiles higher while at the same time the US’s distillate inventories print fell. Also surprising was that gas managed to retreat too. Crude stocks increased by +3m barrels to reach a total +337.5m, w/w. The EIA supplies were forecasted to increase by +1.9m barrels. Digging deeper, imports of the black-stuff has continued its recent upward trend, rising +536k barrels, w/w. In contrast, distillate stocks (heating oil and diesel) declined by -600k barrels to +152.7m. It’s worth noting that refineries were running at +81.2% of capacity, up +1.4% vs. an expected ‘no change’. Risk aversion trading strategies and employment fears should continue to price out any speculative element. For market direction, we are now depending on equities and investors ‘on’ again ‘off’ again risk appetite.

Gold was little changed yesterday ad again this morning. The general feeling is that the commodity may come under renewed pressure as the greenback threatens to extend its gains against the EUR, thus eroding the demand for the metal as an alternative investment. Last week it ended on a high note, printing its first monthly gain since Nov. Weaker US data tried on a number of occasions to push the commodity lower, to test Feb.’s monthly support lows. It’s Greece’s debt concerns that will probably increase demand for bullion as an alternative to holding a currency. For most of last month, a stronger greenback had curbed the demand for commodities, but it’s the big picture concerns about deepening EU deficits becoming contagious that is supporting the yellow metal on ‘much deeper’ pull backs. Various think tanks believe that with the sovereign-debt problems, in the end, gold will be the only hard asset speculators will want, the ‘ultimate currency’ ($1,117).

The Nikkei closed at 10,221 up +50. The DAX index in Europe was at 5,723 up +10; the FTSE (UK) currently is 5,417 up +12. The early call for the open of key US indices is higher. The US 10-year eased 1bp yesterday (3.61) and is little changed in the O/N session. The ‘dovish’ Fed comments last week have managed to push the US yield curve lower. Treasuries advanced as weaker than expected economic data and the threat of credit-rating downgrades for Greece encouraged the demand for the safety of US government debt. Any credit-worth signs of a European rescue package should see relief rally in yields to back up. Until then, despite how expensive product looks and despite stronger data the market waits for concrete signs of eventual exit measures. European uncertainty has been increasing the risk aversion trading appetites. Look for better buying on pull backs, even if the product looks expensive on the curve.

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