EUR euphoria over for now

There are many outside ‘moving parts’ to the Greek equation. We have Chancellor Merkel, under pressure domestically to say ‘no’ to aid, which she has done. The Greek government, who approved their third austerity cut ($6.6b), and whose finance ministry has been overtaken by protesters in Athens this morning, unable to appease their own. We have the IMF wanting to lend a hand, believing that financing from them will be ‘no threat to the Euro-zone’. We have an EU who disagrees, afraid of stigmatizing the region and currency. Besides, the IMF includes US and China, and Europe wants ‘no’ outside power, probably how many Greek’s feel. We have credit agency’s (Moody’s and Fitch) stating that the Greek’s are serious about getting their finances under control. What we have is a mess and no-one is evening talking about the rest of the PIIGS. Expect Trichet to cite the region as one of many reasons why their exit strategy timing is questionable. It seems that Greece is holding the cards and not the rest of EU on monetary policy.

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 ‘subdued’ trading range.

Forex heatmap

The US equity market, temporarily, was impressed with yesterday’s ADP report (-20k vs. -15k). The revisions however were ‘ugly as an additional -388k job losses over the past six months are now reported compared to initial estimates’. Analysts believe that the potential positives outweigh the negative print. The deepness of the revisions increase the ‘probability attached to a resumption of employment growth in the months ahead’. Was some of the data weather related? To a small extent, but surprisingly the ADP tried to explain it away.

‘Two large blizzards smothered parts of the east coast during the reference period for the BLS establishment survey. The adverse weather had only a very small effect on today’s ADP Report due to the methodology used to construct it. However, the adverse weather is widely expected to depress the BLS estimate of the monthly change in employment for February, but boost it for March. Therefore, it would not be unreasonable to expect the BLS estimate for February (due out this Friday) to be less than today’s ADP Report even though the BLS estimate will include the hiring of temporary Census workers not captured in the ADP Report’.

So we are told to look beyond both Feb. and Mar. ADP and NFP reports to appreciate an undistorted weather variable. Most of yesterday’s monthly losses were in the goods-producing sector (-37k), unlike the service-sector which saw a net gain (+17k). Tomorrow’s number will be interesting indeed.

There was a nice surprise in the ISM Non-Manufacturing PMI (53.0 vs. 51) yesterday. It expanded at its fastest pace in two years as orders increased. This is strong evidence that manufacturing gains are filtering throughout the US economy. Non-manufacturing makes up 90% of the economy. Look at the sub-categories, employment advanced to its strongest print in two-years (48.6 from 44.6). More jobs equal more money equals more spending and presumably growth. Business activity, a measure of sentiment, increased to 54.8 in Feb. from 52.2 the previous month, new-orders rose to 55 vs. 54.7, the strongest reading in nearly 3-years.

The Beige Book was a non-event. It reported that economic activity continued to expand although severe weather held down activity in many Districts. Nine-Districts reported modest improvement in activity, two reported mixed conditions and one reported activity had ‘slackened or remained soft’ but such was weather-related. Consumer spending improved slightly, demand for services was overall positive and manufacturing activity improved. Interestingly, most Districts reported weakness or a further decline in commercial real estate and construction. Loan demand was weak and lending standards remained ‘tight’ everywhere. There were no issues with price pressures and as expected labor markets remained soft, with some regions reporting ‘an uptick in hiring or slowdown in layoffs’.

The USD$ is currently is higher against the EUR -0.22%, GBP -0.26%, CHF -0.27% and lower against JPY +0.02%. The commodity currencies are mixed this morning, CAD +0.10% and AUD -0.53%. The loonie advanced for a fourth consecutive day yesterday and managed to print a one month high as both crude and gold prices heightened the appeal of currencies tied to growth. Similar to most other currency, it has managed to back off-some ahead of the Cbanks announcements. Earlier this week, the BOC did what was expected of them, by keeping rates on hold. It seems that they are potentially ‘behind the curve’. Their following communiqué was hawkish in nature, leading to somewhat predictable rate increases for the second-half of this year. The BOC said that ‘inflation and economic output have been higher than policy makers expected’. But, also repeated to stand pat through June unless the ‘current inflation outlook shifts’. Why not hike now? The market it seems is beginning to price in an earlier hike. Their statement omitted an earlier inflation risk reference, that being ‘tilted slightly to the downside’. It also omitted a reference to having ‘flexibility’ even with the key interest rate close to zero. Canada’s annual inflation rate was +1.9% in Jan. (fastest pace in 12-months) and the core rate (ex-food and energy) at +2%. Governor Carneys rhetoric justifies the bull’s positions and has certainly caught some technical positions flatfooted. Tomorrow, we have the NFP employment report and for now traders are happy to wait and see.

The AUD came under pressure in the O/N sessions on concerns that slower growth in Europe and weaker global equity markets would reduce the demand for higher yielding currencies. The AUD has had an interesting week thus far. Stronger growth numbers (GDP, q/q, +0.9% vs. +0.3%) pushed the AUD to print a weekly high vs. the greenback. As expected, the RBA hiked rates, very much telegraphing the decision, by +25bp to +4%. Governor Stevens said ‘rates should be closer to average’, which policy makers have indicated 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’. If investors concerns ease over Greece’s ability to finance its debt then expect better buying on pull backs by the market (0.9011).

Crude is lower in the O/N session ($80.45 down -42c). The bulls seem to be gaining the upper hand as the bears back off after yesterday weekly inventory report. It showed that refinery utilization rates are at their highest since Oct., thus boosting demand. Utilization rates increased +0.7% to +81.9% last week. The headline print for crude climbed a +4.03m barrel, that’s more than three times estimates! Market is now expecting the higher utilization rate to quickly ‘mop up excess supplies’. The total US fuel demand averaged over the month was +19.3m barrels (+3% y/y). Other factors have also contributed to yesterday’s gain. A weaker greenback combined with a rally in global equities has lent its support to the bulls. The headline print certainly did not warrant higher prices. Currently, it’s all about sustainability as many variables need to be considered. Digging deeper, other fuel stockpiles came in close to expectations, with gas up +800k barrels and distillate inventories (heating oil and diesel), down -800k. It seems that this market may be supported ‘on air’ rather than the fundamentals. Technical traders love this. With momentum and an investor attitude that the economic situation will not get much worse, has their graphs predicting a $90 print. However, if the dollar threatens to advance for surety reasons, the black-stuff will come under renewed pressure.

The ‘yellow metal’ advanced to a 6-week high print yesterday, as the greenback came under renewed pressure and extending last months gains. Investors are willing to divert monies into the ‘yellow metal’ as a hedge against currency market instability. Last month it managed to print its first monthly gain since Nov. European sovereign debt issues and a ballooning UK deficit with the potential of ‘hung’ parliament after the next general election has investors seeking some sort of portfolio surety. For most of last month, a stronger greenback had curbed the greater 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. Investors continue to seek the ‘ultimate currency’, being gold, on pull backs. Bears be wary of Cbanks wanting add the commodity to their reserves ($1,137).

The Nikkei closed at 10,145 down -107. The DAX index in Europe was at 5,789 down -28; the FTSE (UK) currently is 5,519 down -13. The early call for the open of key US indices is lower. The US 10-year backed up 1bp yesterday (3.63) and is little changed in the O/N session. Treasury prices having been trading close to home pending the Greek announcement. Prices softened slightly after the stronger than expected ISM non-manufacturing report. It gave dealers an excuse to liquidate some of the positions to allow them to take down supply next week. Today we get next week’s US funding announcement (3’s, 10’s and 30’s). By week’s end expect some further give in the curve, unless we get any surprises from Europe.

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