EURO mess is far from over

Let’s face it there are too many distorting signals in the market right now. We have Juncker stating that ‘Greece will not be left alone’. However, Papandreou still has to convince both Merkel and Sarkozy over the next few days of Greeks austerity concerns and plans. We have the BOJ contemplating easing their monetary policy again. The Chinese Premier Wen ‘warned of latent risk in their banks and pledged to crack down on property speculation’. Domestically some of the G8 countries are on the verge of tipping over, social-economic issues ‘within’ will consume their own leaders. Wildcat-strikes in European countries will eventually be supported by their ‘neighbors’. This morning’s NFP number will be just another wild card in the pack. The market range of unemployed is +50k to -75k. Any small deviation from this (basically below a negative three digit print) and you will most likely want to turn the ‘risk on’ button. It’s been an unpredictable week for many.

The US$ is weaker in the O/N trading session. Currently it is lower against 11 of the 16 most actively traded currencies in a ‘subdued’ trading range.

Forex heatmap

It was suppose to be the day of ‘calm before the storm’ yesterday as we wait for this mornings NFP data. Trichet made it interesting as the ECB and BOE both left rates unchanged. The ECB continues to unveil plans of unwinding their quantitative measures despite the ‘Greek effect’. They will tighten the terms of its three-month market operations by returning to the ‘pre-crisis practice of offering the funds at a variable rate’ and will keep lending to commercial banks as much money as they need. Trichet fired a warning shot to the IMF by saying it would be ‘inappropriate for them to give help to Greece’. Moody’s downgrading Deutsche Bank and aversion strategies helped the USD, easily pushing a weary EUR lower, albeit for now. Other US data yesterday was mixed. As expected, initial jobless claims fell (+469k vs. +496k, w/w) after the snowstorm swollen readings of the last two-weeks. Continuing claims was the big winner, unexpectedly declined to its lowest level in 12-month (+4.6m vs. +4.5m), but remains elevated. Analysts continue to expect further declines in initial claims as the labor market continues to stabilize. The emergency benefits programs remained elevated (+5.68m vs. +5.479m) despite a decline in the extended benefits program (+178k vs. +188k) as the duration of unemployment continues to lengthen.

Pending home sales and the factory order’s headline somewhat disappointed the markets, despite some of the ‘obvious’ reasons. The market expected a risk of a negative print for pending home sales, but, the depth of the decline surprised all (-7.6% vs. -0.8% revised). Analysts gave various reasons to try and explain away the negativity. Firstly, month-to-month volatility is always’ the go-to answer. Secondly, the strong resale demand in the 3rd and 4th Q possibly brought demand forward so homebuyers could take advantage of the inventive programs that expired last Nov. Thirdly, there is a possibility that the market is softening and finally, if that’s so, then potential home buyers will be patient and wait.

Despite US factory orders posting its 5th consecutive gain (+1.7% vs. +1.5%), it’s what’s in the report that one should ponder on. Both defense and non-defense aircraft spending accounted for most of the gain in orders during the month, and notably, business investment declined after two-months of gains. If one excludes transportation, then orders were up only +0.1%.

The USD$ is little changed against the EUR +0.03%, GBP +0.01%, CHF +0.02% and higher against JPY -0.17%. The commodity currencies are mixed this morning, CAD -0.19% and AUD +0.12%. The loonie did very little of anything yesterday, especially after four consecutive day’s of gains and with the market applying risk aversion strategies. It seemed that the currency is an animal all onto itself. Canadian Ivey PMI came in weaker than expected (51.9 vs. 50.8), and the currency pull-back was short lived, even with commodities under pressure. 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’. Governor Carneys rhetoric justifies the bull’s positions and has certainly caught some technical positions flatfooted. Now it’s up to this morning NFP for direction.

The AUD ended its three-day slide vs. the JPY on prospects that the BOC may increase stimulus measures to curb deflation, thus boosting demand for higher-yielding currencies. Now we wait for the NFP fallout. 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 (0.9025).

Crude is higher in the O/N session ($80.61 up +40c). Similar to other commodities, the dollars gain pressurized crude prices yesterday. At one point the black-stuff fell -1.4% in the morning session, this after rallying to a 6-week high the previous day. This week’s EIA report showed that refinery utilization rates are at their highest since Oct., a sign that gave the bulls the green light to keep the commodity’s prices somewhat elevated. Utilization rates increased +0.7% to +81.9% last week. The headline print for crude climbed +4.03m barrel (more than three-time’s estimates). The 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). 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’ bulls ran into a brick wall yesterday. The dollar rallied vs. the EUR causing gold, at one point, to fall the most in a month as investors sought alternative investments. Earlier this week traders were willing to divert monies into the commodity 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 had investors seeking some sort of portfolio surety. The big picture concerns about deepening EU deficits becoming contagious are temporarily supporting the yellow metal on ‘much deeper’ pull backs. Bears should be wary of Cbanks wanting to add the commodity to their reserves ($1,136).

The Nikkei closed at 10,368 up +223. The DAX index in Europe was at 5,813 up +18; the FTSE (UK) currently is 5,546 up +19. 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. Treasury prices having been trading close to home despite shorter-term yields pushing a tad higher. The demand for the safety of US government debt fell as investor concerns eased about Greece’s ability to cut its budget deficit. How long will this last? It seems that the ECB faith in Greece has given dealers an excuse to liquidate some of the positions to allow them to take down supply next week (3’s $30b, 10’s $21b and 30-years $13b). Let’s see how the market reacts to NFP.

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