Greek debacle on hold, EUR and ‘risk’ in vogue

After Friday’s pleasant US employment surprise and a market starting to discount Greece with its European support is pushing ‘risk’ back in vogue. Regulators are look at implementing restrictions for speculation in CDS’s and preventing a ‘run’ on a country. It’s an interesting situation in Europe, you have a vocal Sarkozy stating that Europe is there for Greece, while Chancellor Merkel refuses to give the ‘green light’ on financial aid to the country, not that they have asked for any just yet. This storm is far from over. On the other side of the world, the governor of the PBOC ‘hinted’ this weekend that China could abandon the unofficial dollar peg, which he said was a ‘special policy designed to weather the financial crisis’. Why could we not all have a ‘magic currency’?

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 ‘subdued’ trading range.

Forex heatmap

The US employment report was a pleasant surprise Friday, stronger than consensus (-36k vs. -75k). Is the better than expected outcome reflecting stronger fundamentals or a smaller than assumed weather impact? It is most likely a wee bit of both. Without the weather variable, we may have been looking at a positive number. It’s nice to see that the unemployment rate was unchanged (+9.7%) for a second consecutive month. Digging deeper, the average weekly hours for all workers fell just -0.1-hour to 33.8, while the average factory workweek fell -0.4-hours. Average hourly earnings for all workers edged up a smaller than expected +0.1% and the y/y held steady at +1.9%. There was a substantial increase in the number of workers employed part-time reversing much of the Jan. decline. Worth noting that the manufacturing sector managed to post a second positive print, the government sector again pared positions. Much has been written on the report, but Mar. numbers could bring in a positive print.

The USD$ is weaker against the EUR +0.27%, GBP +0.38%, CHF +0.28% and JPY +0.18%. The commodity currencies are also stronger this morning, CAD +0.13% and AUD +0.55%. The loonie managed to appreciate to its highest level in 2-months and capped a winning week after a stronger than expected NFP report. North American ‘growth’ is always bullish for this commodity driven currency. This Friday we get to see the Canadian employment report. Last 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. The trend remains your friend. expect better buying of the currency on USD rallies in the medium term.

The AUD rose to its strongest print in four weeks as demand for higher yielding assets increased after the Euro-zone signaled their support for Greece. It seems that risk is back on and in vogue ahead of the Australian employment report later this week. Last week the RBA hiked rates 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’. Now that risk is back on, expect better buying on pull backs (0.9114).

Crude is higher in the O/N session ($82.18 up +68c). The bulls are back in town. Crude surged higher on Friday after the surprisingly stronger than expected US employment report. Optimism that fuel demand will climb in the world’s biggest energy consuming country pushed the black-stuff higher. At one particular point after the NFP release the commodity managed to surge +2.3% higher, teasing technical analysts into justify their graphs pointing towards a $90 print. The market will want to witness a few elevated closes before buying into their theory, especially ahead of the OPEC meeting on Mar. 17th. Already the Saudi Arabia’s King Abdullah has targeted $75 as a fair price for consumers and producers. Last 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, will support commodities on pull back. Now we return our attention back to Greece and the EU fallout.

The ‘yellow metal’ ended higher on the week and rallied again on Friday, on concerns that Greece and its sovereign debt woes boosted the buying of the metal as a hedge against currency volatility. By day’s end, with the dollar paring some of its EUR gains also provided some commodity based support. In Feb. the commodity 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 had investors seeking some sort of portfolio surety. Bears should be wary of Cbanks wanting to add the commodity to their reserves ($1,140).

The Nikkei closed at 10,585 up +216. The DAX index in Europe was at 5,874 down -3; the FTSE (UK) currently is 5,595 down -4. The early call for the open of key US indices is lower. The US 10-year backed up 8bp on Friday (3.68%) and is little changed in the O/N session. Treasury prices plummeted lower after the jobless report. Traders see the Fed’s exit path shortening after the surprising release that basically confirms that the US has side-stepped a depression. Also it seems that the ECB faith in Greece has given dealers an excuse to liquidate more of their positions to allow them to take down supply this week (3’s $30b, 10’s $21b and 30-years $13b).

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