Greek’s woes passé?

The market has been grasping at straws with little data to use as fodder, especially in the North American trading sessions. Risk-on, risk-off has been moving on hearsay. China may decouple the Yuan from the dollar, the Greek’s have Obama’s support and equity markets rallying on ‘air’ with little volume. Opposing arguments against a stronger EUR are mounting. Rating agencies are questioning the possibility of a European sovereign default. Internal EU drafts analyzing their ‘biggest budget deficit’ and concluding that the Greek tax hikes may fail to generate the revenue their government anticipates. This will only heighten the macro-contagion concerns. Greece has until next week to convince all, and if so, then the market can move on to another speculative issue.

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

Forex heatmap

Surely with the EUR weakening -6% against the dollar this year and a Chinese Yuan rallying +6.2% benefits the European economy? Who is kidding whom? These are questions posed by former EU commissioner Romano Prodi. He believes the Greek problem ‘is completely over’. There are no other sovereign issues in Europe. Speculatively, everything has been blow out of proportion. One wishes that could hold true for the UK economy. Their ‘fragile’ scenario remains however, especially after this mornings plummeting manufacturing production data (-0.9% vs. -0.3%). It seems that Sterling has legs for one direction and that’s down. It’s only when the EU gains momentum can the UK economy find some traction. The general election supersedes everything at the moment. Their economy will provide enough political copy for fodder in the run-in.

The USD$ is stronger against the EUR -0.23%, GBP -0.48%, CHF -0.20% and JPY -0.25%. The commodity currencies are mixed this morning, CAD -0.04% and AUD +0.24%. The loonie remains the darling of currencies. Even with commodities weakening there is an appetite to own the currency as speculators gamble on ‘growth’ prospects. The currency continues to congest vs. its southern partner and certainly outperform on the crosses. Traders are waiting for tomorrow’s trade numbers and Friday’s employment report to solidify their market positioning. Technically, the currency is on course to test the USD support levels close to 1.0200. Depending on this week’s data, the domestic currency may have the momentum to provide another parity onslaught where it should run into strong opposition. 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 communiqué was hawkish in nature, leading to somewhat predictable rate increases for the second-half of this year. The BOC must b concerned about the loonies’ strength of late. However, it has occurred in an orderly fashion and rapid appreciation for speculative reasons would have sent alarm bells ringing. The trend remains your friend. Expect better buying of the domestic currency on USD rallies in the medium term.

The AUD managed, at one point, in the O/N session to print a seven-week high. There is speculation that this evening’s Australian employment report will again provide strong evidence that the RBA will require another rate hike next-month. Robust Chinese export numbers has investors demanding higher yielding growth currencies. To top all the support variables for the currency was the RBA’s deputy governor Lowe comments that growth will be likely at or above average for the next couple of years. 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%. 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’. Continue to expect better buying on deeper pull backs (0.9163).

Crude is lower in the O/N session ($81.37 down -12c). Crude was little changed yesterday, in fact another dull day of trading for the black-stuff, especially after last week’s late surge on the back of stronger than expected employment data. Traders are wary about this morning’s inventory report. Analysts expect another build in stocks, a sixth consecutive rise, on the back of imports edging up and refinery utilization remaining flat. Global optimism that fuel demand will climb in the world’s biggest energy consuming country has helped push the commodity to its recent highs. Now that we have firmly broken the psychological $80 a barrel, some technical analysts believe this opens the way for a $90 print. OPEC meets next week and already the Saudi’s King Abdullah has said that they target $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%. The market is expecting the higher utilization rate to quickly ‘mop up excess supplies’. With momentum and an investor attitude that the economic situation will not get much worse will support commodities on pull-backs. Perhaps this morning weekly reports may surprise.

For a second consecutive trading session this week the ‘yellow metal’ has struggled. It managed to print new weekly lows as the dollar strengthened vs. the EUR, thus reducing the demand for the metal as an alternative asset. Comments from China also managed to weigh on the commodity. Authorities indicated that ‘bullion probably will not be the country’s main reserve investment’. Technically that means they will ‘have to hold dollars’. This action, by default, will weigh on all commodities. Earlier this week investors were happy to cash in on their profits that were booked using other G7 currencies. Forgetting Greece, it’s all about the performance of the dollar. Currently, any signs of weakness and we will have buyers happily enter the market. Until then, the bulls are the unlucky investors. Last month 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 had investors seeking some sort of portfolio surety back in Feb. Will we see the same interest at lower levels ($1,125)?

The Nikkei closed at 10,563 down -4. The DAX index in Europe was at 5,895 up +10; the FTSE (UK) currently is 5,607 up +4. The early call for the open of key US indices is lower. The US 10-year eased 1bp yesterday (3.70%) and is little changed in the O/N session. There was a demand for bonds despite the plethora of product to be issued this week. The appetite was aided by the Chicago Fed Evans stating that ‘low interest rates are likely to be needed for some time, as high unemployment lingers and inflation stays below target’. We have contagion issues on one hand, questionable global growth and hyping policy maker’s rhetoric providing the tug-of-war for product. Until the market gets some concrete data to chew on, one can expect various asset classes to trade in ‘limbo’. Yesterday’s 3-year auction ($30b) was well received. The bid-to-cover ratio was 3.13 compared with 2.83 in Feb. and 2.98 in Jan. The average has been 2.89 from the past 10-auctions. Today we get to bring down 10’s ($21b) and tomorrow long-bonds ($13b).

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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