A EURO parachute has holes

A EURO parachute is available it seems for Greece, breaking all their own rules. Member governments have laid the ‘life-line groundwork’ if need be. However, policy makers continue to voice their optimism that Greece’s ‘budget cuts will make a bailout unnecessary’. Why the help then? Back to reality, the unprecedented pledge reflects the true concerns that Greece’s budget woes could spread. If this does occur, then the market by then will have truly lost the confidence of the investor and the already 10% decline, thus far this year, of the EUR will only be a blip on a much grander scale. We wait too see how much the market will buy into this idea. We have the Fed announcement later this afternoon.

The US$ is mixed in the O/N trading session. Currently it is higher against 10 of the 16 most actively traded currencies in ‘whippy’ trading range.

Forex heatmap

Yesterday, the NY Fed’s Empire Manufacturing Index eased slightly (22.9 vs. 24.9 in Feb.). Analysts will have us believe, that despite the declining headline, the sub-components improved across the board. The new-orders index surged to 25.4 from 8.8 in Feb. Shipments advanced to 25.6 from 15.1 last month and order backlogs rose for the third-consecutive month to 4.9 from 2.8 (the highest print in four-years). Surprisingly, even the delivery times managed to swing back into positive territory. Technically a good sign, as ‘times’ normally increase when ‘factories have trouble moving product out the door because orders are coming in strong’. So, in other words, the demand backdrop remains firm and suggests the recovery in industrial activity has legs. The employment component index rose to 12.4 from 5.6, while the workweek measure improved to 12.4 from 8.3 last month. This will surely give a boost to Mar.’s NFP predictions. Finally, pricing power is returning modestly. Prices received rose to 8.6 from 4.2, while prices paid fell to 26.9 from 31.9 last month. More importantly the data does not raise any concerns over the outlook for inflation. The robust components surely will lead to a stronger ISM this month. Other data showed that US Industrial production beat expectations (+0.1% vs. +0.0%), keeping optimists ‘V’ shape scenario intact. It’s interesting that the severe weather conditions that we have experienced this year have had little impact on any of the data. Capacity utilization continues to improve at a rapid pace (72.5% vs. 72.7%), which can only be positive for the 1st Q GDP number and adding to the evidence that the Fed will likely hike rates in the second half of this year.

The USD$ is higher against the EUR -0.07%, GBP -0.30% and lower against the CHF +0.04 % and JPY +0.22%. The commodity currencies are weaker this morning, CAD -0.01% and AUD -0.02%. It’s not a surprise that the loonie would come under some pressure yesterday as global equities and commodity prices softened on monetary tightening speculation from both China and India. In fact, the market is happy that the currency has been able to pare some of this year’s record gains. It makes it more desirable to add to long CAD positions and at better levels too. Technically and fundamentally, the loonie is ‘piggy-backing’ on parity after last week’s surprisingly strong employment numbers (+21k). Traders are now betting that the BOC will be hiking sooner rather than later because of the potential ‘upward’ pressure on core-inflation supported by a faster than expected pace of industrial capacity’ (70.9%). Trader’s opinions vary on the timing of a hike, consensus is probably July. Despite the trend remaining your friend. The market should be expecting better levels to own the domestic currency in the short term, as record IMM long growth currency positions and softer commodity prices pressurize these ‘weaker longs’.

Rating agencies questioning the stability of various sovereign debt coupled with trader speculation that China may want to implement monetary tightening measures has pressurized higher yielding growth currencies thus far this week. To date the AUD has managed to retreat from its two-month high. Demand for the Australian currency has also lost traction on concerns that the global economy has not recovered enough to let RBA to raise interest rates again. Of late, robust Chinese export numbers have had investors demanding higher yielding growth currencies. 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%. The market expects the RBA to hike with a ‘gradual approach’. Continue to expect better buying on deeper pull backs (0.9154).

Crude is lower in the O/N session ($79.52 down -28c). The ‘black-stuff’ found it difficult to maintain its sea-legs yesterday, a second consecutive trading session, as the dollar gained, curbing demand for most commodities as a currency hedge, before this week’s OPEC meeting. Risk aversion trading strategies combined with global bourses finding it difficult to gain traction on China and India monetary tightening rumors had the bears happily adding to their positions. With OPEC meeting tomorrow, Iran, the second-biggest producer in the group, wants to keep output unchanged because there is no sign of growing demand. Fundamentally, it’s not all bad news for the bulls. Last week’s EIA reports supported the ‘bull’ story. The weekly report showed a decline in supplies of gas and distillate fuels. Gas stocks dropped -2.96m barrels to +229m vs. an expected ‘little change’ scenario. Distillate supplies (heating oil and diesel) decreased -2.22m barrels to +149.6m. It was expected that stockpiles were to fall by only -1m barrels. On the flip side, crude inventories rose +1.43m barrels to +343m vs. an expected climb of +2m barrels. There was even an OPEC report stating that member states will need to produce more oil than previously estimated. It’s expected that the members need to be pumping +28.94m barrels a day to satisfy this years global demand. That’s an increase of +190k barrels a day over last year’s projections. A belief that the economic situation will not get much worse should support commodities on deeper pull-backs.

The yellow metal was little changed yesterday. However, be wary, we could be entering a ‘new safe heaven phase’. Technically, these levels are providing good support for the bulls despite having a rough go of it so far this month. The interest to own gold may gain as debt rating concerns and the prospect of credit tightening in China persuade investors to seek a ‘haven in precious metals’. Currently, it’s all about the performance of the dollar, any signs of weakness and we will have buyers happily entering the market ($1,112).

The Nikkei closed at 10,721 down -30. The DAX index in Europe was at 5,943 up +40; the FTSE (UK) currently is 5,632 up +39. The early call for the open of key US indices is higher. The US 10-year eased 1bp yesterday (3.71%) and is little changed in the O/N session. Prices remained close to home despite strong readings from yesterday’s US data. Money-market interest rates, at a five-month high, are providing strong proof that the market believes that the Fed is laying the groundwork for its own exit strategy. The treasury bears want to take control with growing confidence that the economic recovery is gaining traction. However, with other asset classes underperforming and a degree of risk aversion occurring may temporarily hinder their strategies. Let’s see what the Fed has to say this afternoon after the FOMC announcement.

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