Greece playing Russian roulette with EURO blanks

Playing European ‘chicken’ is at the detriment of the EU vision. There have been some strong opinions expressed publicly by various European leaders and think tanks. Merkel’s Germany continues to push back and yesterday noted that ‘punishment for fiscal misbehavior should be expulsion from the Euro agreement’. Further comments that ‘Greece has tricked the EU too often’ continue to unease Capital-Markets. Thrown in a comment or two by the IMF that Portugal has ‘some tough accounting to do’ has investors considering bailing the region. Who is supposed to be doing the PR and damage control on this situation? Greece has set the deadline for the EU to unveil their plans and intentions for next week. Bigger picture, on Apr. 20th, Greece needs to refinance Eur8b and on May 20th another Eur8b. Thus far, the market expects a solution to be found, but, irrevocable damage has occurred. Holding the EU at gunpoint with no ammo benefits no-one!

The US$ is mixed in the O/N trading session. Currently it is higher against 11 of the 16 most actively traded currencies in ‘whippy’ trading range.

Forex heatmap

Yesterday’s US CPI numbers continue to show that inflationary pressures remain. It’s evident that housing and gas prices continue to disguise inflation pressures in the US. This is in stark contrast to the PPI report earlier in the week which shows deflation to be the issue. It was gas and housing that applied the strongest downward pressure to CPI in Feb. (+0.1% vs. +0.2%). With most other sub-categories posting gains (autos, medical, etc.) and despite inflation remaining low, analysts believe that the ‘underlying’ inflation is starting to increase its pace. The market should be questioning the timing of the Fed’s exit strategy. On the flip side, the housing sector which commands nearly 40% of the CPI weighting could continue to distort the headline print. The markets anticipate shadow inventories and the ending of incentive programs to continue to put pressure on future house prices. Alone, house price should not deter the Fed from tightening because of other price pressures. Digging deeper, energy prices eased -0.5% as gas prices tanked -1.4% m/m. It’s worth noting that aprox. 60% of the CPI covers prices consumers pay for services (medical, airline fares etc).

With the US labor market continuing to stabilize, weekly claims data is not providing the same amount of market excitement we have seen in the past. This week’s headline print was a tad higher than expected (+457k vs. +455k) however, the downward trend remains intact. It seems that the winter distortions may have worked itself out of the system. Analysts expect pre-blizzard level to be breached very soon as the market anticipates Mar.’s NFP to reveal a significant increase. The emergency claims disappointed again moving higher (+5.88m vs. +5.527m)and will likely continue its upward trend over the next few months after the program was extended for an extra month to the beginning of April. However, the number of Americans obtaining emergency claims from either the extended or emergency claims programs continues to reach record highs, pushing over +6m last week, and suggests that the duration of unemployment continues to increase.

Finally, the Philly Fed headline improved in Mar. (+18.9 vs. +17.6), posting its second consecutive monthly gain and expanded at the fastest pace in 4-months. Analysts are now looking for a stronger ISM index print. Digging deeper, new orders and shipments declined suggesting that pipeline demand is fading (9.3 vs. 13.6). Employment and average workweek posted the large gains, which should provide support for a strong NFP headline print. The prices paid component advanced, increasing at the fastest pace in 18-months. Inventories also turned negative, again, after rising last month. Even the future expectations surprised and managed to advance to its highest level in 12-months.

The USD$ is lower against the EUR +0.06% and CHF +0.23 % and higher against GBP -0.46% and JPY -0.17%. The commodity currencies are mixed this morning, CAD -0.36% and AUD +0.00%. The hitting out of the park streak was broken yesterday, as the loonie depreciated for the first time in two-weeks vs. its southern neighbor on the back of commodity prices finding it difficult to maintain their upward momentum. Up to yesterday it has been a runaway train with so many supporting variables pushing the currency towards parity. This reprieve or any reprieve will be seen as an opportunity to only add to investors saturated positions. Already this week, the CAD managed to record its strongest print in two-years, basically piggy-backing parity. With the Fed ‘keeping’ low interest rates for an ‘extended’ period of time should support most growth currencies. Canadian fundamental data continues to surprise and has forced traders to reconsider an earlier rate hike by Governor Carney. Trader’s opinions vary on the timing of a hike, consensus is probably July. Despite the trend remaining your friend and the Canadian Government throwing its support behind a ‘competitive currency’, the market should be looking for better levels to own the domestic currency, as these lofty heights are a tad rich. There is natural CAD resistance to be expected first time around parity.

Concerns that China will take additional steps to cool its economy have the potential to dampen demand for raw- material exports from Australia. Hence, the reason why the AUD has retreated from its two month highs already printed this week. With rumors that China is about to raise interest rates to prevent asset bubbles occurring has the AUD sliding the most in three-weeks vs. the JPY as investors exit riskier positions. Prior to these rumors, it seemed the stars were lining up for a stronger AUD. Expectations for low interest rates in the US and Japan was fueling risk appetite. In retrospect, the AUD advance this week had ‘underperformed’ other currencies gains vs. the dollar as traders reflect ‘a paring in expectations for an Apr. interest rate hike following the RBA board meeting minutes’. 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 (0.9202).

Crude is lower in the O/N session ($81.66 down -54c). Despite crude remaining in bullish territory, traders were happy to lock in some profit after printing a 10-week high earlier this week as the dollar advanced. Technically the market remains optimistic, while fundamentally weak demand has us not so. In reality, US demand is better y/y, but we are still some ways from calling it a ‘tight’ market. The bullish print this week was fuelled by the weaker than expected weekly inventory headlines. The report recorded a bigger than forecasted decline in supplies of gas and distillate fuels. Gas inventories fell -1.71m barrels to +227.3m last week vs. an expected decline of only -1.2m. Distillate supplies (which include heating oil and diesel) fared no better, decreasing -1.49m barrels to +148.1m. Stockpiles were forecasted to drop by -1.35m. On the flip side, inventories of crude rose +1.01m barrels to +344m. The market had anticipated an increase of +1.15m barrels, basically as expected. Other factors have also been raining on the ‘bears’ party. OPEC decided this week to keep its production limits unchanged ‘amid signs that a worldwide glut of crude is disappearing along with the recession’. Various analysts’ reports are now predicting that ‘demand for oil will recover this year, requiring additional supply’. The technical analysts are now eyeing $90 a barrel by year end. With investors believing that the economic situation will not get much worse should support commodities on most pull-backs. However, the Greek domino effect could provide some interesting support for the ‘bears’.

Despite staying close to home yesterday, the ‘yellow metal’ is expected to find some traction as investors seek an alternative to a ‘potential weakening’ of the EUR and low interest rates. Already this week, and after the Fed’s communiqué, we witnessed the commodity advance the most in a month on the ‘extended period of time’ comment. Analysts believe that with this ‘low rate environment combined with continued gold ETF interest and reduced Cbank sales’ should provide ‘strong’ support for gold for the next 18-months. Further interest to own the commodity may gain as the prospect of credit tightening in China persuades investors to seek a ‘haven in precious metals’. It seems that Europe investors want to continue to buy gold as an alternative to holding the EUR. However, the dollar’s direction remains the strongest indicator to wanting the metal or not ($1,121).

The Nikkei closed at 10,824 up +81. The DAX index in Europe was at 6,025 up +14; the FTSE (UK) currently is 5,662 up +20. The early call for the open of key US indices is lower. The US 10-year backed up 1bp yesterday (3.66%) and is little changed in the O/N session. Treasury prices managed to stay close to home despite stronger fundamental data. However, the 2’s/10’s spread again managed to tighten to its narrowest margin in 2-months (271bp) after jobless claims dropped for a third consecutive week and the Philly Fed index expanded this month at the fastest pace so far this year. Bond traders have technically been unwinding ‘steepener’ positions and putting on flatteners as the Fed is ‘still willing to err on the side of keeping rates low’. The Fed reiterated that the recovery will be ‘slow and that rates will remain low for an extended period of time’. Next week refunding requirements came in as expected at $118b (2’s $44b, 5’s $42b and 7’s $32b). Again, the market will need to make room to take down this supply.

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