Ascension Day is not for the EUR

With little support from the bigger boys out of mainland Europe due to Ascension Day, the market is trying to push the EUR through last week’s lows. Lack of liquidity, double touch option barriers and a malaise that the EUR has no inclination of technically trading higher is only compounding the currency’s downfall. Its day’s like this that end up being the most volatile. At these levels the EUR does not seem to have a heart beat, and the market does not seem to want to resuscitate it. This can only mean that despite the record speculative short and European investors divesting into gold will only push the EU/IMF accord supported currency lower. The market continues to take the attitude, ‘we will see you down there’.

The US$ is weaker in the O/N trading session. Currently it is lower against 10 of the 16 most actively traded currencies in a ‘subdued’ trading range.

Forex heatmap

Yesterday, it was not surprising to see the US trade balance widen for Mar. (-$40.4b vs. -39.4b). This regular announcement is beginning to have an anemic effect on the markets. The deficit has widened to its highest levels in over a year (+2.5%) on imports climbing faster than exports. The ‘widening’ is evidence that the US recovery remains in an upward trend. The uptick in consumer and business investment equates to imports needing to keep growing. On the flip side, one should also expect export numbers to improve as other economies begin to find their own growth traction. Digging deeper and breaking down the numbers, imports advanced +3.1% to $188.3b, led by a +$2.76b in crude purchases and a surprise increase in demand for foreign-made cars. If one excluded oil then the trade gap actually narrowed to -$15.6b from -$16.4b m/m. Exports, on the other hand managed to surge +3.2% to $147.9b. The increase was concentrated mostly in the emerging Asia and Latin America. Year-to-date, the EUR has slumped -12% vs. the greenback, this depreciation may eventually dampen the Euro-zones economic recovery. Various analysts are now forecasting a double-dip for the region which would result in only impeding US’s export growth.

The USD$ is lower against the EUR +0.15%, GBP +0.16%, CHF +0.18% and higher against JPY -0.23%. The commodity currencies are stronger this morning, CAD +0.73% and AUD -0.16%. The loonie remains in ‘no man’s land’, planning its assault on parity again. Yesterday, it was well contained, but there is life in the currency in the O/N session. Even with a weaker trade surplus print yesterday (+0.3b vs. +1.2b), it had little effect on the currency. On a cross related basis the CAD continues to find strong buyers and has managed to print an 8-year high vs. the EUR this week as investors seek surety in a currency that has strong fundamentals. Risk aversion trading strategies that historically require purchasing of the USD and selling of the loonie are simply being ignored. The dollar has been in demand vs. most of its other major trading partners and not against its largest. This week, the CAD retreated from a three-month low, after the EU/IMF accord announcement, as a record increase in ‘their’ employment last month (+108k vs. +24k) has dealers pricing in a rate hike by the BOC next month. Technical analysts have noted that the greenback has wanted to grind higher for surety reasons despite the threat of Canadian interest rate hikes, but, the countries stronger fundamentals coupled with a ‘rapid’ gold market is bringing loonie buyers on dollar rallies back into the market. Loosening risk aversion will only promote the currency even more.

It’s not surprising with the doubt that the markets are experiencing with the EU/IMF accord that growth currencies have retreated from their initial euphoric high recorded earlier this week. However, saying that, the AUD gained support last night from a stronger job’s report. Job growth accelerated last month, backed by full-time employment. Employment advanced for a second consecutive month (+33.7k vs. +22k), but managing to keep the unemployment rate steady at +5.4%. It’s noted that most of the jobs gains were in Queensland, which is the ‘source of much of the coal shipments to China’. The AUD in the O/N session extended its gains on speculation that the RBA may need to keep raising interest rates, despite signaling a pause last week (0.8982).

Crude is weaker in the O/N session ($74.82 down -83c). This week’s inventory EIA report has again put pressure on crude. Stocks have climbed for the 14th time in the last 4-months as refineries had various units lay idle. Supplies of crude increased +1.95m barrels to +362.5m vs. a forecasted climb of +1.6m. Inventories at Cushing increased +784k barrels to +37m (the highest level in 6-years). Not helping the cause, refineries operated at +88.4% of capacity, down -1.2%, w/w, the first decline in two months. On the flip side, gas inventories managed to fall, down -2.81m barrels to +222.1m. Analysts had expected an increase of +400k. This is certainly a bear report for the commodity. Of late, both the US economy and the dollars strength and not oil fundamentals have driven the market. The IEA has again cut its estimate of world oil demand this year by -220k to +86.4m barrels a day. According to the same organization, OPEC will need to pump +28.7m bpd to ‘balance global oil demand and supply this year’, that’s -400k barrels less than last month’s estimates. The market is now defending the $73-75 support levels, where earlier this week it had expected the commodity to revisit the $80 handle. Over the last 5-trading sessions the ‘black gold’ has managed to shave -13% of its value. Recent prices had been supported on ‘expectations that demand will climb as economies rebound’, however, the market will now rely on fundamentals and the oversupply of the commodity. Expect the market to continue to be better sellers on rallies.

Gold continues to outpace other asset classes and constantly recording new record highs (USD, EUR, GBP, JPY, CHF) on concerns that the EU/IMF loan accord to bail out indebted nations in Europe may not be enough to contain the sovereign debt crisis. Investors are speculating that the aid package could ‘cement easier monetary policy’ and promote inflation. In Europe, investors want to be in the ‘currency of last resort’ and are using the ‘yellow metal’ as their second reservable asset, supplementing their EUR denominated assets. Others have outright been liquidating their EUR holdings and buying gold ahead of a possible ‘dissolution of the monetary union’. Many foresee the aid package as quantitative easing. With the chances of monetary tightening being postponed in Europe is positive for the ‘yellow metal’ as interest rates are an ‘opportunity costs for non-yielding assets’. Year-to-date, the yellow metal has appreciated +13% on European contagion fears, while the EUR has depreciated -12% fueling demand for the commodity as an alternative investment. The technical bulls believe that $1,400 is a possible one-year target. For now, the market is a better buyer on pull backs ($1,235).

The Nikkei closed at 10,620 up +226. The DAX index in Europe was at 6,199 up +16; the FTSE (UK) currently is 5,388 up +5. The early call for the open of key US indices is lower. The US 10-year backed up 2bp yesterday (3.55%) and is little changed in the O/N session. The treasury market took down the second tranche of this week’s $78b supply of new product. Again dealers quite rightly cheapened the curve in anticipation. Yesterday’s $24b 10-year note was well received and yielded 3.548%. The indirect bid (a proxy for foreign demand) was 42% compared with 40.9% for the past eight auctions. The direct bid (non-primary dealers etc) jumped to 25% vs. 10.7% also in the past eight offerings. With the market needing to take down $16b long-bonds today and equity markets edging higher should provide further pressure to the curve.

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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