EUR in no-mans land

Bernanke comments that the US economic recovery is moving at a ‘moderate pace’ has temporarily overshadowed concerns that the European sovereign debt crisis is spreading. Quite frankly, what else can he say? He needs to sooth and encourage consumer confidence to sustain whatever growth they are experiencing. Unlike the ECB who is trapped when it comes to their currency. If they tighten, rates would only serve to weaken the economy even further and lead to more selling of their currency. If they eased, the last remaining longs that backed the supposedly ‘Bundesbankish’ ECB would probably abandon all their remaining EUR investments, further pressurizing the EUR. Even with the record short positions, the weak state of affairs has investors nursing their winning crowded positions, and this despite sentiment realizing that we will experience some ugly short covering market rallies like yesterday. It’s expected to happen as one fight’s for its own existence.

The US$ is mixed in the O/N trading session. Currently it is lower against 9 of the 16 most actively traded currencies in a ‘subdued’ trading range.

Forex heatmap

Bernanke aided Capital markets yesterday in the sense that he continues to see economic expansion and does not think there will be a double-dip recession. Is he not the same Bernanke that denied knowing anything serious was amiss before the financial crash in 2008 in a Time magazine article? It seems that Fed officials are at opposite ends when it comes to interest rates, perhaps this is leading to a split within the Cbank? Chicago Evans is arguing that high unemployment and low inflation justifies holding rates at very low levels. Yesterday he said that he thinks that they ‘will continue to have an accommodative policy stance for quite some time’. His stable-mate, Hoenig, reiterated his call for the Fed to begin raising rates soon, bringing them to +1% by end of this summer. Currently Capital markets is deflated, it has had all the ‘stuffing knocked out’ and is taking a breather before the next onslaught.

The USD$ is lower against the EUR +0.29%, GBP +0.20%, CHF +0.11% and higher against JPY -0.13%. The commodity currencies are stronger this morning, CAD +0.48% and AUD +0.91%. Despite the disappointing Canadian housing starts number yesterday (+189k vs. +203k) the loonie appreciated for a second consecutive day as fundamentals persuaded investors to shy away from ‘higher-yielding assets and toward those of nations with strong balance sheets’. This was also aided by the support of commodities and equities. When it comes to risk aversion and questionable growth, it’s the commodity currencies that are normally the most affected, but on the whole the loonie is certainly holding its own after the stronger domestic data and BOC hiking rates last week (+25bps). Year to date, the currency has been the worlds second best performer (+10.6%) vs. its southern neighbor after the JPY. With the upcoming G8 and G20 meeting in Toronto or otherwise know as the ‘Austerity gig’, Canadian policy makers are beginning to become more vocal on how the impact of Europe’s debt crisis on Canada may escalate. Carney and Finance Minister Flaherty in Korea last weekend called on economies to boost domestic demand and signaled out China’s need to revalue its currency as part of any effort to rebalance global growth. The market is seen using the CAD as a safer way to play an economic recovery in the US with linkage to commodities and less banking or fiscal noise to be concerned about. Until the loonie breaks out of the 3c range (1.0400-1.0700), orderly CAD buying is preferred on dollar upticks.

Australian consumer confidence fell last night (-5.7% to 101.9) for a third consecutive month, after the RBA hiked rates for the sixth time in eight months. This is providing stronger evidence that business and consumer sentiment may cool economic growth this year down under. The AUD has felt the pinch for most of this week as global policy makers seem to be heading for a collision over strategies for a recovery. However, in the O/N session, the currency got a reprieve and found favor amongst investors on the back of Asian bourses seeing black and stirring demand for higher yielding assets, at least temporarily. Questionable global growth has thus far naturally dampened demand for ‘commodity currencies’. Not containing Europe’s debt issues could lead to a global double dip and an aggressive sell off in growth currencies. So far, it seems that the crisis in Europe has not had a material impact on the Australian economy. Depending on equities and commodities, some investors are looking to sell AUD on upticks for now (0.8273).

Crude is higher in the O/N session ($72.57 up +58c). Crude prices trade a tad higher, dragged by Bernanke’s comments that the US economic recovery is ‘moderately paced’. He does not think there will be a double-dip recession. The market has been trying to digest and come to terms with the ‘weaker’ employment report and the EU debt containment efforts. Fundamentally, there’s been a change in the perception of how solid the global rebound is, as questionable growth is generally leading to a weaker commodity prices. Even the softer than expected weekly EIA report has done little to bolster the demand on mass for the black-stuff. Last weeks oil inventories recorded a decline of -1.9m barrels vs. an anticipated -1m. Not to be outdone, total gas inventories fell by -2.6m barrels. The market had expected an increase of +750k. On the flipside, distillates stockpiles increased by only +500k barrels whereas capital markets were expecting to double the headline print. This morning we get to see the weekly inventory report in its allotted time slot after last week’s shortened holiday week. The technicals continue to point to a market being overbought in short term. Sellers remain on upticks as investors become moderately risk averse.

A new record print was realized yesterday with the ‘yellow metal’ remaining in demand as an alternative to the EUR. Technically, it has become the benefactor when all other currencies fail. Rumors of the contagion debt effect not being contained are providing a reversal of fortunes for the commodity. The Fitch rating agency released a ‘beware of UK’ notice yesterday. The threat to global growth from Europe’s debt crisis and weaker global bourses tends to increase the demand for the commodity as a ‘safer haven’ on pull backs. The currency concern’s is only promoting a case for owning the yellow metal. Europeans are content in using the commodity as some sort of hedge against their European holdings, believing that the EUR has not bottomed out just yet. With India’s gold import numbers surpassing China as the world’s largest user of the commodity has been providing a natural. For now, the market is a better buyer on deeper pull backs ($1,238 -330c).

The Nikkei closed at 9,439 down -99. The DAX index in Europe was at 5,875 up +7; the FTSE (UK) currently is 5,023 down -5. The early call for the open of key US indices is lower. The US 10-year backed up 3bp yesterday (3.18%) and is little changed in the O/N session. Treasuries happened to pare earlier gains as equity markets saw black. Expect dealers to push yields back up a tad so as to take down this weeks remaining supply at a reasonable rate (10’s-$21b today and 30-years-$13b tomorrow). Yesterday’s 3-years yielded 1.22%. The bid-to-cover was 3.23 after last months 3.27 cover rate. The last 3-year sales saw an average of 3.08. Indirect bidders took 47% of the supply and direct bidders took 16%. The short term bigger picture has treasury yields remaining under pressure on EU efforts to contain Europe’s debt crisis. At the moment, the market seems happing entertaining risk-off trading strategies.

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