EUR hobbling higher

Has the market got the momentum to apply ‘the squeeze’ on the weak EUR shorts and macro positions S/L that have been moved down by the recent low EUR print? Perhaps Prechter’s Elliot Wave two week EUR reversal predictions are beginning to take shape. Or is it easier to say that a well received Spanish bond auction, Chinese, Japanese and Australian expansion data is giving the green light for the EUR to ‘hobble’ again? Trichet’s guest appearance yesterday reassured the markets by stating that that the ECB will keep providing sufficient liquidity. In a roundabout way, he was able to defend the ECB’s bond purchases, making clear that the target of price stability is not threatened by these measures. Hooray for the EUR! Rumors of EU members preparing financial aid for Spain, if true, is going to ruin the opening ceremonies of the World Cup.

The US$ is stronger in the O/N trading session. Currently it is higher against 12 of the 16 most actively traded currencies in a ‘subdued’ trading range.

Forex heatmap

Cbanks and growth data out of Australasia managed to hog most of the headlines yesterday, burying somewhat the US Trade and weekly claims prints. April’s trade balance unexpectedly widened due to the revisions (-$40.3b vs. -$40.0). The deficit widened on both a nominal and real basis, suggesting that trade could result in a small drag on 2nd Q real GDP. Digging deeper, the decline in nominal exports (-0.7% m/m) outpaced that of imports (-0.4%). It seems that the stronger dollar has been making US goods less competitive. There seems to be a consensus amongst analysts that questionable Euro-zone growth coupled with a stronger dollar scenario could eventually have a negative impact on US trade’s contributions to growth. Breaking down the sub-sectors, the decline in exports was dominated by the consumer goods and food categories, while gains occurred in the industrial supplies and the auto sector. With respect to imports, the decline was led by consumer goods and the auto, while gains were the strongest in capital goods and industrial supplies. If we excluded the volatile petroleum component the trade deficit expanded by a wider margin, up +4.1%, m/m (US$1.1 billion). The non-petroleum exports plunged -2.0%, while imports were little changed at -0.7%.

There were no surprises in the weekly claims report as the headline print remains very much range bound (+456k vs. +459k). Collectively, initial (+456k), continuing (+4.462m) and emergency benefits (+4.99m) all fell. Digging deeper, one notices that the 4-week moving average is sitting at +463k, an increase of +2.5k w/w. Finally, somewhat of a positive note, the number of individuals who continued to receive jobless benefits declined by -255k to +4.46m (the lowest level in 18-months).

The USD$ is higher against the EUR -0.22%, GBP -0.15%, CHF -0.03% and JPY -0.32%. The commodity currencies are weaker this morning, CAD -0.27% and AUD -0.76%. The loonie continued its winning streak yesterday, printing a three week high as investors speculated that European fiscal woes would be offset by other regional expansions. Stronger compelling data out of China and other Australasian members encouraged investors again to strap on some risk, boosting commodity and equity prices. This is always a plus for growth currencies. With Trichet giving his own policies a thumb up and stating that monetary policies ‘will do all that’s needed to maintain price stability over the medium term’, seemed to give the ‘stability theme’ a boost. For most of this week, the CAD has got a leg up from its own domestic fundamentals and the idea of using the currency as a proxy for a safer heaven asset. Overall, the loonie is certainly holding its own after the BOC’s rate hike last week (+0.50%). Year-to-date, the currency has been the worlds second best performer (+11.4%) vs. its southern neighbor after the JPY. With the upcoming G8 and G20 meeting in Toronto, expect Canadian policy makers to become more vocal on how the impact of Europe’s debt crisis on Canada may escalate. Using the loonie as a safer way to play an economic recovery in the US with linkage to commodities and less banking or fiscal noise has speculators better buyers of the currency on dollar rallies.

The AUD was completing a perfect hitting streak this week until signs that China’s inflation data may warrant authorities taking steps to cool their economy has weighed again on growth currencies. O/N data revealed that China’s inflation quickened to the fastest pace in 19-months, heightening speculation that the PBOC will hike interest rates. Already this week, stronger domestic fundamental data had aided the AUD. Australian employment data surprised to the upside, adding +26.9k new jobs vs. an expected +20k and pushing the unemployment rate down from +5.4% to +5.2%. It was the third consecutive month of job gains, emphasizing the RBA’s call that that economic growth will accelerate this year. Dealers have been increasing their bets that Governor Stevens will resume the country’s most aggressive round of monetary tightening. Currently Australia’s jobless rate is almost half that of both the EU zone and the US’s. Up until this point, 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 the growth currencies. So far, it seems that the crisis in Europe has not had a material impact on the Australian economy. China is Australia’s unknown variable. Depending on equities and commodities, some investors are looking to buy AUD on dips (0.8467).

Crude is lower in the O/N session ($74.51 down -91c). Crude prices traded higher yesterday, appreciating nearly +7% this week, on the back of global expansion reports in China, Japan and Australia. Positive global bourses and a EUR finding some traction had dragged the commodity higher. It seems that the combination of O/N profit taking and the fear that China may cool its economy again has pressurized oil prices. This week’s EIA report had temporarily provided an underlying bid to the market. The report revealed that oil inventories fell for a second straight week, easing worries about excessive domestic supply. Crude stocks fell -1.8m barrels, more than double the streets estimate of a -700k decline. It’s worth noting that the decline in inventory was not accompanied by a clear decline in demand. The US demand was at +19.376m bpd, down -3.2%, or 645k barrels w/w. Last week demand had topped +20m. On the flipside, gas inventories were expected to fall -400k bpd were little changed, down by just -8k barrels, to +218.9m. Interestingly, over the last four weeks the EIA said gas demand lagged year-ago levels by -1% at the start of the summer driving season. However, the IEA have increased its demand forecast for worldwide oil use in 2010 by +1.7m, or +2%, to a record +86.4m barrels a day. In fact, they have bolstered its projection from outside the OPEC by +65k barrels a day. Distillates stocks (including diesel and heating oil) increased by +1.8m barrels, about six times the expected increase. Refineries lifted operations relative to capacity to 89.1% from 87.5% last week (the highest rate in two years). It’s all about demand and as long as there is a perception of stronger demand than pull back is to be bought. However, short term technicals continue to point to a market being overbought.

After recording a record high print this week, the ‘yellow metal’ has fallen back to reality as the EUR and global equities have rebounded somewhat and eroding the precious metal’s safe haven appeal. We are now playing the technical game. How low can the commodity go after not been able to remain above the $1,250 price level? Generally, it has become the benefactor when all other currencies fail. The contagion debt effect not being contained has provided a reversal of fortunes for the commodity this year, appreciating year-to-date +14%. 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 questionable EUR has pushed investors to owning the yellow metal. Europeans have been content in using the commodity as a hedge against their European holdings, believing that the EUR has not bottomed out just yet. On the flip side, historically, ‘the physical market is unlikely to provide much support for gold over the summer months which are typically the seasonally weakest for jewelry demand’. Buyers are waiting in the wings to purchase product on pull backs ($1,222 -10c).

The Nikkei closed at 9,705 up +163. The DAX index in Europe was at 6,057 up +1; the FTSE (UK) currently is 5,153 up +21. The early call for the open of key US indices is higher. The US 10-year backed up 7bp yesterday (3.27%) and is 2bp in the O/N session (3.29%). Treasuries felt the weight of global bourses in the black after China, Japan and Australian expansion data persuaded investors to lighten up on their risk aversion strategies. The final US auction of the week, 30-years-$13b long bonds, had dealers well prepared to take it down with ease. The long-bonds reopening came with a yield of 4.182%. The bid-to-cover ratio was 2.87 compared with average of 2.65 from the past four auctions. The indirect bid (foreign buyers) was +36% compared with an average of +30.4%. The direct bid category was +20% vs. +25.3% four auction average. At the moment, the market seems happy entertaining risk-on trading strategies with 10’s resistance at 3.30%.

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