Weak EUR shorts not amused

A hive of activity this morning from all directions has ended up giving the EUR support. The darn currency will not go down, no matter what ‘kitchen sink’ is being thrown at it. The strong demand for Spanish long-bonds has temporarily alleviated some of that countries rumor filled concerns and boosted investor confidence somewhat. Tension, however, still remains about the debt situation there as the IMF seeks to talk to officials next week. The SNB will no longer pre-commit itself to forex intervention, given the limited success of past interventions. They are expected to accept a gradual CHF rise and not sharp movements. The dovish innuendos on not selling CHF on a ‘super-charged’ scale tried to push the EUR again under water. A surprisingly strong UK retail sales print (+0.6%) reversed sterling’s and equities losses, thus giving the EUR a leg up and squeezing weaker short positions out ‘again’.

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

Forex heatmap

Yesterday’s US data brought mixed reactions from capital markets. Industrial Production +1.2% rise did beat market expectations, largely due to a +4.8% weather related jump in utilities output (humid weather had individuals switching on the air conditioner early). Digging deeper, production of business equipment increased by +1.3% last month, the third consecutive monthly increase, and suggests that businesses are raising their capital expenditure. This can only be a plus for the 2nd Q GDP growth. Motor vehicle and parts output rose +5.5% rebounding from a previous decline. The revisions to previous month were small and offsetting, and the May results happened to push overall capacity utilization up a full percentage point (74.7% vs. 73.7%), but remains 6bp below its long term average. Analysts agree that the manufacturing data shows little signs of abating just yet. However, there are good reasons to expect to witness a slowdown in the second half of this year. Firstly, potential spillover from European Fiscal concerns and secondly a stronger dollar will create a weaker demand from abroad and restocking inventory issues in the US.

The May residential construction report was even weaker than anyone’s estimates and only points to bleakness in the future. The expiry of the homebuyer’s tax credit in April was the main reason behind the -10%, m/m, drop in housing starts (593k vs. 659k). Couple this with the number of building permits falling to +574k (-6%) suggests that ‘starts’ have much further to fall. Analysts believe that the ‘permits’ totals seem to suggest a further drop in ‘starts’ of -6% this month. Without further government support the housing market is in for a double dip. By default this will again lead to a decline in sales and prices.

Finally, Producer Prices (-0.3% vs. -0.1%) were dragged down by the drop in gas prices last month (-7.0%). Already this month, gas data is looking at a bigger depreciation in prices for the month of Jun. On the flip side, the core-PPI increased by +0.2% and pushed the annual core-inflation up to +1.3% vs. +1.1%. Theses numbers remained subdued. However, analysts expect it to rise over the coming months as the rise in the crude core-PPI finally to kick in.

The USD$ is higher against the EUR -0.20%, GBP -0.60% and lower against CHF +0.85% and JPY +0.24%. The commodity currencies are weaker this morning, CAD -0.33% and AUD -0.40%. BOC Governor Carney said ‘the uneven global recovery and prospects of renewed weakness in Europe mean that future increases in the central bank’s benchmark interest rate are not preordained’. ‘The Bank must balance the competing influences on Canadian activity and inflation of momentum in domestic demand and the increasingly uneven global recovery’. Analysts took away from Carney’s speech yesterday a message that is consistent with further hikes at each of the next few meetings and then a pause close to year-end. The loonie remains coveted, aided by equities and commodities rebounding somewhat from their lows yesterday. Investors and dealers are quietly increasing their bets that economic growth will eventually fuel demand for commodities. It remains the world’s second best performer (+13.0%) vs. its southern neighbor after the JPY. 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, just ask the Russians.

The AUD retreated for a second consecutive day as regional bourses fell, damping the enthusiasm to own higher yielding assets. The slide in commodities specifically affects the AUD as half of the countries exports are commodity based driven. Earlier this week, comments from the RBA, who said that Europe’s debt crisis would ‘inevitably weigh’ on global growth, is fueling speculation that the Cbank may keep rates unchanged until at least the end of the year. It seems that that ‘previous rate rises has given them flexibility to leave borrowing costs unchanged at next month’s meeting’. With Asian bourses back peddling from its highs on concerns that the world economy may falter is affecting all growth currencies. Last week, stronger domestic fundamentals like the country’s employment data, pushed dealers into increasing their bets that Governor Stevens will resume the country’s most aggressive round of monetary tightening. So far, it seems that the crisis in Europe has not had a material impact on the Australian economy. Technically, the market continues to want to buy AUD on dips (0.8652).

Crude is lower in the O/N session ($77.19 down -48c). Crude prices advanced yesterday after a somewhat bullish weekly inventory report dominated by the drop in refinery capacity rates. Refineries operated at +87.9%, down -1.2% from the previous week. Gas stocks declined -636k barrels to +218.3m last week with gas demand advancing +1.6% to +9.34m barrels a day (the highest level in nearly a year). Historically, gas consumption peaks sometime between US Memorial and Labor Day in Sept. (the height of the US driving season). On the flipside, crude oil rose +1.69m barrels to +363.1m vs. an expected -1m barrel decline. Inventories of distillate fuel (diesel and heating oil) increased +1.8m barrels to +156.6m vs. an expected +1m barrel gain. Even with demand creeping higher, there is sufficient supply. The market again seems to be embracing fundamentals. Positive global expansion reports have aided this asset class over the past week. It’s all about demand and as long as there is a perception of stronger demand then pull back’s are to be bought.

Gold has been one of the most difficult of asset classes to trade of late. Even with global bourses advancing, there is an appetite for the commodity. Technically the ‘yellow metal’ is trading with a greater consideration of its safe heaven status. Pull backs are being supported by doubts of sustainable global growth and by the technicals indicators showing that the metal wants to test higher. Commodity prices are finding it difficult to break down, which is, by default, technically encouraging individuals to want to own it for hedging purposes. It’s worth noting that the ‘yellow metal’ has outperformed equities, FI and other commodities this year because of the European Sovereign debt crisis. Gold has gained +12% as the EUR plunged -14%. Generally, it has become the benefactor when all other currencies fail. Year-to-date, 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. For now, buyers are waiting in the wings to purchase product on pull backs ($1,233 +300c).

The Nikkei closed at 9,999 down -68. The DAX index in Europe was at 6,219 up +29; the FTSE (UK) currently is 5,278 up +41. The early call for the open of key US indices is higher. The US 10-year eased 3bp yesterday (3.26%) and is little changed in the O/N session. Treasuries happened to advance for the first time in three sessions as the weaker housing starts and a falling PPI convinced speculators that the US economy could actually stall. The gains in prices were somewhat pared by the industrial production headline print. Basically, with inflation remaining somewhat benign and no future inflation pressures on the horizon are evidence that Bernanke and Co. have no reason in thinking about moving rates any time soon. Stronger rumblings that the US economy’s momentum is not being built upon should continue to provide some sort of bid on deeper pullbacks. Futures dealers are beginning to lean this way, contracts are pricing in a +28% chance of a hike by year end, that’s down from +40% a month ago. With no normalization of rates on the horizon, yields should remain low for the foreseeable future.

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