Canada $1 billion G20 answer

What did Canada get for the ‘billion-dollar’ boondoggle? G20 members set deficit-reduction targets and agreed to pursue higher capital requirements for banks ‘once’ economic recoveries take hold. The advanced economies will aim to stabilize their debt-to output ratios by 2016. In the real world, too many pledges never seem to sway investor confidence. The tight pledge timing does not take into account the economically unexpected and the unplanned, where is your time table then? Market reaction, muted at best, it will focus on confidence and US employment numbers out later in the week. It certainly should be more ‘headline’ grabbing that the G20’s past weekend exploits.

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

Forex heatmap

G20 has come and gone and investors again seem to be playing lip service to ‘whatever’ was said. The Capital markets trend remains intact with investors concerned about the imbalance of global growth and if growth itself is sustainable. The G20 has endorsed European austerity plans. For PM Cameron it’s a must, as the country was in danger of losing market support and perhaps spiraling into a Greek like effect. The market is back to focusing on this weeks numbers. This morning we get US consumer spending, analysts anticipate little change as Americans are expected to have used wage gains to rebuild savings. Later in the week, we need to see a good US employment print to drag investors back into the market.

The USD$ is higher against the EUR -0.12%, GBP -0.27%, JPY -0.13% and lower against CHF +0.42%. The commodity currencies are mixed this morning, CAD +0.12% and AUD -0.20%. The loonies four day weakness on the back of declines in equities and commodities had investors seeking sanctuary in some risk-aversion currencies abruptly came to an end on Friday. It has continued its impressive run in the O/N session trying to test strong support at 1.0300 levels. With oil and gold prices doing an about turn gave the CAD its bid again. The recent weakness has given the stubborn bulls a better average to enter new long CAD positions. Despite domestic fundamental data showing that the Canadian economy is ‘firing on all cylinders’, the recent bid to the loonie may have been a tad overdone and a healthy purge is what we got. Speculators continue to place bets that Governor Carney will raise interest rates faster than other developed countries. Big picture, the CAD is holding its own as the currency is seen as a safer way to play an economic recovery in the US with linkage to commodities and less banking. Now, with talk that the currency is to be used as a Cbanks safe haven destination for capital should lend even more support to the currency in the medium term. Do not be surprised to see the currency trade beyond parity in the coming months.

The AUD got a temporary lift on speculation that new PM Gillard may compromise on a proposed mining tax after, however, signs that a weaker global economic may exhaust demand for higher-yielding assets in the near term. The initial aftermath of the G20 has not materially changed risk attitude. Traders continue to take the high as global risk sentiment, on the whole, is weakening, which causes growth related currencies such as the AUD to succumb to increased selling pressures. Earlier this month, comments from the RBA, who said that Europe’s debt crisis would ‘inevitably weigh’ on global growth, had fueled speculation that the Governor Stevens 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’. To date, the crisis in Europe has not had a material impact on the Australian economy, but, that’s been called into question. With European stress test disclosures lined up failing to calm investor’s fears has technical analysts wanting to sell the currency on rallies despite the positive fall out from a compromise on the mining tax (0.8730).

Crude is lower in the O/N session ($78.61 down -25c). Crude prices temporarily managed to advance in the O/N session on weaker global bourses after the dollar lost traction vs. the EUR, increasing the investment appeal of commodities. The commodity ended last week under pressure after the EIA inventory release reported an unexpected gain in supplies and US data showed that the purchases of new homes tumbled the most on record m/m. Oil stockpiles rose +2.02m barrels to +365.1m vs. an unexpected fall of -800k barrels. On the flipside, gas supplies fell -762k barrels to +217.6m vs. an expected market decline of -180k barrels. Imports of crude oil climbed +4.3% to +10.1m barrels a day, the highest level in 18-months. The headline print certainly fly’s in the face of the ‘bulls’ way of thinking. Crude stocks remain well above the five-year average level, and are +3.2% above a year ago, the biggest year-on-year surplus in 6-months. Distillate stocks (diesel and heating oil) rose +297k barrels, less than expected as demand dropped to its lowest level in 7-months. Currently there are too many negative variables that support the bear’s short positions. The fear that a double dip is on the cards has the speculators wanting to sell. Year-to-date, the commodity has appreciated +11%. Direction is dictated by demand and with ample supply and global growth worries has speculators once again wanting to sell on rallies.

Bigger picture, Gold continues to be a safe heaven attraction. With the Fed indicating last week that they are willing to keep rates low for an extended period of time pared some of the dollar recent gains and by default the yellow metal is providing an alternative investment vehicle. The commodity price ended the week on a bid note as ongoing credit worries and concerns about a global economic recovery trigged a safe-haven demand for the metal. Technically, pull-backs have been bought. The commodity’s prices will remain robust on speculation that European’s Economic woes will be prolonged. With broader risk appetite under pressure, the market is capable of printing new record highs again. The upward bias trend remains intact as the ‘yellow metal’ is trading with a greater consideration of its safe haven status. The asset class is well sought after, technically encouraging individuals to want to own more of it for hedging purposes. Year-to-date, gold has gained +16%. Generally, it has become the benefactor when all other currencies fail. Thus far, 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 all pull backs as equities remain under pressure ($1,255 -30c).

The Nikkei closed at 9,639 down -44. The DAX index in Europe was at 6,127 up +58; the FTSE (UK) currently is 5,075 up +28. The early call for the open of key US indices is higher. The US 10-year eased 1bp on Friday (3.11%) and 2bp in the O/N session (3.09%). All last week, Treasury prices remained better bid because of the disappointing US housing data and on the Fed’s announcement that they will keep ‘rates low for an extended period of time’. This week’s direction will depend on how North America interprets G20’s solidarity on deficit target reductions and are they in fact a realistic goal. The main event will be NFP this Friday. The cost of Greek CDS’s surging to a new record is again pressurizing global bourses and given the FI asset class support. The belief that the US economy’s momentum is not being built upon should continue to provide a better bid on deeper pullbacks.

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