Irelands Euro crisis and its not soccer

The 750b EUR bailout months ago still cannot sooth investors fears, pushing the gap between the Bund, Irish and Portuguese debt to an all time high this morning. The market continues to worry about the banks that hold Greek sovereign debt. A defaulting Greece would lead to a financial meltdown. Following the money from Greece s ‘secret financial transactions it used to conceal debt’ is proving to be an accountants nightmare. Not helping investors confidence is the breaking of the ranks by an ECB member. This morning, not throwing any cold water on the situation is Weber, stating that ‘the global financial crisis is not yet over and setbacks in financial markets cannot be ruled out’. Currently it’s a two horse race to the exit between the Irish and the Greeks as rumors suggest that Ireland needs to tap the EU for help.

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

Forex heatmap

The markets are waking up after a few weeks hiatus and again is buying into the financial meltdown theme. The beginning of the summer we loved the dollar, then we could not get rid of it quick enough, as weaker US data became persistent, and now, again we romance the dollar as it seems that the second day back to school and we loath the PIIGS ‘again’. The transparency of information is creating far more volatility and information overload. Bring back the telex-machine! The market continues to feed off EU financial bank rumors and Japanese Finance ministers rhetoric. Thus far, today is a new day with yesterday’s theme. The market requires some data to squash most of these rumors.

The USD$ is higher against the EUR -0.06% and lower against GBP +0.45%, CHF +0.20% and JPY +0.27%. The commodity currencies are mixed this morning, CAD -0.18% and AUD +0.34%. This is a big, shortened holiday week for the loonie. Starting with this mornings highly anticipated interest rate announcement by the BOC and ending with the release of the monthly jobs report on Friday. The BOC call is a spilt vote amongst analysts. Fact, futures are pricing in a +65% chance of a BOC tightening. It’s probably one of the toughest calls over the last decade. Fundamentally, the Canadian economy is recovering from the recession faster than its largest trading partner, already returning to its pre-recession employment levels. Even the Governor has said the current +0.75% still provides ‘considerable monetary stimuli’. There are perhaps two main reasons for tightening, firstly, real-rates remain negative and secondly, domestic data ‘is still showing signs of holding up relatively well’. That been said, a naysayer will point out the +5.8% 1st Q growth and then focus on the July’s +2% release, a -100bp fall from the BOC prediction, July’s job losses (the first in a year) and inflation, the core-rate slowing to +1.6%. Canada is not immune to weaker data reported south of its borders. It’s only natural that growth and interest rate sensitive currencies would experience some volatile moves on changing risk attitudes. One gets the feeling that the market is still rather long the loonie!

The AUD is currently trading close to its monthly highs ahead of this evenings jobs’s report down under. It’s anticipated that the release will show that employers will have added positions for a sixth consecutive month (+25.2k expected) and if so, put further pressure on the RBA to resume hiking interest rates. Analysts believe that the market is somewhat underestimating the number of chances of further tightening over the next 6-12 months. The currency also garned support O/N from data that showed that the number of loans granted to build or buy houses jumped by +1.7 in July. The market had been expecting only a 1% change.Not helping the currency will be the forming of a minority government. PM Gillard won the backing of key independent lawmakers this week, allowing her Labor Party to retain government and pursue a ‘tax on mining companies’. Technically, ‘the fiscal outlook looks worse under a minority government and management of an economy growing at +10% in nominal-terms may increasingly rest on the RBA’. At the moment the currency seems oblivious to potential European woes (0.9131).

Crude is lower in the O/N session ($73.68 -41c). Oil prices fell the most in a week yesterday, as the EUR plummeted vs. the dollar, curbing the appeal of commodities as an alternative investment to the greenback. Fear that the European debt crisis may worsen, coupled with weaker German factory order numbers has investors paring their expectation for global growth. Historically, this is also the week that traders will start to sell gas short, anticipating an increase in inventories over the next few weeks as the Labor Day in the US signifies the ending of the summer driving season, the peak gas demand period. Last weeks inventory report provided a smallish surprise and a short lived technical support for the commodity. It revealed an unexpected decline in supplies of distillate fuels. Distillates (heating oil and diesel), fell -739k barrels to +175.2m. The market had been expecting the inventory to increase by +1.15m barrels. Inventories of crude itself advanced +3.42m barrels to +361.7m Supplies were forecast to climb by +1.2m. The market is wary that the underlying situation has not changed, the fundamentals remain weak, demand does not look good and stockpiles of crude and products remain at a record high. Speculators remain better sellers on up-ticks in the short term and the market seems on course to take out the recent lows and make an assault on the $70 psychological support level.

Gold prices continue to advance on its record high print recorded earlier this year as individuals seek to protect their wealth. The uncertainty of recent data has investors contemplating boosting their demand for the commodity as a safe heaven. Last month, bullion appreciated +5.2% alone. Consumers are trying to put there cash somewhere more solid on mounting concerns that the global economy will struggle. Speculators again are supporting the various safe heaven assets on pullbacks, avoiding the riskier classes to invest in due to uncertainties in the markets. With a genuine fear for global growth, by default, should boost the demand for the metal as a protector of wealth in the grand scheme of things. Sentiment for the yellow metal remains bullish. The opportunity costs of holding gold are low due to falling interest rates ($1,260 +$1.60c).

The Nikkei closed at 9,024 down -201. The DAX index in Europe was at 6,083 down -34; the FTSE (UK) currently is 5,377 -30. The early call for the open of key US indices is lower. The US 10-year eased another 6bp yesterday (2.60%) and is little changed in the O/N session. With global bourses on the back foot and speculative concerns that European banks will need to up the ‘ante’ of their capitalization has investors heading to the sidelines. The longer end of the US curve leads the advance, managing to tighten the 2’s/10’s spread by 7-ticks to +212bp. Yesterday’s 3-year auction came in with a record low yield of +0.79% vs. a previous trough of +0.844%. The bid-to-cover ratio was 3.21 compared to an average of 3.25. Indirect bid was strong at +42%, while the direct bid was +12% compared to an average of +15.7%. This weeks total debt sales equate to $67b, later today we get to see what the markets appetite is like for the benchmark 10-years.

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