No EURO Irish Wake Just Yet

The Forex market will make Fixed Income traders out of us yet. Understanding and appreciating global yield curves helps us in on our Forex odyssey. Yesterday it was the health of the Polish and Portuguese debt demand that managed to convince investors to do a U-turn from adding to their risk aversion trading strategies. This morning, dealers held their breath for the Irish EUR400-600m 3 and 6-month T-Bill auction. Yields north of 2% and 2.35% would only contribute to the recent concerns that the Euro-zone sovereign debt crisis has not gone away. Results saw yields actually drop from the previous sale last month (+1.925% and +2.19%). One has to wonder how active is the ECB pursuing purchasing Euro-zone bonds to provide support?

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 ‘whippy’ trading range in the O/N session.

Forex heatmap

There were no surprises in the Fed’s Beige book yesterday. It reconfirmed that US growth slowed over the summer with some sectors faring better than other, especially agriculture and manufacturing. The biggest weaknesses, not surprisingly remains in real estate and construction. Recent data shows that home sales continue to fall after the expiration of a federal tax credit. The Fed also noted that bank lending, a barometer for future growth, witnessed only a small improvement. ‘Most districts reported little or no change from existing low levels of commercial and industrial lending, as businesses remained quite cautious about expansion plans’. Despite the subdued negativity, they reassured the market that the ‘economy was still growing’. Markets initial reaction to this and Obama’s Tax breaks was non-committal. ‘Economic growth at a modest pace was the most common characterization of overall conditions’. Not too much of a surprise was the report indicating that the ‘price of wages and goods and services remained limited’, which suggest benign inflationary pressures in the economy. Lower yields are here to stay for the medium term.

The USD$ is higher against the EUR -0.07%, GBP-0.56%, CHF -0.42% and lower against JPY +0.17%. The commodity currencies are stronger this morning, CAD +0.23% and AUD +0.73%. Wow! Did dealers ever get caught offside after the BOC hiked for the third time this year to +1%? The decision was not even unexpected. They were left holding copious amount of dollars when the sucker punch, the Ivey PMI blew all analysts expectations out of the water (+65.9 vs. 55.9). In his following communiqué, Governor Carney signaled that Canadian policy makers may increase them again this year as the nation’s economy continues to grow. They said ‘financial conditions have tightened modestly but remain exceptionally stimulative’. The market took this as dovish and a signal to own more CAD. Most had anticipated that Governor Carney would have expressed a tad more caution. However, a small not so insignificant disclaimer did appear in his speech when he stated that ‘Canada’s recovery will be slower than projected because of a weaker outlook for the economy of US, and further rate increases need to be carefully considered’. Also aiding the currency’s rise is Fitch Rating’s reaffirming the country’s ‘outlook as been stable’. The one directional play may have overshot its mark in the short term. Do not be surprised to see the market take some dollars back ahead of tomorrows employment report. A favorable report brings parity back to the table.

The AUD is on a roll, threatening to take out yearly highs after recording new fresh 4-month prints on stronger data in the O/N session. The currency happened to advance against all its major trading partners after employers added more jobs than analysts anticipated (+30.9k vs. +25k) and the jobless rate fell (+5.1% vs. +5.3%). Traders are once again increasing their bets that the RBA will hike at its next meeting. Futures prices are currently recording a +26% that Governor Stevens will commence tightening again on Oct. 5th. Analysts believe that the market is somewhat underestimating the number of chances of further tightening over the next 6-12 months. 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 (0.9255).

Crude is higher in the O/N session ($74.85 +18c). Yesterday, oil reversed its earlier losses as rising global bourses helped to support prices against a ‘naysayers’ belief that domestic inventories in the US are excessive. The market now believes that a serious rise in risk aversion and a bigger drop in global stocks would threaten that $70 psychological level. At the moment, the market does not have the momentum to follow through on this week’s loss. Earlier this week, the EUR plummeting vs. the dollar had curbed the appeal of commodities as an alternative investment to the greenback somewhat. Last weeks inventory report provided a surprise and 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. We need another bearish surprise in this morning’s inventory report to push crude to test the $70 psychological support level. It’s starting to look further and further away.

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 ($1,256 -80c).

The Nikkei closed at 9,098 up +73. The DAX index in Europe was at 6,157 down -7; the FTSE (UK) currently is 5,442 +13. The early call for the open of key US indices is higher. The US 10-year backed up 5bp yesterday (2.65%) and is little changed in the O/N session. Improved demand for Polish and Portuguese debt product yesterday eased some of the market concerns and had investors lightening up on their risk aversion trading positions. Many companies are lining up to sell debt, continuing this week of heavy issuance as the private sector tries to take advantage of these historical low yields. The second tranche of this week’s $67b auctioned debt was well received. The $21b, 10-year product yielded +2.67%. The bid-to-cover ratio was 3.21 compared to an average of 3.04. Indirect bid was strong at +55%, while the direct bid was +7% compared to an average of +14.3%. The 2/10’s spread is little changed at +214bp.

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