This has been a long Ã¢â‚¬ËœshortÃ¢â‚¬â„¢ holiday trading week in North America with the same mixture of ingredients that have us trading in a Ã¢â‚¬ËœmajorÃ¢â‚¬â„¢ currency tight range. There have been a few winners to the risk on and off again, double-dip maybe or not, trading approach. Most notably the growth and higher yielding commodity assets like the Aussi and Loonie. Both currencies are technically threatening to print new yearly highs, both economies seem to be on an upswing, both Cbanks like hiking rates. The jobs report down-under was stellar, CanadaÃ¢â‚¬â„¢s is this morning and the currency is pricing in a stronger number. Its difficult not to like these currencies, even when the market wobbles, as their fundamental and technical downside seems rather limited at the moment. The world likes commodities and yield. Is the loonie parity on the table again? Imagine where the currency would be with sustainable global growth!
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 Ã¢â‚¬ËœsubduedÃ¢â‚¬â„¢ trading range in the O/N session.
Stronger US data gave risk lovers a Ã¢â‚¬Ëœleg upÃ¢â‚¬â„¢ yesterday. The US July Trade deficit narrowed (-42.8b vs. -47.4b) and the weekly claims report plummeted (+451k vs. +478k), tempering concerns that their economy is heading towards a double-dip. The trade gap fell -14%, the most in nearly 2-years. Digging deeper, exports rose to a 24-month high, adding support for the manufacturing sector, which along with agriculture according to the Beige Book release, has been the mainstay of the recovery. The market is wary, realizing that the Ã¢â‚¬Ëœeconomy is not firing on all cylindersÃ¢â‚¬â„¢, but are relieved that the manufacturing sub-sector continues to grow and is not on the verge of another recession. Exports increased +1.8% to +$153.3b, while imports declined -2.1%.
New weekly claims fell -27k last week to +451k, reversing the recent upward trend that was reflecting poorly on the US jobs market. This is another caveat of good Ã¢â‚¬ËœheadlineÃ¢â‚¬â„¢ news that is trying to ease concerns of a double-dip recession. Naysayers will talk about the distortions produced by the Labor Day holiday. A more accurate gauge is the 4-week moving average, which is less volatile, fell a more modest -9.2k to +478k. AnalystÃ¢â‚¬â„¢s note that itÃ¢â‚¬â„¢s a level thatÃ¢â‚¬â„¢s consistent with a Ã¢â‚¬Ëœsubdued private sector job creationÃ¢â‚¬â„¢. Continuous claims fell by -2k to +4.48m. The market should not and has not focused too much on the release.
The USD$ is lower against the EUR +0.34%, GBP+0.18% and higher against CHF -0.74% and JPY -0.0.03%. The commodity currencies are stronger this morning, CAD +0.25% and AUD +0.09%. Governor Carney has explained away the BOC hike this week by stating higher rates are somewhat offset by lower bond yields. In his communiquÃƒÂ©, Governor Carney signaled that Canadian policy makers may increase them again this year as the nationÃ¢â‚¬â„¢s economy continues to grow. Ã¢â‚¬ËœFinancial conditions have tightened modestly but remain exceptionally simulativeÃ¢â‚¬â„¢. The market has taken this as a dovish signal to own more CAD. The loonie is receiving Ã¢â‚¬Ëœthree-prongÃ¢â‚¬â„¢ support, a less dovish BOC, a currency being used as a proxy for growth and to a lesser extent a safer heaven investment. The BOC decision was not a total surprise, but, the sucker punch for the weak dollar bulls was the strong Ivey PMI that forced investors to liquidate their dollar longs. One also gets the feeling that the market seems to be getting ahead of a ‘stronger’ Canadian Employment report this morning. It would not be a surprise to see a relief rally after the report, as liquidity becomes a premium. Depending on whatÃ¢â‚¬â„¢s reported, many speculators seemed to have missed this Ã¢â‚¬ËœmoveÃ¢â‚¬â„¢ and would be expected to be better buyers on USD rallies. A surprisingly strong report will bring parity back to the table.
Again the AUD ends the week on a winning note, itÃ¢â‚¬â„¢s the fourth consecutive week for the currency to advance vs. the greenback as concerns eased that the US economy will slow, boosting demand for stocks and higher-yielding assets. The Chinese trade numbers also boosted the currency as ChinaÃ¢â‚¬â„¢s imports grew +35.2% y/y. The currency is threatening to take out yearly highs after recording new fresh 4-month prints. Data this week has also aided the currencyÃ¢â‚¬â„¢s climb as 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% chance 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 Ã¢â‚¬Ëœtax on mining companiesÃ¢â‚¬â„¢. Technically, Ã¢â‚¬Ëœthe fiscal outlook looks worse under a minority government and management of an economy growing at +10% in nominal-terms may increasingly rest on the RBAÃ¢â‚¬â„¢. At the moment the currency seems oblivious to potential European woes (0.9238).
Crude is higher in the O/N session ($75.71 +146c). Crude prices rose to a monthly high this morning as the weekly EIA report revealed an unexpected decline in inventories and US weekly claims benefits fell yesterday. This has boosted the already deflated optimism that US economic recovery will accelerate. Oil supplies fell -1.85m to +359.9m vs. an expected climb of +1m barrels. Not to be outdone, gas supplies also declined -243k barrels to +225.2m. They did happen to beat analystÃ¢â‚¬â„¢s forecasts of a decline of -1m barrels. The 4-week average demand for gas was +1.1% higher than a year earlier, averaging nearly +9.4m barrels a day. US refineries ran at +88.2% of total capacity, up +1.2%, w/w. The market had been expecting a decline to +86.3%. Finally, distillate fuel (diesel and heating oil) fell by -400k barrels to +174.8m barrels vs. an expected increase of +940k barrels. The market is wary that the underlying situation has not changed, the overall fundamentals remain weak and stockpiles of crude and products remain close to their record highs. Expect speculators remain better sellers on up-ticks in the short term as we continue to trade within a tight $5 range.
A healthy purge was warranted in the lemming gold trade of late and yesterdayÃ¢â‚¬â„¢s surprisingly positive weekly jobless claims provided the ammunition. The yellow metals price happened to fall the most in 6-weeks as US stock indices rose, eroding demand for the commodity as an alternative investment. The market will now have to wait and see where support comes back in for the commodity before piling again into that trade. There is an over whelming consensus that the precious metal remains poised to rally to all-time high this year amid global economic concerns. The uncertainty of recent data has investors contemplating boosting their demand for the commodity as a safe heaven. The problem, too many investors may own that Ã¢â‚¬Ëœone directional tradeÃ¢â‚¬â„¢ causing some weaker longs to become nervous about market pull backs. The opportunity costs of holding gold are low due to falling interest rates ($1,249 -$1.40c).
The Nikkei closed at 9,239 up +141. The DAX index in Europe was at 6,195 down -26; the FTSE (UK) currently is 5,486 -8. The early call for the open of key US indices is higher. The US 10-year backed up 9bp yesterday (2.74%) and is little changed in the O/N session. Improved weekly claims numbers pushed bond prices lower as investors curbed their demand for the safer asset class. Also hindering FI prices has been the up-tick in corporate issuance of late. The private sector is happy to try and take advantage of these historical low yields. The final tranche of this weekÃ¢â‚¬â„¢s $67b auctioned debt received a tepid response. The $13b, long bond yielded +3.82%, a 3bp tail. The bid-to-cover ratio was 2.73 compared to an average of 2.78. Indirect bid was +36%, while the direct bid was +8% compared to an average of +19.2%. The 2/10Ã¢â‚¬â„¢s spread also widened 3bp to +219bp.
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