Irish Bonds Drag EUR higher

Capital Markets are feeling the effects of this push-pull trading strategy approach ahead of the FOMC rate announcement this afternoon. Euro-zone debt rumors are being offset by new and rampant rumors of an expanding Quantitative Easing program by Bernanke. Market consensus is betting that an announcement will only be forthcoming after the US mid-term elections in Nov. The European periphery markets are buoyed after the strong results in the Greek 3-month T-bill auction and Ireland’s successful long bond issue. Both Finance Ministers were able to offload most of their product at the top end of the scale, proving that the ‘downtrodden’ market movements were exaggerated in the last couple of trading sessions. The markets reaction is certainly a bullish signal for the European periphery and the Euro-zone markets.

The US$ is mixed in the O/N trading session. Currently it is lower against 12 of the 16 most actively traded currencies in a ‘whippy’ trading range.

Forex heatmap

Lack of US data did little to sway market prices one way or another yesterday. The US homebuilder confidence was unchanged last month (13 vs. 13). Probably the best thing that analysts could say about the release was that the ‘unexpected unchanged reading still does not put the index back at its record low’. The US housing market remains challenged (other releases this week should support that theory-building permits, housing starts etc). Analysts anticipate data to stay weak throughout the remainder of the year. The ‘future expectations’ component over the next six-months hovers at 18 (the lowest reading in 18-months). Digging deeper, walkthroughs (prospective buyers touring model) softened one point to 9. This is a good indicator (foot traffic) that shows that the market should be bracing itself for further decrease in home sales. There is very little to get upbeat about when one is discussing the US housing sector. With the lack of upward momentum in the private sector employment, household balance sheets constantly being challenged and potential buyer’s confidence being questioned equates to a buyer sentiment remaining cautious. Homebuilders continue to witness restrained credit conditions, direct competition from the foreclosed and distressed properties categories and a sizable shadow inventory of homes yet to hit the market. On that note the US housing sector should remain terminally ill.

The USD$ is lower against the EUR +0.55%, CHF +0.25% and JPY +0.38% and higher against GBP -0.19%. The commodity currencies are weaker, CAD -0.19% and AUD -0.13%. Yesterday’s Canadian wholesale Trade print for July (-0.1% vs. -0.3%) will do no favors for the GDP release later this month. Analysts note that it’s not the headline that’s the biggest concern, it’s the -0.3%, m/m, drop in real sales that will be a bigger volume-induced hit to value-added GDP. Digging deeper, inventories expanded for a fifth consecutive month, with stockpiles growing +0.5% to $53.1b. They were offset by a decline in motor vehicle inventories. Rising Canadian inventories are a risk factor to future growth in production and jobs as they occur in key sectors like manufacturing and wholesale trade. The released data did little to phase the currency’s value. The loonie happened to climb for the first time in three days as commodities and global bourses advanced. Speculators continue to covet higher yielding growth currencies like the CAD and AUD. US/CAD spreads are dominating the directional play of North American currencies. Month-to-date, spread trades have been the most fundamentally, macro-financial driven reason to want to own the loonie vs. its southern neighbor. A wider spread ‘reflects the improved monetary policy sentiment for Canada’ and is supportive for the currency. The loonie is receiving ‘three-prong’ support, a less dovish BOC, a currency being used as a proxy for growth and to a lesser extent a safer heaven investment. A higher percentage of speculators seem to have missed most of last weeks ‘move’, the market should expect to witness better buying of Canadian dollars on ‘big dollar’ rallies in the short term. It seems that parity is again back on the table.

Over the last quarter the AUD has been the best performing major currency. Various technical analysts now believe it is perhaps the most overvalued. Using ‘purchasing power parity’ (cost of goods relative to other countries), the AUD is close to being +27% too expensive. Since June, the dollar has rallied +12% vs. the ‘big dollar’, benefiting from its unilateral trade links with the Chinese economy. China is Australia’s largest trade partner. Not helping the currency will be the forming of a minority government. PM Gillard won the backing of key independent lawmakers this month, 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’. The problem, a proposed tax on mining companies will dampen demand for the nation’s assets. If we happen to witness global economic growth decelerating, then we could have the reallocation of funds back out of growth currencies just as quickly as it came in. The AUD has gained ground against all of its major trading partners as the ‘vix index’ of volatility softens, boosting investor appetite for assets tied to growth. ‘Clearly what happens in the Australian economy is now more dependent upon what happens in China’. Analysts believe that the market is somewhat underestimating the number of chances of further tightening by the RBA over the next 6-12 months (0.9464).

Crude is lower in the O/N session ($74.10 -76c). Crude prices rallied for the first time in five trading sessions yesterday, mostly on the back of global bourses advancing, signaling that economic growth will accelerate. Fundamentally, oil is looking at stocks as a proxy for growth. The market expects the commodity to trade sideways over the coming weeks. The ‘black-stuff’ will gyrate north and south of the psychological $75 print, until at least investors gets confirmation that the market is picking up, or that ‘the uncertainty and depressed conditions both here and within the Euro-zone spread’. The release of the neutral weekly EIA report last week, coupled with the announcement that Enbridge is prepared to restart a pipeline after repairs, had the commodity paring its earlier gains. The inventories release was very much inline with Capital Markets expectations. The weekly headline print showed that oil inventories fell -2.5m barrels vs. a market expectation of -2.6m. Stockpiles of gas declined -700k barrels vs. a market prediction of a -400k loss, and inventories of distillates (diesel and heating oil) decreased -300k vs. expectations of an -800k retreat. At +357.4m barrels, US crude inventories remain above the upper limit of the average range for this time of year. Crude imports rose +141k barrels to +8.99m bpd and this despite an outage by Enbridge, who provides a pipeline which brings crude directly to the US from Canada. Refinery utilization slipped -0.6% to +87.6% of capacity. 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. Analysts expect speculators to remain better sellers on up-ticks in the short term.

Gold climbed to its third record high, in as many sessions yesterday, as investors continue to seek protection on speculation that government programs to stimulate the economy will erode the value of the dollar and boost demand for the precious metal as an alternative investment. The FOMC meet later this afternoon and any mention of projects to keep the currency low will provide stronger support for the commodity. Year-to-date, the yellow metal has appreciated +17.3%, outperforming most of the other asset classes, as global sovereign-debt concerns and an ‘uneven economic recovery roil financial markets’. With the dollar currently trading within striking distance of a 5-week low vs. the EUR is also aiding commodity prices. Metals are heading for their 10th consecutive annual gain. Global ‘fear’ has the momentum, again, to push speculators back into this overcrowded, one-directional commodity trade. With the Fed on the verge of announcing further QE programs ‘tend to be supportive of asset prices and is fueling concerns about the potential longer-term inflationary impact of such measures’. The opportunity costs of holding gold are low due to falling interest rates, by default, the market should expect better buying of the metal on pull backs ($1,280 -110c).

The Nikkei closed at 9,602 down -24. The DAX index in Europe was at 6,311up +17; the FTSE (UK) currently is 5,622 +20. The early call for the open of key US indices is higher. The US 10-year eased 4bp yesterday (2.70%) and is little changed in the O/N session. Investors flattened the 2’s/10’s curve (+226bp) on speculation that the Fed will be more accommodative in its policy statement later this afternoon. Yesterday, the Fed happened to buy back $5.19b’s worth of product to aid them in flattening the curve and to prevent money from being drained from the financial system. A small proportion are betting on an QE announcement today, while others believe it would be more appropriate to announce something after the mid-term elections in Nov. With the sovereign debt crisis deepening in Ireland and US consumer confidence falling to a 1-year low, debt product is well supported on deeper pull backs.

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