Irish clarity needed to support EUR

It was inevitable. Ireland had no choice but to seek financial help. All the market has ever asked for was clarity. We still wait for the details of the assistance and the conditionality. What will the relief rally be like this morning in North America? Thus far, it has not been that impressive in the O/N session. Maybe investors had expected a clear cut resolution. This toing and froing between the Irish Government and EU/IMF team may persuade investors to shift focus to the fiscal woes of other debt laden peripheries like Spain and Portugal. It was this fear of a looming contagion that prompted officials to press Ireland to accept aid early. At the moment the market seems rather ambivalent to the resolution and more concerned with China’s monetary tightening actions.

The US$ is weaker in the O/N trading session. Currently, it is lower against 14 of the 16 most actively traded currencies in a ‘whippy’ trading range.

Forex heatmap

With the lack of fundamental releases over the last two trading sessions it was bound to happen that any relieving news from Dublin would act negatively on the dollar as investors again took back some of their insurance premium. With a holiday shortened trading week in the US, the market has much data to get through. The Irish resolution only ever called for clarity, and again we have to wait for details. Do not be surprised to see focus shifting to other debt laden euro-zone countries as investors try to gauge who will be next to use EU/IMF funds, maybe Spain or Portugal!

The USD$ is lower against the EUR +0.51%, GBP +0.58%, CHF +0.30% and JPY +0.11%. The commodity currencies are stronger this morning, CAD +0.40% and AUD +0.68%. The loonie was battered about on Friday after China’s new reserve requirement for Bank’s were announced, discouraging demand for assets related to economic growth. It was the second consecutive weekly loss for the currency vs. its largest trading partner as commodity prices found it difficult to maintain traction. Like any commodity and growth sensitive currency, market increased risk-appetite favors the loonie. Last week’s net foreign security purchase print and the provincial bond spread’s tightening to Canada’s continue to provide longer term support for the currency. Yesterday, BOC Governor Carney said that their monetary policy was flexible that he would adjust interest rates to meet inflation targets if the loonie continued to strengthen. The BOC has greater flexibility than the Fed as a result of a more robust recovery. At the moment, the market is tentatively happy buying the loonie on any dollar rallies as risk appetite increases and growth sensitive currencies benefit.

The AUD is inching higher, tracking the EUR, as Irelands acceptance of any aid package has revived demand for higher-yielding assets and reduce concern that the European nation’s banking crisis may spread. Even news that S&P’s had put NZD on negative watch prompted only a brief dip for the currency. Commodity and growth sensitive currencies have taken a specific beating over the last week as the Irish debt problems talks intensified. As the leading commodity currency, the AUD is highly vulnerable to any Chinese monetary actions. So, O/N gains have been somewhat capped after China ordered banks to set aside larger reserves for the second time in two weeks, draining cash from the financial system to limit inflation and asset-bubble risks. From a fundamental perspective, the decline have been somewhat limited after last weeks minutes indicated that Governor Stevens decision to raise interest rates was ‘finely balanced’. Policy makers said a ‘modest tightening’ was considered prudent when they increased the benchmark rate earlier this month (+4.75%). Market players are viewing corrective rebounds as fresh selling opportunities short term on the back of the Chinese variable (0.9938).

Crude is higher in the O/N session ($82.54 +56c). Oil prices on Friday solidified the commodity’s biggest weekly loss in three months on the back of China’s decision to raise banks’ reserve ratios. Market anticipates further monetary action to follow. The commodity also ended under pressure despite last week’s surprisingly weak EIA report. Investors remain on tender hooks, fearing that China may also attempt to rein in inflation further, which would also affect demand. Now that the dollar is on the back foot in the O/N session has given commodities a small lift. Crude stocks fell by -7.3m barrels last week, the largest weekly decline in 15-months. The market had been expecting a small decline of-100k barrels. Not to be outdone, the other fuel categories also declined. Gas inventories were down -2.7m barrels, while distillates (heating oil and diesel) fell by -1.1m. The market had expected a decline of-600k and -2.2m barrels respectively. Despite the negative readings, the US continues to experience a ‘large supply glut’, with crude and fuel inventories above five-year average levels. In September, inventory levels happened to print a 27-year high, and have been declining ever since. The ‘big’ dollars value will continue to influence prices despite the fundamentals. The oil market has lost -6.2% during the last five trading sessions. Continue to follow the dollar for direction as fundamentals take a back seat.

Gold prices have again tentatively found their footing after experiencing its longest losing streak in six months earlier last week. With the dollar under pressure has boosted the demand for the commodity as an alternative investment. Investors are back in the saddle using the commodity as a hedge against inflation and store of value. The fear that emerging markets are beginning to tighten their monetary policy could curb the demand for the commodity as a safe-haven asset. For most of last week a stronger greenback had restricted the demand for bullion, with gold usually trading inversely to the dollar. Speculators are expecting European debt concerns to eventually provide more support on these pullbacks, as Capital Markets shift their focus toward sovereign debt issues and away from QE2 debates. Year-to-date, the metal is up + 23.1% and is poised to record its 10th consecutive annual gain. For most of this year, speculators have sought an alternative investment strategy to the weaker dollar and have been using the commodity as a proxy for a ‘third reservable currency’ ($1,357 +$5.50).

The Nikkei closed at 10,115 up +93. The DAX index in Europe was at 6,878 up +35; the FTSE (UK) currently is 5,749 +17. The early call for the open of key US indices is higher. The US 10-years eased 8bp on Friday (2.87%) and is little changed in the O/N session. Over the past two week’s the FI market has witnessed an aggressive upward shift in the yield curve despite the Fed’s buyback program, dovish rhetoric and risk-aversion trading strategies. Stronger US data has increased sentiment that Bernanke and Co. will be successful in boosting economic growth and avoiding deflation. Expect dealers to again cheapen up the curve ahead of this week’s new supply, the treasury will sell $99b of product ($35b-2’s, $35b-5s and $29b-7’s).

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