EUR do we reload?

Technical analysts will tell us that the EUR charts were oversold. The fundamentalist will naturally embrace this mornings PMI prints in Europe and China, even though a stronger Asian reading may give the PBOC more reason to tighten policy sooner. Despite the sovereign debt woes continuing to weigh on the Euro-zone outlook, the US recovery story is strengthening and that’s a global plus. It’s giving investors the opportunity to cash in on the recent dollar rally and perhaps a pause for thought, do we reload? Despite periphery spreads tightening this morning and Euro rhetoric trying to stave off a default crisis, the fear of sovereign debt defaults spreading will have capital fleeing from currency to currency causing even more havoc as Capital markets widen their contagion net to include Belgium and Italy. Do we reload?

The US$ is mixed in the O/N trading session. Currently, it is higher against 9 of the 16 most actively traded currencies in another ‘volatile’ trading range.

Forex heatmap

Better than expected US data yesterday helped to alleviate some of the equity pains. The Chicago PMI rose to 62.5 this month from October’s 60.6 and the strongest reading in seven months. This is certainly a good lead off for a favorable national ISM reading. The one outlier, the Empire State reading which had a very disappointing headline print mid-month, was in stark contrast to every other manufacturing survey which provides proof of a gathering pace of expansion in the sector. Digging deeper, one notices that most of the subcategories paint a favorable picture. The forward looking new orders rose from 65 to 67.2, the strongest print in three years. The production index rose from 69.8 to 71.3, the highest print in five-years. Analysts will be happy that the employment index also advanced from 54.6 to 56.3. The prices paid component also inched higher, 70.7 from 68.9. Not surprising, the print probably reflects commodity input prices. It worth noting that with large amounts of spare capacity and high unemployment should mean that the pass through costing to consumers seems unlikely in the short term. Manufactures continue to work on their inventory levels, dropping from 54.9 to 48.4. Overall, the market should be happy with the employment scenario, as yesterday’s data suggests that manufacturing should record progressive gains in this Friday’s NFP report.

Lightening the mood somewhat was consumer confidence increasing this month to 54.1 from a revised October print of 50.2. Even the present situation index inched higher to 24 from 23.5. Consumers are certainly upbeat entering the holiday shopping season with their expectations for economic activity over the next six-months jumping to 74.2 from a revised 67.5, perhaps a good omen for Black Friday and Cyber Monday’s results. Even the consumer’s mood towards the US employment situation improved and that’s the whole battle.

Not a surprise was September’s S&P’s Case-Schiller House Price Index print yesterday. It was weaker than expected at -0.7%, m/m, before seasonally adjusted and -0.8% seasonally adjusted. Certainly further proof that other recent data’s downward trend remains intact. On a year-over-year basis, the +0.6% September print was weaker than the market +1.6% expectation.

The USD$ is lower against the EUR +0.67% and GBP +0.40% and higher against JPY -0.12% and CHF -0.23%. The commodity currencies are stronger this morning, CAD +0.45% and AUD +0.48%. Leaving default risk and Chinese monetary tightening aside, the loonie took it directly on the chin from domestic fundamentals yesterday. Canadian headline 3rd Q GDP came in lower than expected yesterday (+1% vs. +1.4%). Not even the 2nd Q revision rising 3-ticks was able to alleviate some of the pain. What most analysts seem to agree on and what pressurized long CAD positions to lighten up was the effect of the value of the loonie was having on trade. The now ‘expensive’ currency is making it tough for exporters (-1.3% m/m) and easier on importers (+1.6%). Even with business inventories increasing, a vote of confidence by businesses that sales will be strong is certainly not being offset by stronger growth prints just yet. Slower Canadian growth points to a struggling 4th Q release. Given expected productivity improvements, the pace of growth maybe too little to reduce the unemployment rate, nor does it risk pushing future trend inflation higher. Governor Carney may be wondering why they have been raising rates so quickly. The currency’s usual risk barometers, crude and equity market futures, continue to struggle as the Euro-zone debt problems multiply. Against the dollar, buyers continue to want to pick up cheaper dollars.

The AUD threatened to take on its 10-week low in the O/N session after a softer than expected GDP print in the last quarter (+0.2% vs. +0.4%). Futures traders are now pushing the risks of the timing of the next RBA hike even further out. Demand for Australia’s currency was also damped as signs China’s economy is accelerating fueled speculation the PBOC will take more steps to slow it down. The Chinese have indicated that they will strengthen liquidity management and ‘normalize’ monetary conditions, damping demand for higher-yielding currencies. With them concentrating on containing strong inflation rather than boosting growth will affect commodity sensitive currencies longer term. Comments last week by Governor Stevens from the RBA have certainly capped any currency rally medium term. He said the nation’s interest rate setting is appropriate for the ‘period ahead. As the leading commodity currency, the AUD is highly vulnerable to any Chinese monetary actions and risk aversion strategies (0.9638). There is stronger market interest to sell AUD on rallies.

Crude is higher in the O/N session ($85.05 +95c). Crude prices yesterday happened to pare earlier losses, following equities, after US economic data provided stronger proof that the world’s largest economy was expanding. Initially, the cost of insuring Portuguese and Spanish debt weighed heavily on crude, but an unexpected consumer confidence print dragged the commodity higher by day’s end. The black stuff had rallied aggressively on last weeks EIA release, as a modest rise in stocks calmed worries about a much larger increase. Crude inventories rose by +1m barrels and despite expectations that stocks would decline, the increase remains slight compared to the massive decrease the previous week. It’s the steady drop over the past two months for total inventories of crude and fuel products that managed to drag prices away from the psychological $80 a barrel. Refineries have been increasing their runs in response to good margins. Utilization rate increased by +1.5% to 85.5% of total refining capacity, another sign that demand was improving. Gas inventories rose by +1.9m barrels, while stockpiles of distillate (heating oil and diesel), fell by-500k barrels. Technically, crude has bounced off handsomely from its monthly lows, all on fundamentals despite the Euro-zones contagion fears. It’s certainly an impressive response despite the stronger dollar index. Now we can all become weather experts as the cold European snap continues to take a firm grip. Markets expect another drawdown on today’s inventory release.

The ‘yellow metal’ rose the most in a week yesterday as Europe’s escalating debt woes boosted demand for the commodity as a haven asset. Debt contagion is driving inventors into the third ‘reservable’ currency as they seek a store of value. Despite the fear that China is to increase margins on commodity trading, a move to curb speculation and dampen inflation, global demand remains robust. Even though the one directional lemming trade seems to be overdone with a head and shoulders pattern emerging, investors continue to hold gold as a hedge against currency debasement and long-term inflation. The Euro-zone backdrop puts a floor on gold prices as these pullbacks have been somewhat supported on demand for a haven in the midst of Europe’s sovereign-debt crisis and tensions in Korea. Year-to-date, the metal is up + 23.8% and is poised to record its 10th consecutive annual gain ($1,393 +$7.40c). Even a higher dollar has been unable to push the commodity’s price lower. This would suggest that Gold is probably the primary reserve ‘currency’.

The Nikkei closed at 9,988 up +51. The DAX index in Europe was at 6,771 up+83; the FTSE (UK) currently is 5,586 up+58. The early call for the open of key US indices is higher. The US 10-year backed up 1bp yesterday (2.78%) and another 9bp in the O/N session (2.87%). Treasury prices have fallen as speculation that the ECB may take additional steps to prevent the Euro-zone’s debt crisis from spreading diminished the appeal of US securities as a haven. With European periphery spreads continuing to widen, expect Capital Markets eventually to widen their contagion trading net to include Belgium and Italy. The Fed’s action of buying treasuries to pump part of their $600m back into the US economy to keep yields low is occurring in ‘fits and starts’. Despite widening 7bp O/N, the market seems to want to flatten the US 2’s 10’s curve (238bp). Analyst’s anticipate that the US 10-year yields will make an assault on 2.50% before year end as investors remain willing buyers on any back ups.

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