Portugal provides the excuse to short EUR

The FOMC minutes reveled that the Fed was more optimistic in its view of US economic growth, but has no plans to raise interest rates or normalize policy at an aggressive pace soon as the FOMC committee sees a ‘fairly high threshold for making changes to the QE2’. With them out of the way, the market will focus on this morning’s fallout of a disappointing Portuguese auction. The good news, Portugal sold the issue, 500m 6-month bills, the bad news, the average yield represents a +164bp increase compared to a similar sale in September and a +28bp increase compared to the most recent 3-month bill auction last month. The market can be expected to further pressurize the EUR as we begin to shift our focus towards employment data.

The US$ is stronger the O/N trading session. Currently, it is higher against 13 of the 16 most actively traded currencies in another ‘whippy’ O/N session.

Forex heatmap

On the face of it, yesterday’s US Factory Orders surprise (+0.7% vs. -0.7%) seemed to have already been discounted in the December equity rally because it was a November print. The headline print was saved by nondurables. Digging deeper, durables fell -0.3%, while nondurables advanced a healthy +1.7%. Year-over-year, orders have advanced +12.5%. Despite the upward momentum, the recent four-month average trend (+0.8%) is only half the pace of the spring and summer readings. With durables down for a second consecutive month the largest metal gain in several years (+10.2) could not outweigh losses in other major categories (Transport -11.1%, Autos -1.8% and non-defense -50.6%). If the market excluded these major categories orders would have risen +2.4%. In the nondurable sub-sector, all the categories increased (petroleum +4.2%, chemicals +1.1% and food +0.9%). Orders for non-defense capital goods (ex-aircraft) rose +2.6%, previously they fell -3.2%. It’s worth noting that gains in demand for capital equipment imply that business investment and exports will keep contributing to US economic growth.

The USD$ is higher against the EUR -0.36%, GBP -0.04%, CHF -0.20% and JPY -0.02%. The commodity currencies are weaker this morning, CAD -0.08% and AUD -0.30%. The loonie has taking flight on the back of its largest trading partners expected ‘re-acceleration in activity in the first few trading sessions of the New-Year. This week’s US data, PMI and factory orders, reinforces many analysts views that the US economy is beginning the year in upward momentum and reason enough for short term chartists to be eying 0.9750 in the first quarter. The loonies year-end buying had been supported by rising oil prices as well as increased front-end interest rate spread support for CAD. With commodity prices plummeting yesterday happened to reverse some of the loonies’ gains, albeit a modest decline. This week’s Canadian Ivey PMI (Thursday) and employment data (Friday) is expected to surprise to the upside, coupled with Euro peripheral stress should further support Canadian government debt as an alternative to the dollar and the EUR. On the flip side, Governor Carney continues to highlights the dangers of a persistently strong domestic currency. Bids for dollars are accumulating on pullbacks (0.9993).

The AUD eased again O/N, hurt by a weaker volatile home sales survey (-0.2% vs. +6.1%). Making matters more interesting was RBA board member McGauchie stating that the government’s stimulus measures will pressurize Governor Stevens to hike rates (4.75%) and that the flood in Queensland ‘may exacerbate already constrained supply conditions and lead to inflationary pressures’. These are good reasons supporting the currency on these pullbacks as investors seek to cross the currency vs. the EUR. Last year the currency rose +14% against the dollar which drove down the cost of imports and eroding exporters’ competitiveness. The currency has been trading under pressure outright as US Treasury yields climb, narrowing the yield advantage of assets down-under. The FOMC minutes this week and the Fed commitment to QE2 will should also reduce some of the currency’s pricing pressures (1.0008).

Crude is lower in the O/N session ($88.58 -80c). With too many hurdles to overcome ahead of the psychological $100 barrier crude plummeted yesterday, aggressively retreating from its 27-month high, the most in two-months, amid speculation that a recovery by global economies will curb demand for the commodity sector. Investors have been using commodities as the currency of last resort for storing value. In December, oil advanced +8.6% while the dollar declined-3%. In today’s weekly inventory report the market expects a fifth consecutive seasonal decline in stocks. Technically, the market is not showing a tighter supply or demand balance, it’s the result of refinery shenanigans to avoid tax at year end in December. Last week’s EIA report showed that crude inventories decreased by -1.3m barrels. OPEC believes that supply and demand are ‘in balance,’ and expect demand growth will slow as the global economy struggles to recover, amid ample supplies. Technically, expect the market to meet price resistance above $90 as there is far more oil in storage, more fuel capacity and more idle oil wells to limit a strong market rally in theory.

Gold prices, like most commodity prices, plummeted yesterday, recording its largest decline in six-months on speculation that a global recovery will curb demand for the metal as a haven asset. Fast money and the reducing of flight to quality positioning has been pressurizing the yellow metal, as equities, being used as an alternative, is providing more of an appeal in the first week of the New-Year. On deeper pullbacks, the commodity should remains better bid on speculation that currency volatility will boost demand for a safe heaven investment once the Euro contagion fears raise its ugly head again. The commodity last year completed its tenth annual advance with bullion rallying +30%, it’s largest rally in three years. Even though the one direction trade feels overdone, investors continue to hold gold as a hedge against long-term inflation and have some strong technical support levels to breach before the markets witnesses a mass exodus. The Euro-zone contagion issues continue to put a floor on metal prices on demand for a haven. Technical analysts believe that gold ($1,384 +$5.40c) will outshine other precious metal in 2011 and peak somewhere above $1,600 in 2012.

The Nikkei closed at 10,380 down-17. The DAX index in Europe was at 6,896 down-79; the +FTSE (UK) currently is 5,999 down-14. The early call for the open of key US indices is lower. The US 10-year eased 5bp yesterday (3.31%) and is little changed in the O/N session. US debt reversed some of the previous day’s losses as investors believed that December’s biggest monthly rout in a year went a wee bit too far and provided favorable buying opportunities despite the strong November factory order print. The market is focusing on Friday’s employment report to gauge if the market has more run to it or if it pauses. Both technically and fundamentally the US unemployment situation (+9.8%) is still too high to have any type of sustained selloff. With the Fed committed to its QE2 plans, debt remains better bid on pullbacks at the moment.

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