Market bets a short EUR win today

The stage is set for a strong dollar performance this morning. When the market overhypes the currency generally disappoints, however, the EUR bears remain optimistic. Consensus seeks an advance GDP estimate for the fourth quarter of +3.6% and the data to show a surge in final sales and a drop in inventories. This would also support a strong first quarter. If we are not disappointed, watch the loonie fly.

Politics, sleight of hand, forceful persuasion must also be added to technical and fundamental analysis to understand certain price actions. S&P’s downgrades Japan’s sovereign debt rating to ‘AA-’ because their Government lacks debt reduction plans. How is this different to the US? Is it their demographics? Nope, it seems the US carry’s the triple ‘A’ notch because of a better fiscal situation and their willingness to rein in deficits according to the rating agency. Even the G20 questions the US’s ability to handle its record budget deficit and Obama’s State of the Union reduction solutions. Apparently a rating agency has a better handling of the situation or does it? There are whispers this morning of a downgrade of US debt by Moody’s. The U.S. has the highest government debt-to-government revenue of any Aaa rated country. The ratio, at +426%, is more than double that of Germany, France and the U.K. and more than four times higher than Australia, Sweden and Denmark.

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

Forex heatmap

US data was all over the place yesterday and provided little comfort for the dollar bulls. Starting with the pluses, US pending home sales beat expectations (+2% vs. +1%), but the outlook looks less rosy. December provided us with a third-consecutive monthly gain, but at a decelerating clip. The gain looks promising for this months existing home sales report, released in two-weeks. It’s worth noting that pending home sales data reflect ‘contracts’ and not ‘closings’ and normally occur with a lag time of two-months.

The communiqué noted that ‘modest gains in the labor market and the improving economy are creating a more favorable backdrop for buyers, allowing them to take advantage of excellent housing affordability conditions. Mortgage rates should rise only modestly in the months ahead, so we will continue to see a favorable environment for buyers with good credit’. It certainly puts a positive spin on the market. However, rising mortgage rates, increasing foreclosures and ongoing income security fears will impede any progress. Rising mortgage rates are already giving way to lower mortgage applications.

When things get bad we tend to blame the weather. Last week’s US jobless claims jumped +51k to +454k, partly because poor weather caused administrative backlogs. Efforts by some of the southern US States to reduce their backlog contributed to the spike, but did not account for all the increase. Over the coming weeks we will get the ‘clean run’ on the data. The more gauge, the four-week average of new claims, climbed +15.7k to +428.7k, the highest level in two-months. The data suggests that the job market may not be improving as quickly as individuals perceive. Digging deeper, continuing claims jumped +94k to a seasonally adjusted +3.99m. While an additional +4.62m received extended benefits, down almost-100k. In total, +9.41m received either state or federal benefits down-224k from the prior week.

December’s durable goods order’s fell for a second consecutive month. The headline print came in at -2.5% following a revised -0.1% decline in November. The volatile transportation equipment category had the largest decrease, falling -12.8%. If we excluded transportation, core-durables orders rose +0.5%. The market had expected a +1% increase. A tad softer, but when combined with recent data showing an improvement in US consumer confidence reinforces the likelihood that today’s GDP could show growth north of +3%.

The USD$ is higher against the EUR -0.01% and GBP -0.22% and lower against CHF +0.05% and JPY +0.33%. The commodity currencies are mixed this morning, CAD -0.16% and AUD +0.15%. The loonie has been rather active within its tight trading range. Softer commodity prices and Japan’s downgrade saga had investors willing to embrace some risk aversion trading strategies and lessening their demand for higher-yielding currencies. The lack of Canadian data is providing no direction, next data point comes on Monday, Canadian GDP. Technically, the loonie is trading around the tone of other asset classes and on the weakness of JPY on the crosses. Carney yesterday said in Davos that he was ‘quiet comfortable with Canada’s monetary policy’. Let’s hope so, he is the country’s last line of defense. Medium term, with the Fed maintaining its plan to buying treasuries can only be an advantage for the currency as investors become more comfortable with risk assets. Governor Carney said last week that the Canadian economy has ‘considerable slack’ that will keep core inflation below +2% until the end of next year. But, with the pick up in global appetite for risk, speculators will now be looking for better levels to sell the dollar outright (0.9951).

The AUD has traded under pressure ever since Prime Minister Gillard announced a one-off tax from 1 July 2011 to fund post-floods reconstruction. The market has seemingly interpreted this as a form of fiscal tightening which eases the pressure for RBA to tighten monetary policy. Dealers have promptly lowered their bets on increases to the benchmark interest rate over the next year. Pricing over the next 12-months fell-7bp to +22bp after yesterday’s announcement. Weaker inflation and the devastation caused by floods will very likely delay further RBA hikes beyond the first quarter. Last weeks data out of its largest trading partner, China, has the market convinced that the PBOC will move to hike their reserve rates. Their actions will reduce further the demand for the commodity sensitive growth currency. The credit downgrade by S&P’s of Japan is also capable of taking some ‘risk’ off the table. Offers again appear at parity (0.9928).

Crude is higher in the O/N session ($85.71 +5c). Crude remains soft after an unexpected gain in yesterday’s US jobless claims bolstered concern that the US economy will be slow to recover. Bearish fundamentals continue to dominate. Last week’s EIA report revealed that inventories ballooned. Stocks climbed +4.84m barrels to +340.6m vs. expectations of a +1.2m barrels rise. Not to be out done, gas supplies increased +2.4m barrels, against expectations of a +2.1m. The only negativity came with distillate supplies (heating oil and diesel) decreasing-100k, less than the expected-300k. Refinery’s in puts averaged +14.1m barrels per day, which was-212k barrels below the previous week’s average as refineries operated at +81.8% capacities. Weekly imports averaged +9.4m barrels per day, up by +386k barrels. Over the last four-weeks, imports have averaged +8.9m barrels, +517k barrels per day above the same four-week period last year. Earlier this week the Saudi Oil Minister indicated that OPEC may increase production levels to meet increasing global fuel demand. His comments have certainly put a medium term cap on the black stuff. He indicated that global demand was expected to increase around +2% this year. OPEC believes that supply and demand are ‘in balance’. Fundamentally, there is far more oil in storage, more fuel capacity and more idle oil wells to limit a stronger market rally in the medium term. Technically, an $83 barrel remains on the horizon.

Gold again is suffering on lackluster physical buying as the commodity’s appeal as a safe haven deteriorates. Prices continue to straddle its three-month low. With increased risk appetite in the market, investors are shying away from the commodity seeking ‘price appreciation’. Currently, the market does not expect gold to outperform other asset classes. With global confidence growing, one gets the feeling that the bulls are trapped and will soon be pushing that panic sell button. Fundamentally and technically the trend has turned rather badly against the longs. Month-to-date, the commodity has fallen -6.3% and only weeks after recording a +30% annual return. Buying has been less than modest with the commodity off to its worst start in 14-years. Has the gold peaked or is simply a short-term correction? The metal has shred $100 from its December highs. With the Euro-zone being able to sell their bonds, there’s less of a flight to quality, which could cause this asset class to be staring at a sub $1,300 a once soon. The market remains a seller on up ticks ($1,317-$2.30).

The Nikkei closed at 10,360 down-118. The DAX index in Europe was at 7,161 up+6; the FTSE (UK) currently is 5,923 down-42. The early call for the open of key US indices is lower. The US 10-year eased 1bp yesterday (3.41%) and is little changed in the O/N session. US treasury prices had a Ping-Pong sort of day. They pared initial losses after the US durable goods unexpectedly fell, initial unemployment claims rose last week and on the back of the Fed buying $6b worth of debt in their buyback program. Fundamentally, yields have risen too far given that inflation is running slower than the Fed wants. The last of this week’s $99b auctions was the well received $29b 7’s. They sold at a strong 2.744% compared with the 2.762% WI’s. The bid-to-cover ratio was 2.85%, stronger than the four auction average of 2.89%. Indirect bids took 52% while the direct too 6% less than the four-auction average of 8%. FI will take its cue from this mornings GDP flash.

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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