EURO is Tired

The EUR is tired, tired of the Euro-hawkish stance. After a 9% advance against the dollar this year, the currency has backed firmly away from its 1.40 resistance levels, for now at least. Other factors have also plagued the currency now that the Euro-periphery default is a reality again. Moody’s multi-notch cut weeks before EU leaders are set to decide on new bailout measures has curbed the risk-reward of owning the currency at these levels. It’s not rewarding.

The dollar is getting a boost from sovereign interest over night and on the price of oil backing away from its two and a half year highs on rumors of Gadhafi stepping down with terms and on other OPEC members stepping up to the plate to plug that hole. Seeing is believing.

Despite German factory orders surpassing January expectations this morning (+2.9%), the re-emergency of periphery worries will keep debt spreads wider and the EUR bulls worried ahead of Friday’s European summit.

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

Forex heatmap

There was no data to feed off yesterday in the US, so investing decisions were driven by our economic optimism or lack of it, and oil trading just under $110 a barrel.

Dallas Fed Fisher, a long skeptic of QE2, did provide us with some ammo. The bond-purchase, a program which he has he doubts about, ‘any time between now and June, should it prove demonstrably counter productive’ he will vote to curtail or discontinue it.

He remains one of the main critics of the $600b program, believing that the economy was been held back by Washington fueled uncertainty. He believes that the program may hurt job-creation by raising inflation expectations and giving the impression that the Fed is willing to finance the governments growing public debt.

Despite his opposition, he expects the program to be completed. His view point did brighten up a dull trading morning before investors began paring their equity position on sustainable growth fears.

The USD$ is higher against the EUR -0.31%, GBP -0.13% and JPY, CHF -0.61% and JPY -0.28%. The commodity currencies are weaker this morning, CAD -0.19% and AUD -0.08%.

Canadian data yesterday was not supportive for the loonie. However, elevated global commodity prices are keeping the loonie bulls happy, for the moment at least. After the prior months revised headline gain of +2.6%, building permits retreated -5.1%, month over month. The magnitude of the decline took the market by surprise and supports the Canadian housing market bears belief that we have seen the ‘top’ on a number of variables and the theme for 2011 will be a moderate housing sector.  

The loonie is hanging tough despite Governor Carney’s views on an elevated currency price. The cross currents in commodities and cross currency flows seem to ‘be buffering spot’ from too much movement. The new reality is a Canadian dollar at or close to parity as the economy adjusts to this paradigm.

The market has preferred been long this currency for both risk averse and commodity supporting reasons. Governor Carney is in no rush to raise interest rates, stressing as before that ‘any further reduction in monetary policy stimulus would need to be considered carefully’. If the Bank really was contemplating an early rate hike, would we not expect the forward looking guidance to be altered? The currency rise remains orderly. Dollar rallies provide an opportunity to want to own some of the commodity and growth sensitive currency (0.9717).

The markets seemed to have ignored the improvement in Australian business confidence last night. The NAB business confidence index rose to an eleven-month high of 14 last month from 4 in January. The business condition index also rose 4 to -2 in February. Data earlier this week showed that Australian job adverts growth fell to +1.2% last month from an upwardly revised +3.0% in January. Analysts do note that the correlation between adverts and jobs growth has been weak, but the release suggests that employment may be taking a breather.

The currency continues to hover close to its six-week low vs. the EUR on fear that Trichet and Co. will raise interest rates faster than the RBA this year. However, Australian fundamentals continue to support a higher policy rate environment, and a currency appreciating medium term. The futures market is pricing in further modest tightening starting in third quarter as the data strengthens and the threat to inflation rises along with commodity prices and higher wage growth. Commodity prices continue to provide support on pull backs.

Crude is lower again in the O/N session ($104.98 -46c). After advancing to a two and half year on speculation that the turmoil in Libya will spread to other energy exporters in the region, affecting global supplies, crude has been able to back off and price out some of the weekend premium. However, the commodity remains in demand on pullbacks, even in technical overbought territory.

According to some wire reports, Libyan leader Gaddafi has offered to step down with certain guarantees, a move that could end the fighting that escalated over the weekend. Also, there are reports that other members of OPEC will join Saudi Arabia in raising oil output to make up the short fall in supply from falling Libyan crude exports.

Prices remain elevated despite the rumors. Contagion fears continue to price in a substantial risk premium. ‘The IEA’s chief economist said that ‘higher oil prices pose a danger for a global economic recovery’ and at $110 a barrel the world should be very concerned. A close above $107 will have the market gunning for $110-112 a barrel.

Last week’s EIA report is also providing support for the US crude market on pull backs. The report showed a smaller-than-expected increase in supplies. Crude inventories fell by-364k barrels to +346.4m vs. an expected increase of +750k. Even worse was the gas inventory headline declining, stocks plummeted -3.59m barrels to +234.7m, greatly exceeding market expectations for a-400k draw. Inventories at Cushing rose by +1.13m barrels to a record +38.57m.

This rise is partly responsible for the wide discount of WTI to Brent crude in recent weeks. Distillate stocks (heating oil and gas) fell-751k barrels to +159.1m, less than analyst expectations for a decline of -1.2m barrels. Refinery utilization rose +1.5% to 80.9% of capacity. The Oil market is beginning to show signs of ‘demand destruction’ as high prices erode consumption. With supply the number one concern, the commodity will remain bid because of the contagion concerns.

Gold remains in demand as Middle East tension boost the appeal of the yellow metal as an investment haven. Commodity prices continue to be supported by geopolitical factors and inflation threats. Gold prices have rallied more than +7% this month, as investors grown increasingly uneasy that the crisis could spread.

Even hawkish global rhetoric has managed to support higher commodity prices this month. Higher consumer prices are boosting the demand for the precious metal as a hedge against global inflation. Recent data reveals that Chinese’s inflation has accelerated the most in six years, and UK consumer prices the most in two years. Even US data is showing that their inflation numbers are edging higher. Last week’s European PPI accelerated more than forecasted in January. China is supporting commodity’s outright, buying of gold in the country climbed to 200 metric-tons in the first two months of this year. With the commodity being used as a store of value the asset class is expected to remain better bid on deep pullbacks, at least until there is peace and less threat of inflation ($1,432 -$2.50).

The Nikkei closed at 10,525 up+20. The DAX index in Europe was at 7,189 up+27; the FTSE (UK) currently is 5,982 up+9. The early call for the open of key US indices is higher. The US 10-year eased 3bp yesterday (3.51%) and is little changed in the O/N session.

FI prices are soft out the curve, as signs of faster job growth and inflation is proof that the US economic recovery is building momentum. With supply come down the pipe this week, dealers will want to make room and cheapen the curve. Treasury will auction $32b of three-year notes today, $21b of 10-year’s tomorrow and $13b of 30-year’s on Thursday.

Geopolitical and event risk in the Middle-East continues to limit FI losses in spite of stronger economic data. Product should remain better bid on these pull backs, even with Fed Fischer stating that he may vote to end bond purchases before June.

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