EUR under threat from weak stop losses

Currency volatility over the last day has been more about panicked position reduction, rather than the pricing in the global affect of the Japanese earthquakes.

Risk sentiment is stable this morning, even as developments in Japan remain tentative. Another earthquake has been reported, Fukushima Daiichi is believed to have leaked more radioactive steam.

In the Middle-East, which seems to have been moved to the back burner, Bahrain declared a three-month state of emergency and the security forces are reported to have begun moving against protesters. This is providing the bid to oil and growth currencies.

The EUR again has failed at the high end of its range, protected by option interest. Weak stop-losses on the downside will have the markets interest now that some of the panicking has been priced out or in.

The US$ is stronger in the O/N trading session. Currently, it is higher against 10 of the 16 most actively traded currencies in a surprisingly ‘orderly’ session.

Forex heatmap

Yesterday’s message was to stop the bleeding, raise cash and anticipate what a hawkish Euro-region, a Middle-East uprising and a Japanese nuclear threat will do to investors personal portfolios. The market has been volatile, irrational at times and seeking shelter by aggressively unwinding the carry and highly leveraged positions, while ignoring global fundamental data. The EUR continues to trade close to the higher end of its recent range despite the Irish corporate tax spat. The fiscal governance reform, introduced last week, highlights the challenges of harmonization by the EFSF (it still needs to be ratified by month end). Punters are continually protecting the top end of the EUR range.

The FOMC statement yesterday has clearly shifted away from their repetitive dovish tone, acknowledging that labour market conditions have improved and commodity prices have risen sharply in recent weeks. Overall consensus has the Fed turing to neutral, dismissing any near term or the potential introduction of QE3. This should eventually put treasuries under pressure once the risk aversion strategies are completed. Bernanke and company are expected to complete their full $600b buyback.

The USD is higher against the EUR -0.26%, CHF -0.27% and JPY -0.08% and lower against GBP +0.07%. The commodity currencies are stronger this morning, CAD +0.41% and AUD +0.21%.

The loonie has been whipped, at one point tumbling the most in 10-months yesterday, threatening parity as investor’s aggressively unwound higher yielding, commodity growth sensitive currencies, as fear became infectious across all asset classes with hourly Japanese developments. The CAD weakened even after Canadian data showed that labor productivity rose more than forecasted last quarter (+0.5% vs. +0.4%). The market seems to be oblivious to fundamental data.

Close to parity, new CAD buying interest happened to appear, and for the time being, technically protecting that level. The currency had been previously supported by cross action. Unwinding of the carry trade has had the commodity currencies underperforming. With stability in overnight Asian bourses these higher yielding currencies have been able to find some much need traction.

The market has multiple reasons for wanting to own the CAD in times of stress and elation. It can be owned for risk adverse, growth and commodity reason. Fundamentally and technically the currency probably overshot it’s near term target, it is not a surprise to see the CAD backup outright. Expect the depth of the backup to be dictated eventually by cross-action.

The new reality is a Canadian dollar at or close to parity as the economy adjusts to this paradigm. Big picture, the currency’s rise remains orderly. These dollar rallies provide an opportunity to want to own some of the commodity and growth sensitive currency that is supported by stronger fundamentals and a sound fiscal position (0.9828).

Despite being one of the biggest currency losers early this week, falling to its lowest level vs. JPY in four months, the AUD has whipped back in the O/N session, as Asian bourses rallied and the BOJ injected more liquidity into the system. Their objective, like any CBank is to boost consumer confidence.

It seems that global investors are becoming more comfortable in buying back some high-yielding currencies like the AUD and CAD, on the belief that the Japanese stocks has already seen rock bottom.

Earlier this week, the RBA minutes were in line with recent official rhetoric and supports markets view that the RBA is likely to sit back and assess the developments in other markets.

RBA policy makers saw the restraint in borrowing ‘as a welcome development, particularly as household debt remained at a historically high level and debt-servicing requirements had recently increased’ according to last nights released minutes. Governor Stevens and his policy members indicated that a ‘mildly restrictive stance of policy continued to be appropriate’.

With some normality creeping back into the market, expect the high-yielding currencies to be better bid on pullbacks as the market movements again seem to have over extended themselves. By day’s end, its all about what happens at the Fukushima nuclear plant (0.9916)

Crude is higher in the O/N session ($98.32 +$1.14c). Oil remain under pressure, despite last nights gain on the back of equities, as Japan’s demand loss continues to outweigh Middle-East tensions. Technical analysts believe that the commodity has the potential to print $92 in the short term after registering a 29-month high last week.

Despite a market that has been in overbought territory recently, geopolitical concerns will eventually support the commodity. An IEA report estimates that outlook for global oil demand this year is little changed stating that more time is required to determine the impact of Japans earthquakes.

Fundamentally, higher oil prices are beginning to cripple the global economic recovery and will lead to a reduction in oil demand later this year according to the IEA. They also said that global oil supply rose to an all-time high last month.

Its basic economics, supply and demand, Middle-East potential supply constraints being cancelled out by the worlds third largest economy. Japan has closed 29% of their domestic refining capacity. This has affected about +1.3m barrels of the country’s total of +4.52m barrels per day of capacity. With future consumption questionable, demand from the region is expected to remain soft in the short term.

On deeper pull backs the Bahrain situation will eventually dominate. Saudi troops have entered the country, irritating Iran, and are expected to protect ‘vital installations in Bahrain and maintain stability and security’.

Gold prices have plummeted this week, with investors selling the asset class to raise cash and on the back of a bid dollar. Over the last week the commodity has fallen just under +4%. Owning this asset class has been very much a profitable lemming trade this year. These price pullbacks, in both gold and silver, are still viewed as favorable opportunities for investors to continue to diversify into safe-haven assets.

Big picture, commodity prices are being supported by geopolitical factors and inflation threats. Even hawkish global rhetoric has managed to support higher commodity prices. Before last week’s unfortunate events, consumer prices were also 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. With the commodity being used as a store of value, the asset class is expected to remain better bid on deep pullbacks. The metal has climbed +26% in the past year ($1,400 +$7.70).

The Nikkei closed at 9,093 up +489. The DAX index in Europe was at 6,722 up+74; the FTSE (UK) currently is 5,699 up+4. The early call for the open of key US indices is higher. The US 10-year eased 1bp yesterday (3.29%) and is little changed in the O/N session.

Ten-year notes are pushing yields to their lowest level in a year as risk aversion trading strategies intensified after last weeks Japanese earthquake. Investors are speculating that Japanese insurers will need to sell the longer dated maturities to pay claims for damage.

The BOJ efforts to provide more liquidity and expand an asset-purchase program have temporarily succeeded in halting the sale of global equities by risk avers investors. Technically, these low yields provide an opportunity to sell the FI market outright. However, fear continues to dominate the ‘playing field’.

Japanese investors are the second-largest foreign holders of US debt and own $882b of US Treasuries. The market is expecting them to be a net seller to finance their immediate operations.

Investors can expect geopolitical and event risk in the Middle-East to continues FI gains in spite of stronger economic data.

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
Dean Popplewell

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