EURO gets Green Light to Advance Further

The EUR has shrugged off a Portuguese downgrade, a Chinese rate hike and is now focusing on Trichet’s expected ‘progressive normalization’ of monetary policy. Tomorrow’s anticipated hike will mark the first significant policy divergence in the G10 core in three-years.

Portugal selling 1b+ bills this morning is considered a success under the circumstance. With an aggressive rise in yield (+5.902%) things could have been worse, the auction may have failed.

The success supports the sovereign’s ability to meet its 15 April bond maturity, but does not undermine expectations that Portugal will have to eventually seek EFSF funding. The IMF stating that Spain did not need financial support reduces the systemic concerns and gives the EUR the green light to test 1.44.

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

Forex heatmap

Yesterday’s US data showed that the service sector is expanding at a ‘moderate’ clip. The headline ISM non-manufacturing index eased to 57.3 from 59.7. Despite being the softest reading in four-months, analysts note that the print still remains above its long-run average of 53.8. Digging deeper, even with the underlying details being softer, they remain supportive of continued recovery ahead. Of note, was respondent’s concern of a possible spillover effects from Japan, specifically with the supply chain.

Six subcategories posted declines, current ‘production’, imports, employment, prices paid, supplier deliveries and new-orders. Inventories remained unchanged, while new-export orders, the backlog of orders and inventory sentiment experienced improved further. Prices paid climbed at a slower pace, but remains above their six-month average. Similar to most consumers concerns, respondents are worried by rising fuel costs and the renewed sluggishness and lack of any signs of recovery in the housing market. It worth noting that some of the categories are not seasonally adjusted.  

There were no surprises from the FOMC minutes. The meeting highlighted the dichotomy amongst the members on timing of exit. This certainly evident from the independent rhetoric jousting of late by various Fed speakers. The minutes reiterated that the FED would be hands off with QE2.

The USD is lower against the EUR +0.48% and CHF +0.82% and higher against GBP -0.14% and JPY -0.23%. The commodity currencies are stronger this morning, CAD +0.27% and AUD +0.51%.

The loonie proceeds to want to edge higher despite a PBoC rate hike. In times past, a tighter Chinese rate policy would have hurt all risk sensitive currencies. The CAD continues to gather support from commodities and the overall general recent positive sentiment and is set for slow methodical gains, nothing out of the ordinary in these tight ranges.

After printing three year highs and appreciating +1.8% last week outright, it was only natural that some profit taking was required. Even news of possible M&A activity has been slow to lend the loonie a hand.

The ‘hawkish’ tone coming from Governor Carney about how the elevation in commodity prices generally leads to higher interest rates will again give the loonie its bid tone with traders happy to sell historical funding currencies against CAD.

With ‘carry’ historically the go to trade this month, has investors looking to buy the currency on dollar rallies. The Federal political uncertainty is expected to have a limited affect on the currency strength. The loonie will be supported in the long term by its fundamentals, a sound financial system and a strong job environment (0.9610).

Down-under is trying to lead the G10 rally, showing no lasting ill-effects from yesterday’s decision by the PBoC to hike policy rates +25bp. The Aussie is back above 1.035 despite a larger than expected (-5.6%, m/m) contraction in new home-loans in February. Analysts note that this is probably due to the disruption to the housing market from the recent floods.

The currency has printed a 30-month high versus JPY on the back of higher yields enticing investors wanting to own some of that premium. The market is back ‘in yield-chasing mode’. Growth and higher yielding currency’s will benefit. With Japan’s loose monetary policy, the yen is expected to continue to weaken further with Japan lagging any significant recovery.

Earlier this week Governor Stevens left interest rates on hold (4.75%) for a fourth meeting and indicated that the currency’s recent strength was helping to control prices, damping the need for further rate increases. Their levels of yields are still the highest in the G10 and continue to attract regional investors en masse (1.0382).

Crude is little changed in the O/N session ($108.49 +15c). Oil prices continue to trade close to its two and half year high, despite reports that two of Gadaffi sons are seeking his ouster. The commodity has found resistance ahead of today’s inventory report where it’s expected that inventories have increased. Pull backs in the commodity are supported by contagion fears in the Middle-East and on the back of Libyan forces renewed aggression raising concerns about oil supplies for the near-term.

Last weeks EIA report showed crude stocks climbing +2.95m barrels to +355.7m. The market had forecasted a rise of only +1.5m barrels. At the other end of the pendulum, fuel demand fell to its lowest level since November with gas softening -2.3% to +8.87m barrels a day. That is -2.1% less than a year ago. Gas inventories were down -2.7m barrels, while distillate (heating oil and diesel) were up +710k barrels.

Recent events will make it unlikely that investors will see a ‘swift normalization’ of crude-oil production in the region. On any pull backs the Middle-East and North African situation will continue to dominate in the event risk category.

Gold has managed to print a new record high as sovereign-debt concerns boosted demand for the precious metal as an alternative asset. The spiraling Portuguese debt costs, the conflict in Libya and the nuclear crisis in Japan have increased the demand for yellow metal as an investment haven. The metal commodity has jumped +28.5% in the past year.

These geopolitical reasons continue to provide support on pull backs for this ‘lemming’ trade, justifying consumers wanting to own some of the asset in their ‘own’ portfolios. Despite last weeks softening of prices, the commodity has preserved its tenth quarterly gain, its longest winning streak in over 35-years, as low interest rates and event risk provide support. It’s difficult to find a reason not to own some of the commodity.

The metals bull-run is far from over with investors continuing to look to buy the commodity on dips. Any price pullbacks are viewed as favorable opportunities for investors to continue to diversify into safe-haven assets, especially metal being used as a store of value. However, rising interest rates increase the opportunity cost of holding non-interest-bearing bullion ($1,456 up+$3.70).

The Nikkei closed at 9,584 down-31. The DAX index in Europe was at 7,168 down-7; the FTSE (UK) currently is 6,017 up+11. The early call for the open of key US indices is higher. The US 10-year backed up 4bp yesterday (3.42%) and is little changed in the O/N session.

The US curve suffered the full weight of the push-pull effect before the minute’s release. Bernanke’s stating that inflation may be transitory pushed bonds higher, speculation that the Fed minutes were to indicate that policy makers would be debating the end of stimulus measures pull them down again.

The pull effect won as treasuries fell after the minutes showed policy makers differed over whether to begin removing stimulus, fueling concern that interest rates will increase. The market remains cautiously short on the back of inflation threats and dissension within the Fed.

This week is an important week for global yield curves, especially for the ECB and the reason investors are reluctant to take on big bets even with event and geopolitical risk in abundance.

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