EUR searching for an excuses to trade higher

The summer of discontent and we thought the market was buying into the ‘stabilization’ theory. Investors have taken a breather in the overnight session, with most G10 pairs essentially trading flat or a touch stronger against the dollar, as global equities trade mixed. It seems that cross market pressures are trying to set the tone and direction intraday, especially after the Euro data this morning, where factory orders registered their sharpest decline in six-month, further proof that the pace of growth in the industrial sector, especially Germany, maybe easing off (-1.8%).

Rating agencies are getting their fair share of exposure. They seem to be going along in alphabetical order when it comes to rating Euro-debt (Belgium, Greece, Italy, Spain etc). Moody’s acknowledged this morning that weaker Euro-zone nations would struggle to remain in investment grade in case of a Greek default, causing the EUR to soften, yields to tick higher and spreads to widen.

The US$ is weaker in the O/N trading session. Currently, it is lower against 13 of the 16 most actively traded currencies in an ‘orderly and subdued’ morning session.

Forex heatmap

The dollar is lower the EUR +0.37%, GBP +0.05%, CHF +0.24% and JPY +0.15%. The commodity currencies are stronger this morning, CAD +0.47% and AUD +0.61%.

This month, the CAD has weakened outright versus the dollar, its longest losing streak in six-months, as crude-oil prices trade heavily amid mounting investor concern that global economic growth is faltering. Weaker domestic fundamental data, like last weeks retail sales and inflation numbers may dissuade Governor Carney at the BoC from boosting interest rates later this month. The Bank next meet on the 31-May to determine their interest rate policy. The market is experiencing risk-on and off again trading, creating volatility within a tight range.

With 0.9800 barriers supposedly maturing at month end, the market will see defense maximized as expiries draw closer, providing resistance for the time being, despite the underlying momentum wanting to drag the dollar to test higher. To date, risk sentiment has been stung over Euro-zone debt restructuring and on doubts about the pace of global growth. Investors are better buyers on these pull backs (0.9760).

The AUD has strengthened against most of its major competitors as a rally in commodities and stocks bolstered demand for the higher-yielding assets. The perception that the worse of the commodity sell off may now be behind us, has the Aussie dollar doing better in the last two sessions. It is also being supported by the uptick in the Asian equity class. The currency is heading towards its first weekly gain this month as improving economic indicators has increased demand for higher-yielding assets. The AUD is trading in demand as traders bet the RBA will raise rates by +30bp points over the next year.

Also providing support for the currency is the belief that the local dollar was gaining stature as a global reserve currency, similar in nature to that of the CAD. Aussie yields are still the highest in the G10 and do look attractive. The expected mix of trade surpluses and rising capital inflows should provide support for the currency on these pullbacks for the time being (1.0571).

Crude is higher in the O/N session ($98.95 +$1.15c). So far this week, crude prices are softer on the back of Europe’s sovereign debt crisis deepening, highlighting concern that economic growth will slow and fuel consumption decline. Oil has been dragged down by the stronger dollar, on European contagion fears and what this may mean for demand. Year-to-date, crude prices are up +39%.

Lat week’s weekly crude supplies fell-15k barrels to +370.3m versus an expected build of +1.7m barrels. Cushing supplies dropped -1.59m barrels to +40.0m, while imports were off-394k barrels per day to +8.54m barrels per day. Distillate stockpiles (heating oil and diesel) also posted a surprise draw, dropping -1.16m barrels versus expectations of a +700k build. On the flip-side and a surprise, was gas inventories growing as expected but modestly, rising +119k versus a forecast for a +800k barrel build. The refinery utilization rate rose +1.5% to +81.7% of capacity, much bigger than the +0.2% expected.

Technically, the report could be seen as overall bearish because of the weaker gas demand. Despite the market being awash with product, the long-term fundamental supply and demand of commodities is still pointing to higher prices.

Gold rose this morning, to the highest level in more than a week, as the European sovereign-debt crisis boosted demand for the yellow metal as a haven. The commodity is being used as a store-of-value and traded like a currency, especially after credit rating agencies raised concerns over Italy, citing slowing economic growth and ‘diminished’ prospects for a reduction of government debt and Greece’s issues with its long-term debt.

The inability of the dollar to maintain its safe-haven status is currently supporting metals. Last week, the commodity had been moving in tandem with oil and the risk-on-risk-off commodity trade. So far this week that relationship has broken. Expect investors to remain nimble because of the gyrating greenback.

The metals bull-run is far from over with speculators continuing to look to buy gold on these deeper pullbacks. Interestingly, the sale of gold coins this month remains on track for the best month in a year amid the worst commodities rout in three-years, which would suggest that bullion’s longest ‘bull market’ still has room to run ($1,521 +$5.70c).

The Nikkei closed at 9,477 up+14. The DAX index in Europe was at 7,166 up+26; the FTSE (UK) currently is 5,857 up+22. The early call for the open of key US indices is higher. The US 10-year eased 4bp yesterday (3.13%) and is little changed in the O/N session.

Treasuries again have found traction and are threatening to ‘piggy-back’ their lowest yields of the year on concern that the European sovereign debt-crisis is worsening and reports this week will show the US recovery is losing some of its bite. Global equities seeing red is reducing the demand for riskier assets. Greece is trying to keep a handle on its fifth austerity plan, Italy coming to term with a potential credit-rating cut and Spain ruling party rout at the weekend is promoting risk adverse trading strategies.

‘Rates remain in this tight range, and despite seeming incredibly low, they reflect a Fed comfortable with the inflation and economic outlook and their ability to adjust’. Expected mixed US data this week has investors remaining better bid on pull backs, providing bullish momentum for the FI asset class, who it seems want to register even lower record yields over the medium term.

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