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Central Bank Coordination?

If Trichet announces new measures this morning to ease liquidity conditions or buy Euro area bonds then we can reasonably assume that Central Bank action this week will have been coordinated. First, it was the Swiss easing monetary policy, then the BoJ intervening, and if the ECB does not disappoint, then Capital markets will be looking to Bernanke to begin signaling some form of easing at the upcoming Jackson Hole conference.

Last nights BoJ intervention has been deemed a success (the long term effect is a different question), the Swiss wish they could say its was that easy. The government noted it was acting alone and justified the intervention by saying that currency moves were ‘one sided and would have hurt the economy’. The BoJ shortened its two day policy meeting to announce new stimulus measures. They will increase its securities buying program and increase its lending program. Will Trichet disappoint in his communique this morning and reiterate a ‘hawkish bias’? It will not do the EUR or the Euro-region growth concerns any favors!

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

Forex heatmap

Capital markets held it breath ahead of yesterday’s private employment report. The headline print recorded a small gain in services with no non-farm implications. A downward revision to the prior month (+145k from +157k) cancelled out the small upside surprise in the July print (+114k) to leave ADP roughly in line with expectations (+100k).

It’s worth noting that historically the first pass estimate for ADP private payrolls and the first pass estimate for NFP private payrolls have been poorly correlated over time. Discrepancies do indeed occur, however, the market has a habit of ‘revising’ them away. Last month’s ADP private print of +145k (revised) was multiple times higher that the granddaddy of fundamentals headline. On face value, analysts would suggest for investors to embrace themselves for a softer print tomorrow.

Digging deeper, all the growth came in the services sector (+121k) in July, while employment within the goods-producing sector softened (+7k). Manufacturing employment eased (-1k), while the construction industry lost jobs for the third consecutive month (-11k). On the plus side, growth was recorded in the professional business services sub-sector (+55k).

Continuing the no-growth concern theme, US non-manufacturing sector expanded yesterday at a very sluggish pace last month, despite production picking up, according to the ISM non-manufacturing purchasing managers index (52.7 vs. 53.3). The market had been expecting little change to the headline. Most respondents indicated that ‘business conditions were flattening out’. Digging deeper, last month’s business activity index rose to 56.1 from 53.4, but new-orders declined to 51.7 from 53.6. Both the employment and prices paid component fell, easing to 52.5 (54.1) and 56.6 (60.9) respectively. The reports weakening tone mirrored Monday’s softer ISM report that revealed that factory activity fell last month. The manufacturing PMI at 50.9 kept its neck just above expansion!

Finally, US June factory orders straddled the negative expectations (-0.8%). Analysts noted that the trend excluding the volatile component (transport and oil) remained modestly positive (durable +0.4% and nondurable +0.8%), but highlights that inventory growth is starting to slow (+0.2%). July’s ISM manufacturing report suggests that stocks could slow further.

The dollar is higher against the EUR -0.63%, GBP -0.31%, CHF -0.59% and JPY -3.40%. The commodity currencies are weaker this morning, CAD -0.68% and AUD -1.13%.

The loonie is on a roll, and it’s not the positive kind. The CAD fell for a fourth consecutive day yesterday, as crude prices declined and US service industries expanded at the slowest pace in eighteen-months, adding to concerns that Canada’s largest trading partner is ‘buckling’. Another day of equity losses discouraged demand for higher-yielding assets and pushed the currency to take out the weak short dollar stop-losses that has opened up this new trading range on the topside.

It’s worth noting that from a safer heaven trading perspective, Canada’s 30-year government bond yield has retreated -0.54% over the last twelve months, the most among the G7. Big picture, concern about Euro and US budget deficits is supporting Canadian denominated assets and by default the loonie.

Traders will turn their focus to tomorrow’s North American employment release and the IVY PMI. Canada is expected to add another +20k new jobs and to keep the unemployment rate unchanged at +7.4%. However, the currency will be at the mercy of the NFP report. The market remains a tentative buyer of CAD on US rallies (0.9723).

The market is back to easing rates again. The AUD continued its slid in the O/N session, for a sixth-consecutive day, as slower growth signs in the region has investors pricing in a cut by the RBA in October. This is the spill over from a poor retail sales print earlier in the week. After keeping rates on hold, Governor Stevens signaled a tightening bias once the world outlook improves. Global data of late is pointing towards the threat of a ‘double-dip’ recession scenario. In the futures market, the pricing of an RBA cut has increased +15bp to +41bp over the next 12-months.

While policy makers have pointed to downside risk to the global outlook, they have also added their concern about Australia’s medium term inflation. Last weeks inflation data would suggest that there is a greater possibility of an RBA hike rather than ease in the latter half of this year, of course that all depends on world growth. With commodity prices feeling the pressure, selling of AUD on rallies is preferred (1.0578).

Crude is lower in the O/N session ($91.74 -0.19c). Crude prices declined for a fourth consecutive day yesterday, completing its longest losing streak in nearly three-months on concern that a faltering US economy will curtail domestic fuel demand from the world’s largest consumer. Disappoint US data this week reveals that the consumer continues to spend less as they change their buying habits in response to a sluggish job market and higher fuel costs. Aiding prices was last weeks EIA’s inventory builds.

US gas stockpiles rose sharply and demand over the past four-weeks fell -3,6% compared with a year-ago, adding to concerns about tepid consumption in the midst of the peak summer demand period. Inventories increased by +1m barrels to +355m, and remain above the upper limit of the average range for this time of year. Not to be outdone, gas inventories moved up by +1.70m barrels last week, and are in the upper limit of the average range. Analysts had expected crude stocks to gain by +1.5m barrels and gas inventories to rise by +250k.

Commodity prices can expect to remain volatile on the back of weaker fundamental data ahead of the ‘granddaddy’ of fundamental releases tomorrow, NFP.

For seven months it’s been a safe bet. Gold surged to another new record high yesterday, as escalating concerns that the global economy is losing momentum spurred demand for the yellow metal as an investment haven. Worries about US growth have compounded by evidence that consumer spending fell in June and on this week’s disappointing ISM manufacturing and non-manufacturing data. Moody’s stating that the US credit rating may be downgraded and by placing the country on negative outlook has led investors to buy the metal as a ‘store-of-value’.

Year-to-date, the yellow metal has advanced +15%, heading for its eleventh consecutive annual gain. This ‘one directional trade’ is far from over, with speculators continuing to look to buy the metal on pullbacks until proven wrong. There remains a demand for the commodity for insurance purposes as alternative asset classes under perform with many investors receiving margin call ($1,666 -$0.20c).

The Nikkei closed at 9,659 up+22. The DAX index in Europe was at 6,698 up+58; the FTSE (UK) currently is 5,573 down-11. The early call for the open of key US indices is higher. The US 10-year eased 3bp yesterday (2.61%) and is little changed in the O/N session.

The long end of the US curve is on fire. Again yesterday, the long bond extended its biggest two-day gain in more than a year, as the service industry expanded last month at the slowest pace in seven-months. Investors have pushed 10-year yields to their lowest level in nine-months as US consumer spending unexpectedly fell in June earlier this week, reinforcing speculation that the economy is slowing. Any extra capital will continue to focus on the back-end as speculators try to grab yield. Investors will now be focusing on tomorrow’s job for directional vindication.

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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 [7]

Vice-President of Market Analysis at MarketPulse [8]
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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