CHF backed by lack of Bonds

A resemblance of calm has returned to this market after last week’s significant volatility. Traders are beginning to focus on Merkel’e and Sarkozy’s meeting tomorrow, where they seek a solution to the sovereign debt crisis and a plan for the EFSF fund (again). The market does not expect Euro-zone bonds to be on the agenda after the German finance minister dismissed them altogether last weekend.

With global panic reversed somewhat, and global bourses in the black, the CHF has been the biggest under-performer in the o/n session, with investors unwinding CHF longs and providing some support for the EUR. It has been rumored that the Swiss Federal Council may comment on plans to set a floor for the EURCHF rate as early this Wednesday. Nothing is unlikely in this trading environment, however, without the SNB believing it was necessary, there is really no reason why the Swiss government would go it alone and set a target. New implemented policy requires time to perform, the SNB can return to intervention or ‘pegging’ anytime.

The major concern with pegging? It would have important implications for JPY and the EUR. The market’s inability to use the CHF as a hedge against Euro-sovereign stress would force the use of other currencies such as the JPY (Noda will not allow this) and even the dollar. The SNB ‘s policy induced short squeezed seen in the EUR and dollar/CHF should slow if bond spreads widen again.

The US$ is mixed in the O/N trading session. Currently, it is higher against 9 of the 16 most actively traded currencies in a ‘subdued’ session.

Forex heatmap

US Confidence plunged this month to the lowest level in 30-years (54.9 from 63.7), adding to concern that weak employment gains and volatility in the stock market will prompt households to retrench even further. The surprise was the actual depth of the plummet. The market had been expecting a pullback after the biggest one-week slump in equities in three-years and the threat of default of a nation’s debt. Both scenarios have intensified consumers’ concerns as unemployment hovers above +9% and companies remain hesitant to hire. Rising pessimism poses a risk that household spending will cool further. This is reason enough for Bernanke wanting to get ahead of the curve, believing that growth was already advancing considerably slower.

Last week, the FOMC decision to keep rates exceptionally low ‘at least thought the mid-2013’ is one of the most important statements ever by a Cbank. They have now confirmed, in writing, that there is “no” chance that they will tighten again for two-years. Their objective is to keep cheap money flowing, get people spending, get growth back on track.

The details of the confidence report are just as worrisome, the ‘economic outlook’ index plunged to 45.7, the worst print since May 1980. The ‘economic conditions index’ also weakened during the month to 69.3, the weakest print in two-years. On ‘inflation expectations’, consumers kept their 1 and 5-year expectations unchanged from July, at 3.4% and 2.9% respectively. Overall, the mood remains very depressed, beware, that does not mean people will not be spending!

The US consumer offered a small upside surprise for a change with headline (+0.5%) and core-retail sales (+0.5%) beating expectations. After stripping out autos and gas, the results are ‘mildly encouraging’. While gas station sales rose +1.6%, m/m, adding +0.2% to overall sales, ex-gas, retail sales were still up +0.3%, month over month. Gains were also registered in autos (+0.4%), furniture (+0.5%) and electronics (+1.4%). Only department store sales (-0.8%), building materials (-0.4%) and sporting goods (-1.5%), witnessed a decline during the month.

The dollar is lower against the EUR +0.51% and GBP +0.28% and lower against CHF -2.11% and JPY -0.17%. The commodity currencies are mixed this morning, CAD -0.04% and AUD +0.68%.

ON Friday, the loonie advanced from almost its lowest level in seven-months as equities stateside rose, reducing the demand for the buck as a refuge. The CAD, despite last week’s turmoil remains one of the better behaved currencies, even with weaker data. Canada recorded its biggest trade deficit in nine-months in June (-$1.56b the fifth consecutive), as energy and auto exports fell, adding to evidence the country’s recovery is waning. Governor Carney said last month that export growth will remain modest because of a strong currency and the need for companies to regain competitiveness. This month, the loonie dropped -3.8% as global equities tumbled on renewed concern that the Euro-zone’s sovereign-debt crisis is getting worse.

There is a flip-side, because of the stronger Canadian fundamentals and yield differential (for now), investors will want to divest away from the EUR and USD. Once the markets absorb all of this weeks Cbanks actions or lack of, there will be an appetite from investors for a second tier reserve basket. Most commodity and interest rate sensitive currencies certainly belong to this basket.

The loonie remains at the mercy of risk aversion trading strategies and commodity prices. In the O/N market, investors look to be better sellers of dollars on rallies (0.9887).

The wild ride for commodity currencies continues, with the AUD being the prime example. A matter of day’s ago, the market was happily singing the currency its praises, witnessing prices breach the 1.10 barrier, some weaker global data and a credit downgrade later and this growth and interest rate sensitive currency is bouncing back from the USD trading premium a couple of sessions ago.

The AUD has advanced against most of its major counterparts in the O/N session as Asian stocks extended a global rally, supporting demand for higher-yielding assets. With Japan’s Finance Minister Noda prepared to intervene again on behalf of the JPY, continues to provide support for this commodity and interest rate sensitive currency.

Later this evening, the RBA is to release minutes of its August 2 meeting when policy makers left the central bank’s target rate unchanged at +4.75%. Futures traders expect the RBA to reduce its key interest rate by-128bp over the next 12-months. Domestic data remains mixed. Last week’s full-time employment fell -22.2k in July, while part-time employment gained +22.1k, keeping total employment largely flat. The unemployment rate rose to +5.1% from +4.9% in June, with the participation rate unchanged at 65.5% The weak employment print should keep Governor Stevens rate changes in check, remaining on hold until further notice. Even with core inflation still running above the RBA’s target range, the policy makers can afford to step aside, unless there a dramatic collapse in global financial markets. That can be said for all other Cbanks. Just like the loonie, the AUD will trade with the swings in global risk appetite (1.0409).

Crude is higher in the O/N session ($85.75 up +$0.37c). Crude prices backed up on Friday as US consumer confidence fell to a three-year low, signaling that economic growth may drop in the world’s biggest oil-consuming country. Economic concerns continue to be the primary driver of the oil market. Some of the market believes that the Fed may have to implement a third round of asset buying to bolster the economy further.

Last week’s US inventory numbers were bullish for prices, successfully dragging the commodity up from its seven-month lows. The report showed that oil stocks fell -5.2m barrels to +349.7m last week. The market had projected a +1.5m barrel build. Crude imports fell-34k barrels per day to +9.07m. The IEA stated that the US’s SPR saw its stock levels fall -2.5m. Not to be outdone, gas stocks dropped -1.59m barrels to +213.5m, compared with market projections for a +500k barrel build. Average gas demand over the last four-week’s has fallen-3.4%, y/y. Distillates (heating oil and diesel) fell-737k barrels to +151.5m versus an expected rise +1.1m barrels. Refinery utilization increased +0.7% point to +90% of capacity, whereas the market projected a decrease of -0.4%

Crude prices continue to hold just above strong support levels. The Fed’s monetary policy will be bearish for the dollar and so should be bullish for crude in the longer term.

Ever since the CME hiked margin requirements (+22%), gold bulls have had their backs against the wall, with commodity prices trading under pressure, falling the most in two-months last Thursday, a day after printing a record topping $1,800. Despite some investors liquidating a portion of their portfolios to raise cash requirements the metal continues to be a recipient of safe-haven flows in this uncertain environment. Prices have more than doubled since the recession began in late 2007. This summer, its climb has accelerated because of the US Congress inability to stabilize the government’s ‘medium-term debt dynamics’, and on the back of Europe’s debt crisis threatening to spread to three of its biggest economies, France, Spain and Italy. The Fed’s efforts to drive interest rates lower to support lending will curtail the dollar’s appeal as a safe haven.

Investors have bought more gold in the last month than in the prior six months according to CFTC data last week. Expect speculators to wait for a deeper correction before they start buying again. This week’s weaker longs should help their cause. The commodity is heading for its eleventh consecutive annual gain. In this environment $2,000 is very much in the realms of possibility over the next six months ($1,744 +$1.80).

The Nikkei closed at 9.086 up+123. The DAX index in Europe was at 6,084 up+87; the FTSE (UK) currently is 5,353 up+34. The early call for the open of key US indices is higher. The US 10-year eased 7bp on Friday (2.25%) and has backed up 4bp in the O/N session (+2.29%).

Last week’s US 10-Year yield dropped the most in three-years on the Fed’s slow-growth view. Policy makers pledge to keep rates exceptionally low has investors coveting yield and aggressively flattening the curve, pushing benchmark two’s to trade on top of o/n fed funds. Disappointing US consumer sentiment data on Friday has investors again demanding US debt for surety reasons.

Treasuries prices have surged this month, pushing 10-year yields down more than-50bp, as the European sovereign debt crisis and a potential double-dip recession has unnerved many investors. The 10-year yield touched 2.0346% last week, an all-time low, amid concern the risk of recession is rising after S&P’s downgraded the US credit rating to AA+. In the short term, the market remains a better buyer of product on pullback, as 10’s seek to retest all time lows.

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