CHF another EURO Disappointment

Now that the SNB has failed to live up to investors expectations of introducing the CHF to a new pegging system, there will be pressure on the Cbank to intervene in FX to weaken their currency as speculators again balk at the introduction of a fresh liquidity boost.

Governor Hilderbrand, for the third time in three weeks, has boosted sight deposits +66% to CHF200b. The markets reaction to a ‘no’ temporary Euro peg or a floor to limit the damage to the country’s strong export industry is failing to dampen the market demand for the currency as a safer heaven bet. Since the announcement, the currency has appreciated +2%. Analysts estimate that the franc’s overvaluation currently stands at +13% and would require a series of FX interventions to get the franc back to trading at 1.28 EUR, its current fair value.

If anything, the Cbank is remaining flexible, the use of draconian measures in this time of heightened uncertainty could push whats left of consumer confidence into full on panic.

The US$ is weaker in the O/N trading session. Currently, it is lower against 11 of the 16 most actively traded currencies in a ‘whippy’ session.

Forex heatmap

Most US data yesterday was a pleasant surprise, if nothing else it kept investors occupied ahead of the Sarkozy and Merkel news conference. US industrial production rose at its quickest pace in seven months in July (+0.9%) as motor vehicle output rebounded strongly, further easing fears that the US economy could be sliding head-first into another recession. The report suggests that the recovery may have regained some momentum over the last few months. The underlying figure, a +0.3% rise in manufacturing ex-autos, shows only moderate growth. It remains to be seen if this can be sustained this month given the financial markets disruptions. Capacity utilization of +77.5% in July is well above the +0.76.9% estimate, with June revised up by +0.2% to +76.9%. It is the highest print in three-years.

Other data showed US residential construction, while still depressed, was not a drag on the economy as the second-half of the year got under way. Data showed housing starts slipped a less-than-expected -1.5% last month, to a seasonally adjusted annual rate of +0.6m units as builders broke ground on new multifamily units to meet demand for rental apartments. On the face of it, housing starts remain somewhat range bound at these historically low levels as homebuilders continue to reduce existing inventories against a backdrop of elevated foreclosures. Data earlier in the week showed that sentiment among home builders was steady at low levels this month, but they were pessimistic about future sales over the next six-months. Other data showed that new building permits fell -3.2% to a +0.597m unit pace last month. Digging deeper, permits were dragged down by a -10.2% drop in the multifamily segment, while permits to build single-family homes rose +0.5%.

There was much said but noting ‘really’ conclusive in the Merkel/Sarkozy summit. They unveiled wide-reaching plans for closer Euro-zone integration, including deficit limits and biannual summits, but said joint Euro bonds could only be a longer-term option. Apparently, they are potentially harmful to the healthiest economies. Yesterday’s surprisingly soft German GDP release will have many question this decision. By day’s end, the two-leaders are not the voice for ‘the’ union. Their objective of the meeting was to shore up some much needed market confidence that has taken a good hiding in August. Their proposals will be considered as a welcome ‘step forward in a common effort to strengthen the governance of the Euro-area’. Both leaders focused on the longer term governance issues and new taxes rather than on measures to spur growth. The leaders seem to be heading in the right direction, but little new is being offered!

The dollar is lower against the EUR +0.09%, CHF +1.36% and JPY +0.28% and higher against GBP -0.40%. The commodity currencies are stronger this morning, CAD +0.18% and AUD +0.46%.

Canadian data yesterday (backward looking) added nothing positive to the Canadian landscape. Weaker manufacturing sales (-1.5%) will only pressurize Junes GDP further. Digging deeper, most of the details are as bad as the headline itself. Inflation adjusted manufacturing shipments fell -1.6%, month-over-month. This adds to the risk of a an outright contraction in the Canadian economy in the second quarter. The data will only re-enforce expectations for the BoC to remain on hold for the next couple of quarters by putting growth well under Governor Carney’s forecast of +1.5%, q/q annualized growth.

The preliminary evidence for the third quarter (forward looking data) is a touch more encouraging thus far. Hours worked expanded sharply in July (+1.1%, m/m) and manufacturing new orders surged in June. Looking beyond this timeline is more difficult due to the ongoing changing nature of global economies, especially in Europe, as they adjust to sovereign risk concerns. Analysts note that with the ‘rise in unfilled orders and new orders, manufacturers may sell down high inventory positions rather than add to production and employment volumes in the near-term, choosing instead to buy time and see what the order book looks like later in the year’.  

The largest losses in the month were concentrated in the petroleum and coal shipments category (-6.6%). Machinery shipments also plunged (-4.2%), followed by primary metals shipments (-1.6%) and transportation equipment shipments (-0.6%). Auto shipments were unchanged on the month. This was the first quarterly contraction of shipments in two-years.

Over the past three trading sessions, the loonie has managed to advance from almost its lowest level in seven-months as equities stateside stabilize, 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 domestic data. This month, the loonie has dropped -3.1% as global equities tumbled on renewed concern that the Euro-zone’s sovereign-debt crisis is getting worse. The CAD, seen as a barometer of risk, closely tracks oil, equities and macroeconomic data from the US, which consumers about +70% of all the country’s exports. Yesterday’s disappointing data had the loonie underperforming against the other major crosses because of the depth of its economic ties with its largest trading partner.

There is a flip-side, because of the yield differential (for now), investors will want to divest away from the EUR and USD. Once the markets absorbs all of last weeks Cbanks actions or lack of, there will be an appetite from investors to own a second tier reserve basket. Most commodity and interest rate sensitive currencies certainly belong to this basket. The focus this week is likely to remain on broader risk aversion, however, there may be a shift back to fundamentals as investor sentiment starts the week on a calmer footing.

Uncertainty around Eurozone’s austerity measures and debt management issues along with overall global growth forecasts will have investors treading lightly. In the O/N market, investors have been better sellers of dollars on rallies (0.9802).

The AUD trades tentatively against all its major trading partners this week after the release of the Cbank’s August minutes on Monday which showed policy makers are concerned that turmoil in financial markets could slow global economic growth. Investors have been paring bets of an interest rate hike any time soon.

The RBA’s August minutes were largely in line with the post-policy meeting statement, however, concerns over developments in Europe and the US continue to overshadowed the RBA’s robust medium term domestic outlook. Many now expect Governor Stevens to remain on hold for the remainder of the year, as ‘risks for the RBA have become more evenly balanced and the outlook remains conditional on the strength of the global economy’. If global turmoil continues, it could temper domestic inflation over time and ease pressure on the RBA to raise interest rates. Some futures traders now expect the RBA to reduce its key interest rate by-128bp over the next 12-months. 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. Currently, investors are better sellers of the currency on rallies (1.0538).

Crude is higher in the O/N session ($87.22 up +0.57c). Crude prices fell yesterday after Germany, Europe’s largest economy, almost stalled in the second quarter (+0.1% vs. +1.3%), bolstering concern that global fuel consumption will diminish. Sarkozy and Merkel considering Eurobonds as a longer term option does not help market confidence.

The weekly inventory report is expected to show that US oil supplies fell to a five-month low this morning. Last week’s EIA release had been bullish for the commodity, dragging prices up from their ten-month low. The report showed that oil stocks fell -5.2m barrels after the market had projected a +1.5m barrel build. 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.

Now that the CME margin rule change has been priced out of the equation, gold prices have been allowed to rally for a second consecutive day as European sovereign debt concerns bolster demand for the yellow metal as an investment haven. Earlier this week, the commodity gained for the first time in three sessions as a weaker dollar revived demand for the metal as an alternative investment. Apart from the administration side effects of owning the commodity, the metal continues to be a recipient of safe-haven flows in times of uncertainty. This is one of those times. Gold’s prices have more than doubled since the recession began in late 2007. The metals climb has accelerated on the back of the European 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 are curtailing the dollar’s appeal as a safe haven and by default, support commodities.

Investors have bought more gold in the last month than in the prior six months according to CFTC data last week. The commodity is heading for its eleventh consecutive annual gain. In this trading environment, $2,000 is very much in the realms of possibility over the next six months ($1,795 +$10.30).

The Nikkei closed at 9,057 down-50. The DAX index in Europe was at 5,904 down-91; the FTSE (UK) currently is 5,299 down-58. The early call for the open of key US indices is lower. The US 10-year eased 4bp yesterday (2.22%) and is little changed in the O/N session.

Treasury prices rallied late afternoon yesterday as French and German leaders dismissed calls for the issuance of euro bonds that would allow borrowing on behalf of all 17 euro states, encouraging demand once again for a safe heaven asset. Investors were looking for more urgency from leaders to tackle the Euro crisis, lack of it and US bonds again set to retest this months low yields.

With the short end of the yield curve resigned to trading on top of o/n fed funds, dealers will expect longer-dated product to trade more volatile as investors reach for yield and on speculation that the Fed may extend bond buying away from shorter-dated notes and towards 10-year notes to help stimulate the economy. Month-to-date, treasuries prices have surged, pushing 10-year yields down more than-50bp. For the near term, bond investors are likely to continue to keep a close eye on equities as they dictate Treasuries’ moves.

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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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