Again the EUR fails to weaken!

The lack of a EUR selloff this morning, in the wake of a poor Euro industrial order print (-0.7%) and ifo data (108.7), seems to prove that the market is no mood to go heavily short ahead of Bernanke’s speech this Friday. Mind you, the ECB stepping in again to buy some Italian bonds, is making investors choice a tad easier. The market very soon will need to justify the reality as it appears to be getting ahead of ‘this’ announcement.

It seems that the BoJ has become another Cbank resigned to the fact that fighting the strength of its own domestic currency outright is too expensive, you only have to ask the SNB what that’s like. After another downgrade overnight by Moody’s (Aa3 to Aa2), the Japanese government has introduced new policy measures to assist exports. They will introduce a credit facility to fund procurement of energy and other resources from abroad. A credit facility to help Japanese companies engage in M&A abroad. The government will fund these facilities by releasing FX reserves ($100b) to JBIC to lend on to Japanese firms. With no intervention or new monetary ease mentioned will probably allow the JPY to appreciate that bit further, even more so if the SNB introduces a floor.

The US$ is weaker in the O/N trading session. Currently, it is lower against 8 of the 16 most actively traded currencies in a ‘whippy’ session.

Forex heatmap

Yesterday’s US data was woeful and forcing the market hard to keep their positions close to home ahead of Bernanke’s much anticipated speech this Friday. The Richmond Fed manufacturing index slumped this month to-10 vs.-1 in July. There was very little good news in the subindexes. Manufacturing shipments plunged to-17 from-1 and the service index was-1 versus +7. The employee index slid to 1 from 4, highlighting how manufactures were having difficulties adding jobs. Manufactures ‘optimism’ regarding future business prospects dropped aggressively in August and they expect future forecasts to darken in the next six-months.

Sales of new US homes fell for a third consecutive month in July, easing to +298k units. Although a depressing print, its just under +7% higher than the number sold last year. The revisions did not help as last month was revised down to +300k units from +310k. Analysts noted that the weaker print coupled with declining competitive activity and bids led to a further fall in prices, down -6.3% y/y to a median price of $222k and a record low level of inventories (+165k-new homes available) for last month. Even with lower purchases, the month’s supply of houses remains static for June and July, holding at +6.6 months.

The dollar is lower against the EUR +0.14%, GBP +0.21%, CHF +0.36% and JPY +0.21%. The commodity currencies are weaker this morning, CAD -0.03% and AUD -0.26%.

Canadian data did little for the loonie outright yesterday. It was left up to US New Home Sales and Richmond manufacturing data to provide the loonie some of its negativity. Domestic data showed that Canadian Retail Sales improved +0.7% in June from +0.3% in May, solidifying the third monthly increase and bringing Canadian retail sales up to $37.8b. Interestingly, core-sales (ex-autos) decreased to -0.1% from a rather robust +0.6% in May. The headline increase can be attributed to lower prices from ‘car dealers’, resulting in a +1.6% increase in volume.

Outlook for the Canadian economy has come under serious scrutiny over the past few weeks. Governor Carney says second-quarter growth is likely to be flat or down slightly. It was only a month ago they had forecasted growth of +1.5% on an annualized basis in the quarter. With weaker US demand growth prospects the currency should come under renewed pressure in the medium term. Parity looms again for the loonie on fears about the stability of the European banking system and on the back of weaker data from its largest trading partner. Technically, the currency needs to fill in that gap. The loonie has dropped –4.1% so far this month, as global equities remain on the back foot. Investors are better buyers of dollars on dips (0.9890).

The AUD for a second consecutive day fell outright in the o/n session as Asian stocks extended global losses, curbing appetite for higher-yielding assets. The Aussie is on course for a fifth weekly drop against the JPY as traders increase bets for an interest-rate cut from the RBA amid concern that global growth is slowing.

O/N reports showed that one of the leading Aussie economic index’s for June fell (-0.8%) and second-quarter construction work missed economists’ estimates (+0.7% vs. +1%). 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’. Currently, investors are better sellers of the currency on rallies (1.0480).

Crude is lower in the O/N session ($85.04 down -0.40c). Crude prices for a second consecutive day got ‘the’ improbable temporary lift as the market continues to price in a QE3 announcement this Friday. Ongoing turmoil in Libya is beginning to dampen investor’s hopes that the country is close to resuming crude exports. Today’s weekly EIA report is anticipated to show that gas inventories shrank last week while crude stockpiles rose.

Last week’s inventory report was temporarily bearish for the black stuffs prices. Oil stocks rose +4.23m barrels to +354m versus an expected inventory decline of-500k barrels, and are above the upper limit of the average range for this time of year. In contrast, gas inventories fell by -3.5m barrels, a week after dipping by -1.6m barrels in the prior week, but are in the upper limit of the average range. Oil refinery inputs averaged +15.4m barrels per day during the week, which were-205k below the previous week’s average as refineries operated at +89.1% of their operable capacity. Over the last four weeks, imports have averaged +9.30m barrels per day, which were-606k below the same four-week period last year.

For the moment, Crude prices continue to hold just above strong support levels, support by Libya, exclude them from the equation and the commodity remains vulnerable. The Fed’s monetary policy will be bearish for the dollar and so should be bullish for crude in the longer term. However, markets appetite is telling us different in the short term.

The reality, investors are nervous about this months +16% rally in gold and are happy to offload some of their positions on the back of stronger global bourses. A hike in margin requirements for gold forwards in Shanghai is helping to curb the precious metal’s meteoric rise. This is a similar move to the CFTC margin hike of +22% earlier in the month. With global bourses printing black has led to a small pickup in risk appetite, in turn, rising riskier assets are appearing at the yellow metals expense.

Apart from the administration side effects of owning the commodity (CME’s and Shanghai margin requirements), the metal continues to be a recipient of safe-haven flows. Gold’s prices have more than doubled since the recession began three-years ago. Big picture, with 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. The commodity is heading for its eleventh consecutive annual gain. In this trading environment, $2,200 is very much in the realms of possibility over the next six months ($1,851 -$9.90).

The Nikkei closed at 8,639 down-93. The DAX index in Europe was at 5,595 up+93; the FTSE (UK) currently is 5,137 up+8. The early call for the open of key US indices is lower. The US 10-year backed up 3bp yesterday (2.13%) and is little changed in the O/N session.

Better than expected manufacturing data from China and the Euro-zone has encouraged some profit taking in the treasury market. With global equities seeing black is the main force for pushing US debt prices lower yesterday. This week the market will be focusing on the demand for US product after yields have fallen to new record lows. The US treasury will issue $99b of new notes supply, starting with yesterday’s $35b 2’s, today’s $35b 5’s and tomorrows $29b 7’s.

Ongoing Euro-zone bank concerns and expectations of additional policy from the Fed on Friday should provide a floor for the Treasury market despite this week’s new-supply. Dealers expect 10’s to trade between +2.35% and +1.95% in the medium term.

Ultra low yields in the US are not dissuading investors. Demand for 2’s remains strong and yesterday’s auction bodes well for both the 5’s and 7’s this week, a sign that treasuries remain a favorite place to seek safety. The 2-year note drew a yield of +0.222%, compared with the average forecast of +0.221%. The bid-to-cover ratio was +3.44, compared with the average of +2.38. Yesterday’s product was the first of the maturity to be sold after the S&P’s downgrade.

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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

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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