Don’t forget EU’s woes when buying EUR’s

Will we get to see an extension of last weeks price action this morning? With London on holidays and New York slowly getting back to normal, the interest may not be there today. However, it’s times like this when liquidity at a premium, has a ‘big’ affect. For FX, investors take on Ben’s speech in Jackson Hole is that the big picture for the future is ‘easier’ monetary conditions, even if the extent is only ‘modest’.

Thus far, the different regions have greeted the news positively, with equities mostly higher and the USD weaker. On its own this morning is the Swiss franc, trading in a bubble and running scared in response to press reports that some domestic banks are considering charging its customers negative interest rates on sight deposits.

It seems that the market has got the general feeling that more monetary stimulus is in prospect. Bernanke has expanded the September meeting to two days combined with his statement that policy makers still have a range of policy options available to implement a ‘new’ ease is giving investors the ‘thumbs up’ to embrace risk.

Trichet has also been helping that cause. His comments Friday that he would not allow European banks to become illiquid stating that ‘the idea that we could have a liquidity problem in Europe is plain wrong’. Analysts note that these comments could lead to an LTRO expansion at the ECB’s next meet which may ‘pull down credit spreads on European financials’. Another boost for the EUR?

The US$ is weaker in the O/N trading session. Currently, it is lower against 13 of the 16 most actively traded currencies in a ‘whippy’ trading session.

Forex heatmap

The dollar is lower against the EUR +0.12%, GBP +0.13% and JPY +0.03% and higher against the CHF -1.03%. The commodity currencies are stronger this morning, CAD +0.43% and AUD +0.47%.

The loonie rose for the first time in five weeks after Bernanke insisted on Friday that Canada’s largest trading partner’s, the US, economy is not weak enough to warrant immediate additional stimulus. The thin CAD market was able to rally as equities gained on Bernanke’s statement that the US economy is likely to recover in the second half of this year and this despite a disappointing Canadian GDP print for the second quarter.

Now that the Fed is taking a timeout regarding implementing any of their monetary tools to stimulate growth, Bernanke is passing the buck. The market will have to wait and see what today’s fallout will be like to gauge the ‘real’ market attitude to Ben’s Jackson Hole speech. Expect dealers to start shifting their attention back to European woes. Until now, the commodity growth sensitive currency, the loonie, remains range bound. It’s movements are been dictated to by the risk loving and risk aversion trading strategies that are positioning most portfolios.

Outlook for the Canadian economy has come under serious scrutiny over the past few weeks, again pushing parity to the fore. Investors are better buyers of dollars on dips until proven wrong (0.9770).

The Aussie dollar climbed to a three-week high o/n before a report tomorrow is expected to show that building approvals increased in last month. The currency happened to print its strongest level in three weeks as Asian bourses gained after the Fed eased concerns that the US economy would stall. The expectations of rate cuts down under have been wound down and there is improved risk appetite following Bernanke’s comments.

Last week RBA governor Stevens said inflation ‘bears careful watching’, easing speculation that policy makers would cut rates any time soon in a speech to the House of Representatives Standing Committee. Futures dealers reduced their expectation for RBA rate cuts over the next year by-7bp to +126bp. He acknowledged the ‘heightened’ degree of uncertainty offshore, but again, highlighted the impact from the improvement in the terms of trade on income keeping inflationary pressures elevated. Importantly, Stevens discounted concerns over bank funding. He has also commented on how Australia’s corporate, household and Government balance sheets are strengthening. Although the Governor stating that the currency at 1.10 is ‘getting ahead of itself’. Currently, investors are better buyers of Aussie dollars on pullbacks as long as this risk loving environment remains (1.0614).

Crude is higher in the O/N session ($85.47 up+10c). Crude prices rallied on Bernanke comments that growth will resume and the central bank has tools to stimulate the economy. Also aiding prices last week was the US weekly supply declining as refinery rates matched their highest level for 2011.

Oil stockpiles fell -2.21m barrels to +351.7m last week. The market had been anticipating a build of inventories of +800k barrels. Crude imports fell-477k barrels per day to +8.77m. Also of note, data released by the IEA shows that the US SPR supply fell -4.8m barrels last week. On the flip-side, gas inventories rallied +1.36m barrels to +211.4m. Analysts had been expecting a-1m barrel decline. Average gas demand in the last four-weeks fell -2.4% from a year ago. Finally, distillates (heating oil and diesel), rose +1.73m barrels to +155.7m, more than the forecasted rise of +700k barrels. Refinery utilization rose +1.2% to +90.3% of capacity.

The report is bullish for crude and bearish for the products. For the moment, Crude prices continue to hold just above strong support levels, supported 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. The market now waits for Ben to re-enforce the Fed’s intentions.

Gold rallied on Friday as falling global bourses coupled with the commodity’s biggest weekly drop in more than three-months boosted investor demand. Earlier in the week, the metal demand diminished after a rally to new record highs. From a technical perspective this is a normal correction given the magnitude of this months move. The weak long investors have been tapping the market and taking some profit off the table on speculation that financial markets may be stabilizing, eroding the appeal of the precious metal as a safer haven. The commodity has lost over 8% in the past three-days, that’s equal to all of last two week gains. Technically it’s a crowded trade that investors wished to pare on expectations Bernanke will do something to boost equity prices today. It will be interesting to see how this market reacts after Friday’s illiquid and relatively low participation.

Before last week, the commodity trade was up +31%, y/d, as the global debt crises and volatile stock markets boosted the appeal of the metal as an alternative asset. A hike in margin requirements for gold forwards in Shanghai is also helping to curb the precious metal’s meteoric rise. This is a similar move to the COMEX margin hike of +22% earlier in the month.

Big picture, with the Fed’s efforts to drive interest rates lower to support lending should curtail the dollar’s appeal and by default, support commodities. The commodity is heading for its eleventh consecutive annual gain ($1,822+$24.80).

The Nikkei closed at 8,851 up+54. The DAX index in Europe was at 5,603 up+67; the FTSE (UK) currently is 5,129 down-1. The early call for the open of key US indices is lower. The US 10-year eased 3bp on Friday (2.20%) and is little changed in the O/N session.

Yields on shorter term treasuries remain rooted to their record lows after the Fed signaled earlier this month that they are willing to take further measures to prevent the US from falling back into a recession. There was no action taken in Jackson hole and with Bernanke refraining from endorsing the use of additional stimulus coupled with a disappointing growth report released on Friday happened to push yields lower. The market has been reacting to what’s not in the Fed’s speech. Treasuries did pare some of their gains after reaching the highs of the day as investors took assurance from Bernanke that growth would eventually resume. 10-year yields remain range bound +2.35-2.03%.

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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