Reasons to Short EUR begin to Pile

Futures fund dealers certainly got the jump in the o/n session and have been happily sitting on their pre-sold positions. The EUR this morning remains choppy, susceptible to month-end flows from real demand players. The currency has been playing with a whole lot of hurt this week.

There is Merkel’s shaky support. Trichet has indicated that the bank is reviewing its assessment of inflation risks as economic growth slows, perhaps ending a tighter ECB policy. European bank’s accounting body apparently have not yet taken big enough losses on Greek debt. What are you waiting for? A default? In the woodwork, there is a German lawmaker stating that their ‘parliament must have a say in future bailouts’. Beautiful, another stalling tactic that will slow the whole Euro legal process down.

An IMF report has cut its 2011-12 growth forecasts for the US (+1.6% from +2.5%-2011 and 2% from +2.7%-2012) and EU (+1.9% from 2%-2011 and +1.4% from 1.7%-2012) and says that Cbanker’s in both should be prepared to ease monetary policy.

Finally, this morning, the Italians did happen to get their debt issue away, but it was a soft bid-to-cover ratio. In this environment and it being the end of the month, it’s difficult to justify long EUR positions.

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

Forex heatmap

Investors will likely wait for this Friday’s Augusts US’s job report to make fresh dollar bets on whether more Fed stimulus is coming. Yesterday’s US data was a healthy surprise. Consumers increased their spending in July (+0.8%), much more than expected. It was the biggest gain in five-months and a confident sign of strength for the US economy going into the second half of the year. Income grew +0.3% as both wages and salaries grew. Even the savings ratio slowed, falling to +5% as consumers become more confident in the economy. The spending portion is very important to overall growth and its good to see it up-tick, especially in the wake of the US government lowing their estimates for the second quarter down to +1% through June. Unfortunately, with unemployment remaining high and energy prices elevated continues to pressurize consumers spending and reduce buying power.

Last week, the Fed said that they stand ready to provide further support to an economy that is saddled with +9.1% jobless rates. Ben did indicate that he expects the economy to pick up speed in the second half and the above report goes someway to back his prediction. Digging deeper, the inflation gauges within the report picked up a tad in July. The price index for personal consumption expenditure increased +2.8%, y/y. On a monthly basis, the PCE price gauge was +0.4% in July from June and what is more important, the core-PCE which is watched closely by the Fed, rose +0.2% in July.

The NAR reported yesterday the number of contracts to purchase previously owned US homes fell -1.3% in July, the first decline in three-months, in a sign that lower prices and borrowing costs continue ‘not’ to attract buyers. The drop followed a +2.4% gain the previous month.

The dollar is higher against the EUR -0.48%, GBP -0.44% and CHF -0.08% and lower against JPY +0.11%. The commodity currencies are weaker this morning, CAD +0.43% and AUD +0.47%.

Like all good commodity growth sensitive currencies, the loonie was supported for most of yesterday by the rise in risk interest. In a thin trading market, the CAD was allowed to print three-week highs before paring some of its gains on profit taking. With Bernanke giving the market a little bit of calm and confidence over the weekend has certainly increased the short term risk appetite of investors. The currency extended it gains after US data showed that consumer spending from Canada’s largest trading partner climbed more than forecasted last month.

Now that the Fed is taking a timeout regarding implementing any of their monetary tools to stimulate growth, the market will have to wait and see what Friday’s, US employment numbers bring to the table before investors place longer term bets. Outlook for the Canadian economy has come under serious scrutiny over the past few weeks, allowing investors to become better buyers of dollars on dips (0.9794).

The Aussie dollar remains robust this morning, having reached its highest levels in nearly a month as investors continue to respond to stronger economic data State side and gains in equities this week. Asian bourses have rallied after the Fed eased concerns that the US economy would stall. The expectations of rate cuts down under have been wound down.

It seems that the currency cannot lose at the moment. If US data continues to improve then local market pricing for interest rate cuts by the RBA will evaporate. On the flip side, if US data takes a turn for the worst, then the AUD will benefit from a weaker dollar. Now that this growth and interest rate sensitive currency would likely be supported on both poor and strong US data, certainly favors a test of the old highs north of 1.10.

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. Domestic credit markets need to reverse expectations of interest rate cuts before the AUD can fully surge again. Stevens 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.

However, domestic data is found wanting. Building approvals in July rose +1% from June o/n, compared with an expected rise of +2%. Aussie consumer sentiment is holding at two-year lows, private sector borrowing has slumped, retail spending is well below normal, home prices are falling, construction and services sector are weak and manufacturing is contracting at a faster pace. These are all strong enough reasons for the RBA to remain on the side line until it has a stronger handle on the economy. Currently, investors are better buyers of Aussie dollars on pullbacks as long as this risk loving environment remains (1.0632).

Crude is lower in the O/N session ($86.91 down-0.36c). Crude prices climbed with stocks yesterday on optimism that the US economy will expand and a report indicated that US consumer spending rallied last month, supporting Bernanke’s comments last week that growth will resume and that the central bank has tools to stimulate the economy even further.

Last week’s EIA report showed that oil stockpiles fell -2.21m barrels to +351.7m. 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 showed 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 has been 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 Libyan revolt has reduced the availability of light oil with low-density and sulfur content. The war torn country’s output has fallen to +100k a day last month, down from +1.6m barrels per day in January. The Fed’s monetary policy will be bearish for the dollar and so should be bullish for crude in the longer term.

Gold prices dropped sharply yesterday, in holiday-thinned trading, after North American bourses opened higher, deflecting interest for the safe-haven metal. With a possibility of a stimulus package from the Fed in the weeks ahead, risk appetite seems to have returned to the markets with ‘safer haven assets’ being liquidated. Technical pressure has also bored down on the commodity who failed again near record prints.

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. It remains a crowded trade that investors wish to pare on expectations Bernanke will do something to boost equity prices even further next month.

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. 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 ($1,794+$2.20).

The Nikkei closed at 8,953 up+102. The DAX index in Europe was at 5,659 down-11; the FTSE (UK) currently is 5,254 up+124. The early call for the open of key US indices is lower. The US 10-year backed up +3bp yesterday (2.23%) and is little changed in the O/N session.

Despite yields on shorter term treasuries remaining 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, the US curve has steepened. Longer term Treasury prices have declined for the first time in three days as the US economy showed signs of resilience and European debt turmoil eased, reducing demand for safe haven debt and boosting global equities. Investors have taken some assurance from Bernanke that growth would eventually resume. Yesterday’s data in the US showed that personal spending rose last month more than expected (spending accounts for +70% of the economy). 10-year yields remain range bound +2.35-2.03%.

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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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