EUR/CHF 1.20 fixation-who will do the pushing?

Investors are too beat up to be running ahead on speculation. It’s G7 day and the rumors of possible concerted monetary easing, the bait, is not been taken by this market. It seems it prefers to wait for more concrete evidence.

Will the Japanese call for global policy makers help to offset pressure on the JPY be ignored? Trichet publicly supporting the SNB yesterday and along with the US having to ‘chastise’ the BoJ’s unilateral intervention efforts will probably ‘erode any innovative response’ from the G7 this weekend, mind you we have been surprised in the past.

A bigger than expected job stimulus plan by Obama has been greeted by a muted reaction by the market. It’s a surprise, especially after Bernanke underwhelmed everyone and failed to go beyond his Jackson Hole speech. For the FOMC, D-day is Sept 20-21.

All we have got now is to be fixated on the number 1.20. Without a Soros who will be doing the pushing? With ongoing concern about a possible Greek debt default or a downgrading of Italy’s credit rating, significant investor demand for the CHF could resurface over the coming weeks. SNB’s metal shouldl be tested.

The US$ is stronger in the O/N trading session. Currently, it is higher against 12 of the 16 most actively traded currencies in a ‘subdued’ trading session.

Forex heatmap

The plethora of data yesterday did noting for the markets already subdued mood. Trichet gave investors an official warning that the Euro-zone’s economy will grow more slowly than previously expected and stated that the region faces ‘intensified downside risks’, enough of a reason for both the BoE and ECB to keep rates on hold at +0.5% and +1.5% respectively. The MPC also left its asset purchase facility on hold at +200b. The market had expected the BoE to waiver on their QE amount. With UK Industrial Production falling in July (-0.2%) and growth in the dominant service sector posting the sharpest slowdown in more than a decade this week, has investors believing that rate increases are off the table for the remainder of the year. Call for further QE have been increasing. Governor King will have to wait for a further slide in the activity and confidence data over the coming months before making an expansion of their QE program a prospect.

Trichet said threats to the euro region have worsened and inflation risks have eased, giving officials the option to take further action should the debt crisis deepen. While monetary policy is still ‘accommodative’, financing conditions have worsened in various regions, allowing the ECB to stand ready to provide more liquidity if need be. Trichet’s assessment of the economic outlook was certainly more pessimistic than last month, joining the line of CBankers whose tone has become more dovish of late. The ECB has revised down their projections for growth (+1.4%-+1.8%) and inflation in the region.

More US labor data continues to offer up further signs of weakness in that sector. US jobless claims rose last week by +2k to a seasonally adjusted +414k. Not helping the situation was the prior weeks print also revised higher to +412k from +409k. The release remains above the psychological +400k print, the watershed marker where analysts believe that the economy is adding jobs. Digging deeper, the four-week moving average rose by +3.7k to +414,750. A surprise was the continuing claims number falling by-30k to +3.7m. This is however a print reported with a one week lag. The unemployment rate for workers with UI was unchanged at +3%.

The US Trade deficit in July reported its biggest drop in nearly three years (-$44.8b vs. -$51.5b, down-13%) as exports surged to a record high and retreating oil prices cut into imports. The bill for crude for July fell to $29.3b from $31.4b as crude imports fell-281m barrels. It’s worth noting that the trade deficit with China expanded to its highest level in 11-months despite rising exports (+1.1% to +$26.9b). Expect to hear more from the China Yuan critics after this print. Excluding inflation, US exports grew +3.6%, while imports eased -0.2%.

The dollar is higher against the EUR -0.25%, CHF -0.13% and JPY -0.10% and lower against GBP +0.08%. The commodity currencies are stronger this morning, CAD +0.03% and AUD +0.22%.

Canadian data did little to affect the loonie price action yesterday, that was left up to the market interpretation of both Trichet and Bernanke’s comments. Outright the loonie was weaker after Trichet said the Euro-zone would grow more slowly than previously expected. On the crosses, the currency outperformed, buoyed by the OECD remarks that the Canadian economy will avoid slipping into another recession and recover from the second quarter contraction to lead expansion among G7 in the fourth quarter. Against its largest trading partner and despite a smaller than expected trade deficit in July (-0.8b) the CAD underperformed as risk sentiment wilted.

There were no surprises with the BoC this week, who held rates steady at +1%. The expected ‘dovish’ tone was applied, explicitly noting ‘the need to withdraw monetary stimulus has diminished’ which is an ‘expected about-face from the July statement. Similar to Trichet, the market expects the Governor will be turning towards becoming more concerned about global growth going forward. For the time being, futures traders anticipate the BoC to remain on hold until the end of the third quarter of next year.

This morning we get the Canadian job numbers. Investors anticipate another strong print. Expect this mornings release and G7 headline to dictate investors interest deferential spread positions for the weekend (0.9897).

Down-under, markets reacted favorably to Obama’s job’s address. The AUD rallied and even pared some of its weekly losses outright. Data out of China indicated that inflation cooled last month from a three-year high has also help the AUD, easing concern that the PBoC would take further steps to curtail price gains.

Big picture, data this week has not helped the currency’s plight. Employment fell -9.7k in August, far below the consensus forecast for a +10k gain. Most importantly for the market, employment growth is worse than the RBA was anticipating, and reflects the accelerated ‘structural change’ partly due to the AUD strength. The unemployment rate rose two ticks to +5.3% from +5.1% in July. Despite being close to full-employment, the pace is now questionable. Already noted this week, the RBA remains firmly on hold. However, the next employment report in October will be important in guiding future market rate expectations.

However, it seems that the currency cannot lose. 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. Currently, investors are better buyers of Aussie dollars on pullbacks as long as a risk loving environment remains (1.0590).

Crude is lower in the O/N session ($88.45 down-0.60c). Crude prices yesterday, despite running ahead on the back of a shortfall of last week’s EIA report ended the day little changed. Prices this week were dragged higher as a weather system threatened to reduce US production in the Gulf.

Last week’s EIA inventory report revealed that crude stockpiles decreased by-4m barrels to +353.1m, but are above the upper limit of the average range for this time of year. Not as radical but on the flip side was gas inventories move higher by +200k barrels last week, after shedding -2.8m barrels in the prior week, and are in the upper limit of the average range. Analysts were expecting crude inventories to dip by-2m barrels and gas stocks to shed by -1.4m barrels. It was certainly a bullish report for prices. Oil refinery inputs averaged +15.5m barrels per day during the week, which were +6k barrels per day above the previous week’s average as refineries operated at +89% of their operable capacity.

For the moment, Crude prices continue to hold, supported by unrest in Libya where the availability of light oil with low-density and sulfur content output has fallen. The Fed’s monetary policy should be bearish for the dollar and bullish for crude in the longer term.

Gold gained for the first time in three days yesterday after an unexpected rise in US weekly claims boosted demand for the yellow metal as a safer-haven. For most of this week, the bulls have been taking a beating after gold prices happened to retreat the most in two-weeks, as a rebound in global equities eroded demand for an alternative asset and spurred investors to sell the metal after its rally to an all-time high late last week.

The bulls would have us believe that commodity prices have recently undergone a strong correction, followed by a decent consolidation and particularly as European sovereign concerns escalate. Investors are guessing that the Fed will be required to ease monetary policy in answer to stimulate their economy. 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 ($1,886+$28.00c).

The Nikkei closed at 8,737 down-55. The DAX index in Europe was at 5,314 down-94; the FTSE (UK) currently is 5,295 down-45. The early call for the open of key US indices is lower. The US 10-year eased 4bp yesterday (1.99%) and is little changed in the o/n session.

Treasury prices remain better bid, again pushing 10-year note yields toward a record low, as investors seek refuge on concern that both the US European officials are not moving fast enough to relieve financial stress in the markets. The 2/30’s spread trades on top of the yearly low of +308. Analysts do not see much of a back up in yields based on the long-term structural uncertainty in Europe as well as domestic fiscal and monetary policy.

As expected, the US treasury announced it will sell $32b 3’s, $21b 10’s and $13b bonds next week. Dealers do not expect to be leaning too heavily on the market to take down supply. They will be focusing on what Ben and the FOMC has to offer at its two day meeting.

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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