Forget EURO EFSF Issues, It’s Quarter-End Pricing

Despite the toing and froing of austerity ideas and Greek sovereign debt solution suggestions, the market remains in a defined range as dealers execute month and quarter end-demand requirements. It can be the silly season for price action, and trying to complete it in this politically and economically charged environment may come at a price. Liquidity remains a premium, as dealers try to end this exhausting month above water.

Now that Germany has handily passed the EFSF ratification (523 vs. 85) this morning, investors should expect some of the market premium to be taken back ahead of US data. Market focus will shift towards the Troika committee, who arrive back in Greece today. They will decide whether Athens has done enough to secure a new batch of aid vital to avoid bankruptcy. Eurozone leaders likely will not decide whether to release Greece’s next bailout installment until the Eurozone Summit on October 13.

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Trying not to be distracted by what was said, what is being said and what’s expected to be said, the market had to chew on some softer US durable order numbers yesterday. The details in the August report highlight the uneven nature of the US economy and despite all this the economy is doing better than a year ago. Durable good orders decreased by -0.1% from the prior month to $201.7b. The market had been expecting a +0.2% rise in orders. The drop followed a +4.1% total orders jump in July and are up a stellar +10% from a year ago.

Digging deeper, a healthy sign was the spending by businesses on equipment rose. Orders for non-defense capital goods, ex-aircraft, happened to increase by +1.1% after dropping in July. The first half of this year has been tough, especially since consumers have reduced their spending as they worry about finances, future incomes and a high unemployment rate. Confidence numbers earlier this week support their financial concerns and mood for this month. The US manufacturing sector continues to struggle. Despite the recent ISM reports showing growth in the sector, the rate of expansion is ‘something not to write home about’. The decline in durable orders was driven by motor vehicles falling -8.5%. Ex-transportation, orders fell -0.1% after rising +0.7% in July. August shipments of durables fell -0.2%, following three consecutive increases. Finally, unfilled orders (future demand) continue to rise.

The dollars is lower against the EUR +0.74%, GBP +0.61%, CHF +0.56% and JPY +0.09%. The commodity currencies are stronger this morning, CAD +0.30% and AUD +0.72%.

The loonie under performed and lagged against other commodity pairs on the back of BoC Deputy Governor Macklem’s comments yesterday. He indicated that policy interest rates “can be reasonably expected to remain below normal for some time to come”. The CAD managed to drift lower outright as riskier assets remained vulnerable to doubts over the ability of European policy makers to stem a debt crisis that threatens to trigger a global recession.

Greek lawmakers approving a deeply unpopular property tax has opened the way for the return of international lending inspectors and the release of vital aid is been seen as a huge boost to global confidence and risk appreciation. Commodity prices have also been finding it difficult to maintain traction, especially after US durable data, which obviously does not benefit the loonie. The CAD currently trades like a low-beta currency that is trading in a well defined range with corporate Canada itching to own some of the currency on top and risk aversion strategist looking to pick up dollars close to the greenback’s breakout level at the beginning of the week.

Last weekend, BoC governor Carney was ‘encouraged’ by euro-area policy makers’ ‘diagnosis of the seriousness of the situation’. Carney has become more concerned about global growth, especially now that the IMF has revised their growth forecasts. Investors are happy to keep their cards close to their chest until after month and quarter end trading (1.0300).

The AUD strengthened outright and versus the JPY as Asian stocks reversed earlier losses, supporting demand for higher-yielding currencies. Aussie data last night was also pro-currency. Australian job vacancies rose +3.2% in the three months to August from the quarter before. Many analysts believe the downward pressure that has been applied to this growth currency has created a price overshoot as there is too much ‘bearishness priced into the Australian interest-rate curve’. It was one of the worst performing currencies in the pass month, declining -2.6% outright.

Investors remain concerned that European policy makers will struggle to resolve their debt crisis. Despite domestically having all the strong fundamentals, cash-futures are showing that traders are betting the RBA will lower its key rate by at least-75bp by the end of the year. If anything, the RBA is likely to be on hold for an extended time, allowing investors to sell higher yielding assets on rallies with the top side becoming more contained (0.9854).

Crude is higher in the O/N session ($82.05 up+84c). Oil prices remain under pressure and are heading for the biggest quarterly drop in three years, on concern that Europe’s debt crisis will linger and on rising inventory levels. The value of the dollar remains the commodity’s biggest nemesis. Crude is down -7.2% this month and -9.8% this year. Prices have dropped-14% since the end of June, the biggest quarterly loss since 2008.

Last week’s EIA report showed a build up of nearly +2m barrels of crude. This is not bullish and coupled with the Euro sovereign crisis should continue to pressurize commodity prices. Not to be out done, gas stockpiles also rose +791k barrels to +214.9m last week. Supplies of distillate fuel (heating oil and diesel) increased +72k barrels to +157.7m. Refineries operated at +87.8% of capacity, down -0.5% from the prior week.

Weaker growth predicted by the IMF, which points to lower oil demand, will have dealers thinking of shorting the market again. Expect investors to run into technically selling on some of these rallies.

Gold prices declined yesterday, similar to other commodities, as European leaders strive to tame the sovereign debt crisis. The European Parliament voting to make sanctions more automatic against member nations that breach deficit and debt limits took some of the fear factor out of the market and had investors liquidating their positions ahead of quarter-end. After last week’s price action, investor’s are taking a cautious attitude in entering the gold market.

The eight-month low print this week seems well supported and suggests that the market may have registered its near term overshoot target ($1,530). All the bullish factors for wanting to own the yellow metal, like dollar debasement economic imbalances and sovereign periphery debt, remain. To try to apply supply and demand logic in a panicked market is near impossible.

Last Friday’s dollar decline was the largest dollar selloff on record. Investors had been selling metals to cover losses in other asset classes. Gold is one of the few assets that remain in positive territory this year and, because of this, as investors required cash, they sell the assets that have performed. The Fed’s efforts to drive interest rates lower to support lending should, by default, support commodity prices ($1,631 up+$13).

The Nikkei closed at 8,701 up+86. The DAX index in Europe was at 5,613 up+35; the FTSE (UK) currently is 5,199 down-19. The early call for the open of key US indices is lower. The US 10-year backed up+1bp yesterday (1.97%) and is little changed in the o/n session.

Product further out the US curve pushed yields higher yesterday. Treasuries fell, extending the advance of 10-year note yields from a record low print (+1.67%) earlier in the week, as speculation that Europe’s leaders are moving toward agreement on measures to counter the region’s debt crisis sapped refuge demand. Also pressuring prices is the US treasury department coming to the market with $99b’s worth of product this week.

The second debt tranche was the issuing of $35b 5-year notes yesterday at record low yields as investors continued to seek shelter. Just like the shorter product, the 5’s withstood the test of the Fed’s “Operation Twist”. The overall demand was strong at a yield of +1.015% and an impressive bid-to-cover ratio of 3.04, well above the four auction average of 2.78. Indirect bidders took +45.9% of the supply, above the +40.9%average and direct bidders took +13.8%. Analysts had feared that the Fed’s move to sell the short end would hurt demand, this was not to be. Today we get the last of this weeks tranches with $29b 7‘s. The current market conditions should see good demand for supply.

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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