Bank of Japan you are costing us money

Oh, can’t you feel the relief? No double dip! Yields and stocks soared yesterday. Don’t bet too heavily on it. It’s probably an even bet that ‘the’ dip is within our grasp. With US growth being so ‘modest’, and in this environment, it would not take much to tip the economy into negative territory. That been said, US industrial production take a bow, just the one, for the time being at least. With the BOJ seeing no immediate threat to their domestic economy is costing us a fortune. Every day the market keeps trying to pick the yen’s high or dollar lows. We would get better odd’s winning the lotto and be spending less. When the market gets confirmation that authorities will indeed be standing aside, the dollar will be blowing to the left and not the right!

The US$ is mixed in the O/N trading session. Currently it is lower against 9 of the 16 most actively traded currencies in a ‘choppy’ trading range.

Forex heatmap

US data yesterday brought us a mixed bag of results. US PPI increased for the first time in 4-months (+0.2% vs. -0.5%), signaling slower growth is not resulting in deflation. Core-PPI climbed +0.3%, more than expected and it was the biggest gain in 8-months. With a slowing economy, companies will have ‘little room to pass on costs and will keep overall prices contained’. The subdued inflation indicators allow the Fed to remain on the side line for the foreseeable future. It was not a surprise to see US Housing starts rising less than forecasted (+0.55m vs. +0.57m) and building permits declining to the lowest level in more than a year (+0.57m vs. +0.58m). This is stronger proof of a lack of a rebound in construction following an expired tax credit and much lower mortgage rates. It’s no surprise to see that weaker income growth, elevated inventories, including shadow stock, and higher unemployment should continue to pressurize the housing industry.

It was a much better reading for US industrial production yesterday (+1.0% vs. +0.5%). Previous months data happened to be ‘skewed’ by an artifice lift in utilities (specifically electricity usage). Digging deeper, manufacturing output climbed +1.1%, while utilities were up only +0.1% and mining advanced +0.9%. Focusing on manufacturing, within the category the gains were dispersed across the sub-sectors (autos +9.9%, machinery +1.1% and electronics +1.1%). Analysts note, looking forward weakness in new-orders means future weakness in industrial production figures. Factory orders have fallen over the last few months and ISM manufacturing survey new-orders have also been eroding prior month’s gains. Ex-autos, however, manufacturing output increased +0.6% in July. The survey evidence still points to a slowdown in the pace of the manufacturing recovery, but, should alleviate fears of the manufacturing sector heading right back into a recession.

The USD$ is higher against the EUR -0.28%, GBP -0.37% and lower against the CHF +0.29% and JPY +0.02%. The commodity currencies are mixed this morning, CAD +0.29% and AUD -0.65%. Yesterday’s Canadian manufacturing shipments were far stronger than the headline suggested (+0.1%). Adjusting the dollars in real terms, the shipment print climbed +0.7% outstripping the dollar headline rise. It’s the constant dollar release that is added to the June GDP. Inventories climbed +0.7%, but, on relative terms remains very low. The ratio of inventories to sales edged a tad higher to 1.31, but remains well below last year’s peak. Analysts note that Canada has been successful in working off its inventory excess to date. A plus was the unfilled orders climbing +1.3%, which would suggest further shipments strength in the coming months. Fundamentally, Canada remains somewhat of a safer heaven globally. However, their economy cannot be immune to a US slowdown. It happens to be its largest trading partner with 70% of all exports heading south. The currency has found some momentum vs. the dollar with intraday bulls dragging the loonie higher towards 1.0275. Sloppy trading and lack of interest because of the summer doldrums has meant that many have missed the buying boat opportunity that they had hoped to witness on the last ‘risk aversion’ go-around.
To own it on the cross would be less volatile and a ‘safer-heaven’ investment with its stronger fundamentals working for it. Frequently, when the US comes under pressure, the loonie is dragged along because of its proximity. BHP Billiton hostile bid takeover of Potash in Canada will keep the loonie firm, no debt involved. Perhaps parity is on the cards again, short term at least.

The AUD came under pressure vs. the JPY on speculation that the BOJ are not ready to intervene on behalf of their currency, this has damped the demand for some of the higher-yielding assets. Government data has also put pressure on the currency’s climb. Reports O/N showed that skilled vacancies declined this month and wage growth slowed in the 2nd Q. Net result traders are adding to their bets that the RBA will leave interest rates unchanged for the next 12-months. Interest rate differential continue to play a big part of the currency’s attractiveness. No currency is immune to this ‘questionable growth’ environment. Risk aversion will likely force the bull’s hand this week, capping rallies, as equities find it difficult to maintain traction at the moment. In reality with the outlook for both the US and Chinese economies becoming uncertain, growth-sensitive currencies like the AUD, CAD and KIWI, are unlikely to continue to draw strong buying interest from speculators (0.9020). Follow the Asian bourses for guidance.

Crude is lower in the O/N session ($75.17 down -60c). Crude prices continue to trade near their one month low as mixed global bourses have ignited concerns that the recovery will not be strong enough to revive fuel demand. The market expects to see ‘side-ways trading in a tight-range’ this week because of the ‘stuttering economies’. Prices have gravitated towards these lows on the back of a bearish EIA report last week and on data showing that economic growth in both China and the US is slowing. The report showed that US inventories of gas and distillates (heating oil and diesel) climbed last week (+400k vs. a flat expectation, while crude stock fell -3m barrels vs. a loss of -1.9m. Distillate stocks rose by +3.5m to +173.1m barrels (the highest weekly inventory level in 27-years). The demand for oil products also fell, as gas demand hit a 2-month low, while demand for distillates is at the lowest level in 10-months. The report re-confirms the IEA conclusion earlier this month that ‘oil demand could take a substantial hit should economic growth continue to falter’. It’s no wonder that the market continues to pressurize commodity prices. Technical analysts believe that $75 a barrel remains a sticky level to penetrate. The recent macro-data flow indicates that the US activity has slowed down and the market should expect further price pull back as US fundamentals continue to show a market that is still overstocked, particularly on the product side. Speculators remain better sellers on up-ticks in the short term. This morning weekly crude report is anticipated to show a sizable draw, largely as a result of an expected additional slide in imports. We have been surprised before!

Gold prices were little changed yesterday, managing to pare some of the day’s earlier rally as global equities on the rise dissuaded investors from demanding the commodity as a safe heaven asset. For most of this week, a weaker dollar has been helping commodity prices. Big picture, the market continues to require safer assets at the expense of equities and other commodities. With a genuine fear for global growth, by default, is boosting the demand for the metal as a protector of wealth in the grand scheme of things. Year-to-date the metal has risen +10.8%. With treasury yields expected to remain low for sometime and with the Fed announcement last week of their intentions to buy bonds, could promote a quickening inflation rate, which would promote pushing commodity prices higher. For most of this year, we have witnessed a gold rally on the back of a weaker EUR ($1,224 -$3.90c). The dollar strength is under scrutiny and the historical negative correlation is not holding true at the moment. It’s about preserving wealth that is driving metal commodity prices big picture.

The Nikkei closed at 9,240 up +79. The DAX index in Europe was at 6,170 down -36; the FTSE (UK) currently is 5,304 down -46. The early call for the open of key US indices is lower. The US 10-year backed up 6bp yesterday (2.62%) and is little changed in the O/N session. Treasuries prices slipped from their 17-month highs after some improved US data yesterday and on the back of global bourses advancing on stronger earning reports in the US. Basically the FI market is taking a breather after the strong run up of late. The underlying sentiment remains positive for treasuries as investors remain extremely nervous about the US. The 2’s/10’s has widened a tad (+212), but, continues to remain in striking distance of analysts predicted +200 target. With the Fed’s intention to resume buying US government debt to bolster a faltering economic recovery will provide further support for a flattening curve bias. The market will be content in owning longer dated product on these deeper pull backs.

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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