Buy the EURO High sell Higher

So it seems. Some of us have been doing it so wrong for so long. The dollar has stopped dead in its tracks and done an aggressive about turn for a number of reasons. The aggressive session move is being attributed to a hedge fund selling the ‘mighty’ dollar on the back of yesterday’s weak US GDP data. Their actions seemed to have prompted the talk of QE3 in the Far East. Difficult to digest as the Fed has been rather transparent in their actions. Most likely, the lack of a rally in US benchmark yields combined with ‘this’ weak dollar ‘implies a market presumption that the weak US recovery will lead the Fed to stay easy for longer’.

Junckers comments should be discarded as political ‘brinkmanship’. He issued a warning to euro zone policymakers opposed to new funding for Greece that absent this there might be no IMF funding for Greece and a very disorderly process. The reality, the EU continues to give sufficient assurance to the IMF. His remarks were a political shot across the bow to all members to toe the line.

The most likely reason and the one most find difficult to admit to, China has done it again and come to the rescue after announcing that next month they will be actively buying EFSF issuance.Its this that may have called a top in the recent USD rally.

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 ‘volatile’ session.

Forex heatmap

Yesterday’s first quarter US GDP of +1.8% fell well short of an expected upward revision of +2.1%. The surprise was consumer spending being revised lower five ticks to +2.7%, with an even larger downward revision to real disposable income. Even the PCE price component saw a marginal downward revision. Stemming the plummeting factor were the expected upward revisions to both construction and inventories. Analyst’s note that the final and revised breakdown (GDP less inventories) fell to +0.6% from +0.8% does not bode well for the second quarter. Despite the temporary problems in the first quarter (weather and defense), the second quarter has its own negative affects to contend with (Japan and its ongoing distribution problems, especially in autos). This has the market already again revising numbers down a tad for the second quarter release to just below +3%.

If the market did not like digesting the growth numbers, weekly claims is becoming more difficult to swallow. The number of claims filing for unemployment insurance disappointingly advanced last week, up +10k to +424k. The trend may be broken now. The market had expected the ‘abnormality’ over the last few weeks to be priced out and expected this reading to push claims back towards that psychological sub +400k print. The fourth gain in the last seven weeks has many worrying about the current state of the labor market advancement. Analysts are already revising their projected NFP prints down (+168k headline with a private print of +180k jobs and an unemployment rate of +8.7%). What is more worrying some, the market is entering a period of volatile reporting with a strong seasonal bias, making it difficult for us to interpret unbiased layoff trends.
The four-week moving average fell ever so lightly, falling-1,750 to +438.5k.

The dollar is lower against the EUR +0.47%, GBP +0.11%, CHF +0.88% and JPY +0.29%. The commodity currencies are stronger this morning, CAD +0.01% and AUD +0.22%.

The loonie traded heavy all day yesterday, especially after weaker US data put commodities on the back foot and investors honed in on the strong trading ties between the two nations. The currency has underperformed on signs of slowing economic growth and reduced speculation that the BoC will resume increasing borrowing costs. For much of this month, the CAD has weakened outright versus the dollar, as crude-oil prices trade heavily amid mounting investor concern that global economic growth is faltering. The Bank next meet on the 31-May to determine their interest rate policy. The market is experiencing risk-on and off again trading, creating volatility within a tight range. To date, risk sentiment has been stung over Euro-zone debt restructuring and on doubts about the pace of global growth. Investors are better buyers on these pull backs (0.9779).

Earlier this week the AUD felt the wrath of the market, falling to a six-week low versus the greenback and against the yen as concern that Europe’s debt crisis is deepening sapped demand for higher-yielding assets. Domestic data had also being weighing on the currency, as a government report showed construction work completed rose less than economists forecast. It increased +0.7% in the three-months versus a +1.4% gain. Traders have reduced some of their bets on the amount of interest-rate increases by the RBA over the next 12-months to 22 basis points from 25 midweek. In the O/N session, the currency found its claws again and rallied to a new weekly high as the dollar faltered ‘across the board’ and regional bourses traded in the black.

Providing support for the currency is the belief that the local dollar is also gaining stature as a global reserve currency, similar in nature to that of the CAD. Aussie yields are still the highest in the G10 and always look attractive. The expected mix of trade surpluses and rising capital inflows should provide support for the currency on these much deeper pullbacks for the time being (1.0664).

Crude is higher in the O/N session ($100.53 +0.30c). It’s not surprising to see commodities temporarily stall after the US growth numbers yesterday. Oil fell from its two-week high as the US economy grew less than forecasted in the first quarter, a signal that fuel demand may struggle to recover. Crude rallied earlier in the week after the weekly EIA report showed that US inventories of distillate fuel (diesel and heating oil), plummeted to the lowest level in more than two-years as consumption increased. Also aiding prices to a certain degree was Goldman and Morgan Stanley increasing their oil-price outlooks.

Last week’s weekly crude supplies rose +616k barrels to +370.9m. Stockpiles were forecast to decrease by -1.5m barrels. A gentle surprise was gas inventories rising +3.79m barrels to +209.7m, above forecasts for a +300k build. The EIA data showed that gas demand fell over the last month by -2.1%, on average, versus the same period of last year. Distillate stocks fell -2.04m barrels to +141.1m barrels, well below projections for a +100k build. Refinery utilization rose +3.1% to 86.3%, much more than the +0.5% increase investors had expected.

Technically, the report could be seen as overall bullish because of the distillate number. However, the oil demand-supply situation is relaxed, and there’s no danger of any shortage. In theory, lower global interest rates should help the commodity which competes with yield-bearing assets for investors’ cash.

Gold prices traded modestly lower yesterday, paring some of this weeks gains and unable to get a firm footing after some negative economic news out of the US. Previously, the yellow metal rose to a three week high, on concern that that Europe’s sovereign-debt crisis may worsen, boosting demand for the metal as an alternative asset.

Strong buying recommendations from Goldman and Morgan Stanley have also been good enough reason to drag the commodity up from last week’s lows. The yellow metal is being used as a store-of-value and trades like a currency. Last week, the commodity had been moving in tandem with oil and the risk-on-risk-off commodity trade. So far this week that relationship has broken. Expect investors to remain nimble because of the gyrating greenback.

The metals bull-run is far from over with speculators continuing to look to buy gold on these deeper pullbacks. Interestingly, the sale of gold coins this month remains on track for the best month in a year amid the worst commodities rout in three-years, which would suggest that bullion’s longest ‘bull market’ still has room to run ($1,526 +$2.80c).

The Nikkei closed at 9,521 down-40. The DAX index in Europe was at 7,158 up+44; the FTSE (UK) currently is 5,937 up+56. The early call for the open of key US indices is higher. The US 10-year eased 7bp yesterday (3.06%) and is little changed in the O/N session.

The FI asset class was able to push yields to new record lows for this year yesterday, after a disappointing US GDP and weekly claims report encouraged investors to seek shelter in a safer asset class. Junker’s IMF remarks about withholding Greek funding had many risk traders running for the exit and entering new risk aversion trading strategies.

Dealers tried to cheapen up the curve ahead of the final auction this week, alas in vain, making the $29b seven-year issue an expensive piece of product to own along the curve. In a well bid auction, the issue yielded +2.429% (the lowest yield for this product this year). The sale was 3.24 times subscribed, above the four-auction average of 2.78. Indirect bidders took 47.6%, while direct bidders took the double of 13%.

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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