Capital Markets this week provided something for everyone!

What a week, we saw Bernanke defending himself in front of US lawmakers. We have had the SNB breaking all the ‘unwritten’ rules regarding their support of their ‘own’ currency. The ECB implemented a record 1-year repo-tender (stamping their exit strategy!) and the US refunding auctions were well received. Looking at most currency levels, we are back to were we started last week? It seems the market wants equities to remain positive into the end of this Q!

The US$ is weaker in the O/N trading session. Currently it is lower against 14 of the 16 most actively traded currencies in a ‘whippy’ trading range.

Forex heatmap

US labor markets are not out of the woods yet. Despite early month improvements, last weeks initial jobless claims have backed up once again (+627k vs. +612k). Analysts are putting the blame squarely on auto-pant shutdowns. Not to be outdone, continuing claims (+6.738m) reversed course after last week’s unexpected decline (+6.708m-the 1st this year) Both initial jobless and continuing claims remain in a tight range, but also at high levels, which probably suggest, depending on the death/birth model, another 5-handle NFP print next week. We are assured of the unemployment rate to creep up. It’s only a matter of time to see that 10% print! An important fact to remember, continuing claims notes only workers without a job over 26-weeks, after that the move to the extended benefits claims system. So an improvement in the claims number is not always positive. It’s probably true to speculate that job cutting has decelerated, but its remains ongoing and with a higher unemployment rate ‘in the bag’ the Fed’s go to variable, the consumer will not be spending-hence further contraction!

Now that the markets anticipates the Fed to remain on hold for most of 2010, yesterday’s GDP headline provided little substance. The final 1st Q US GDP did come in better than expected (-5.5% vs. -5.7%), mostly on the back of improvement to non-durable goods, gross private investment and government consumption. Digging deeper, inventories also fell less than the previous reports, while other revisions saw a decline in personal consumption growth and a larger contraction in net exports and imports.

A positive sign, yesterday, the Fed announced some changes to its liquidity programs. The reduction in offering amounts under the TAF and modifications to some other facilities reflects the fact that demand for many programs has been declining, in line with improvements in financial markets conditions. If financial market conditions continue to improve then the Fed a number of these facilities will expire as scheduled next Feb.

The USD$ currently is lower against the EUR +0.37%, GBP +0.66%, CHF +0.36% and higher against JPY -0.06%. The commodity currencies are stronger this morning, CAD +0.44% and AUD +0.42%. The loonie remains in a tight range and to date is the worst performing currency vs. the USD this month. It is down -5.7% since reaching a yearly high on the 1st day of the month. Governor Carney has been rather vocal about the currencies aggressive appreciation since March and the effects it is having on Canadian economic growth. The markets took his comments to heart and have had a good winning streak going by being long USD. However, Cbank actions and economic think ‘tank’ rhetoric of late should provide some positives for ‘risk appetite’. To date investors have ignored the positive spin both OECD and the IMF are putting on things, it seems that Canadian domestic ‘green shoots’ are not rooting! The BOC this week said that Canada’s recession is as deep as their southern trading partners. They believe that ‘Canadian households are facing rising stresses because of increases in unemployment’, which will not be currency positive in the medium term.

The AUD managed to rise for a 3rd-consecutive day on the back of a rebound in global equities combined with the IMF stating that the Australian economy will recover faster than previously estimated. With the Fed remaining on hold this week has speculators seeking to grab higher yielding assets like the AUD (0.8061).

Crude is higher in the O/N session ($71.13 up +90c). Oil remains bid after Nigerian militants (MEND) attacked a Shell pipeline disrupting supplies to an export terminal. On Tuesday the API reported that gas stockpiles increased to +211.4m barrels and crude supplies fell -72k barrels to +356.6m. This weeks EIA announcement supported the API findings. Refineries are also operating at the highest rates this year (+87.1%) and fuel demand is off -5.5%, w/w, the biggest year-to-date. If we add in the disappointing Japanese export numbers (-40.9%, y/y) with the higher gas number, oil bulls should be concerned about future demand for the commodity. Demand destruction remains commodities greatest nemesis and not volatile currency levels. It’s now expected that OPEC in Sept. will not announce a further reduction in production, but, ‘will ask for more compliance with existing quotas’ (to date members have a 77% compliance record with last years production cuts). The weekly reports are a bearish report for commodity prices. Over the next couple of months expect the market to focus on the US driving season that ends on US Labor Day. The ‘yellow metal’ continued its winning streak and advanced for a 3rd consecutive day as investors speculated that with the Fed being on hold well into next year, making gold a good alternative investment ($945).

The Nikkei closed 9,877 up +81. The DAX index in Europe was at 4,849 dup +49; the FTSE (UK) currently is 4,289 up +37. The early call for the open of key US indices is lower. The 10-year Treasury’s eased 8bp yesterday (3.58%) and are little changed in the O/N session. As to be expected, dealers made the Fed pay up for the long dated $3.2b buy-back’s yesterday (August 2026-2039). Combine this with a weaker US labor reports and investors believing that the Fed will remain on hold well into 2010, has encouraged better buying of treasuries across the curve and on pull backs for now.

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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