Double-dip debate derails EUR again

With the G20 out of the way the market can get back to ‘reality’. The ‘double-dip debate’ has investors on their toes. A multitude of concerns has risk-adverse trading strategies dominating the O/N currency positioning. Capital Markets is worried about the Chinese recovery as well as the weak economic data from Japan (Ind. Prod. -0.1%, household spending -0.7%). This morning, dealers are driving the dollar, CHF and JPY higher, yields to record lows and equities into the red as they become nervous about the ECB’s plans to refinance a EUR 442b funding program this Thursday and on the announcement that Greece expects to return to the bond market next month. It’s not all doom and gloom, with the Euro-zone economic sentiment index rising (98.7 vs. 98.4) it gives ‘hot-money’ a better average to short the EUR ‘again’!

The US$ is stronger in the O/N trading session. Currently it is higher against 13 of the 16 most actively traded currencies in a ‘volatile’ trading range.

Forex heatmap

Yesterday’s US income and spending reports were solid. Personal spending picked up last month (+0.2% vs. +0.1%) and there was ‘healthy developments’ for income growth (+0.4% vs. +0.5%). Digging deeper, household spending increased +0.4%, adjusting for price swings, volume also managed to show improvements, up +0.3% from a flat reading the previous month. In respect to spending, durable goods orders increased +1.1% (cars and parts), while the non-durable sector happened to forge out a small decline -0.2%. The purchases of services accelerated to +0.3% in real terms. The Fed’s preferred inflation indicator, the PCE deflator, decreased -0.1% last month, which negated the previous months increase, while the core-PCE (ex- food and energy) advanced +0.2%. Flipping to the income stream, even though personal income increased less than expected, it was the 7th straight consecutive advance. The strength in the sub-categories was evenly disbursed. The private sector wages (+40% of total incomes) happened to increase +0.4%. By sector, the goods-producing and the services-producing both recorded gains. The only sub-category to drag its feet was the government unemployment benefits. It’ worth noting that dividend income continues to contribute a larger percentage of total gains. Finally, the savings rate jumped to +4.0% for the first time in 10-months.

The USD$ is higher against the EUR -0.46%, GBP -0.40%, CHF -0.00% and lower against JPY +0.87%. The commodity currencies are weaker this morning, CAD -0.81% and AUD -1.44%. The loonie was caught in ‘no-mans’ land yesterday after its impressive two session gain on the back of commodities. It did try to test resistance at the 1.0300 level, however, dollar buyers where found in abundance. The recent weakness has given the ‘bulls’ a better average to enter new long CAD positions. Despite domestic fundamental data showing that the Canadian economy is ‘firing on all cylinders’, risk aversion trading strategies dominates as we encroach on the loonies recent lows this morning. On the crosses, CAD is holding its own and in relative terms is seen as a safer way to play a global economic recovery with links to commodities and less banking. Speculators are also betting that Cbanks will up the ante and use the currency as a safe haven destination for capital. Do not be surprised to see the currency trade beyond parity in the coming months as long as the ‘double-dip debate’ does not take hold.

In the O/N session the AUD plummeted the most in three weeks on concerns that the global economy is slowing. Weaker global industrial and confidence data has investors talking of ‘double dips’ which will obviously affect growth and high-yielding currencies. In this quarter alone the AUD has dropped just over +6% vs. the greenback. The initial aftermath of the G20 has not materially changed risk attitude. In fact, it seems that the markets have become more ‘jittery’. Earlier this month, comments from the RBA, who said that Europe’s debt crisis would ‘inevitably weigh’ on global growth, had fueled speculation that the Governor Stevens may keep rates unchanged until at least the end of the year. It seems that that ‘previous rate rises has given them flexibility to leave borrowing costs unchanged at next month’s meeting’. To date, the crisis in Europe has not had a material impact on the Australian economy, but, that’s been called into question. European funding fears has technical analysts wanting to sell the currency on rallies and shifting into more risk adverse currencies like JPY and CHF (0.8730).

Crude is lower in the O/N session ($76.91 down -134c). Crude fell from a seven-week high as the dollar rallied vs. the EUR, reducing the appeal of commodities as an inflation hedge. After rallying earlier in yesterday’s session on fears that Alex would disrupt production as it moves towards the Gulf of Mexico, prices fell on speculation that reports would show that both US consumer confidence and manufacturing would slow this month. The commodity ended last week under pressure after the EIA inventory release reported an unexpected gain in supplies. Oil stockpiles rose +2.02m barrels to +365.1m vs. an unexpected fall of -800k barrels. On the flipside, gas supplies fell -762k barrels to +217.6m vs. an expected market decline of -180k barrels. Imports of crude oil climbed +4.3% to +10.1m barrels a day, the highest level in 18-months. The headline print certainly fly’s in the face of the ‘bulls’ way of thinking. Crude stocks remain well above the five-year average level, and are +3.2% above a year ago, the biggest year-on-year surplus in 6-months. Distillate stocks (diesel and heating oil) rose +297k barrels, less than expected as demand dropped to its lowest level in 7-months. Currently there are too many negative variables that support the bear’s short positions. The fear that a double dip is on the cards has the speculators wanting to sell. Year-to-date, the commodity has appreciated +11%. Direction is dictated by demand and with ample supply and global growth worries has speculators once again wanting to sell on rallies.

Bigger picture, Gold continues to be a safe heaven attraction. Yesterday the commodity retreated from its record highs on technical resistance and profit taking, a healthy purge in the recent one directional trade. With the Fed indicating low rates for an extended period of time has questioned the dollar recent strength in recent trading session’s and by default the commodity has provided an alternative investment vehicle. Technically, pull-backs have been bought. The commodity’s prices will remain robust on speculation that European’s Economic woes will be prolonged. With broader risk appetite under pressure, the market is capable of printing new record highs again and again. The upward bias trend remains intact as the ‘yellow metal’ is trading with a greater consideration of its safe haven status. Year-to-date, the commodity has gained +16%. Generally, it has become the benefactor when all other currencies fail. Thus far, Europeans have been content in using the commodity as a hedge against their European holdings, believing that the EUR has not bottomed out just yet. For now, buyers are waiting in the wings to purchase product on all pull backs as equities flounder ($1,236 -220c).

The Nikkei closed at 9,570 down -123. The DAX index in Europe was at 6,025 down -131; the FTSE (UK) currently is 4,979 down -92. The early call for the open of key US indices is lower. The US 10-year eased 5bp yesterday (3.04%) and another 7bp in the O/N session (2.97%). Treasures were in demand across the US curve on fears that the G20 deficit pledge would dampen global growth prospects. In theory, G-20 said advanced economies (ex-Japan) plan to reduce their deficits by 50% in three years which should on paper curb the record bond auctioning. Also providing a lift for the ‘safer’ asset class is this weeks NFP report where many analysts expect a much weaker headline. The belief that the US economy’s momentum is not being built upon should continue to provide a better bid on deeper pullbacks.

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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