EURO-Greek woes disguised by month end-extensions

It’s Friday, the market is jaded. With most of the US East Cost buried under the white stuff, fear mongering from rating agencies, national strikes, dovish Fed rhetoric, and possible coup attempts, it is no wonder that FX traders want to close shop early. The past five trading day’s will fill economic and history books for years to come. Big picture, uncertainty reigns supreme, intra-day traders have been toying with currency values and not influencing the gravity of global uneasiness. The surprise of the week, there are investors who have money to park somewhere, even if they are promised riches of ‘no growth return’. Low interest rates continue to support global equities to a certain degree. Something has to give, ‘risk on risk off’ enhances a new type of ‘day’ trading. Afternoons are best, when London goes home North American liquidity dry’s up and algorithmic traders take control with their stop-loss hunting. Who ever said that forex was difficult! Be wary of large month end extension requirements in all the asset classes today.

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

How weak were yesterday’s numbers? Will we be picking through snowstorm induced distortions to jobless claims over the coming weeks? Most likely and NFP payrolls will definitely be a mess. In Jan., we witnessed US business investments stumbling. The headline print (+3% vs. +1.9%) is misleading for durable goods orders. Defense spending and volatile aircrafts numbers pulled the headline higher. In reality the rest of the report was disappointing. Core-durable goods orders fell to -0.6% vs. +0.9%. Even more important was the capital goods poor print which analysts use as a ‘gauge for business investment’. Digging deeper, headline orders were stronger than expected (beating Jan. which was revised higher), defense climbed +19.2%, while non-defense aircraft climbed a whopping +126%. As indicated, getting rid of these sub-categories we are looking at a disappointing report. Core-orders (ex-trans) disappointed basically because the previous months ‘base effect was more material than the market had anticipated’. The details were mixed, with non-defense, ex-aircraft capital goods orders falling -2.9% (first drop in 3-months). As indicated, it’s used as a gauge for the business climate where uncertainty reigns supreme. The ‘core’ was once again pressurized by both the auto and machinery orders dragging it lower, as vehicle and parts orders fell -2.2% and machinery retreating -9.7% on the month. Despite all this, there were areas that continued to experience strength. It no surprise that computers (+4.6%) and electrical equipment (+1.4%) remain a go-to category.

Is it such a surprise that we witnessed a higher jobless claims print with the weather conditions that the eastern sea board is experiencing? Analysts are informing us that we should discount ‘some’ of the rise in the jobless claims (+496k vs. +461k) as it reflects distortions introduced by a clearing out effect on claims that would have occurred earlier in the month. We should expect initial claims to be difficult to read given the weather disruptions. The spike in emergency claimants at the end of last month has now reversed itself completely this month (+5.47m vs. +5.79m)

The USD$ is currently is lower against the EUR +0.11%, GBP +0.03%, CHF +0.15% higher against JPY -0.22%. The commodity currencies are mixed this morning, CAD +0.00% and AUD +0.13%. Growth sensitive currencies are always going to fare the worst when capital markets believe that growth will stall. The loonie remains contained in its tight 4c trading range despite getting an initial leg up from Bernanke’s ‘extended period of low interest rates’ this week. However, the currency is posed to break out of this range and possible test this year’s low print once again. Greek ‘rating’ worries is promoting risk aversion trading strategies. Yesterday, the CAD crosses experienced an overdue healthy purge as investors took some recent well earned ‘growth profit’ off the table by offloading their long loonie positions. The currency received no help from commodities either. With oil retreating, just under -3%, and global equities faring no better, investors continue to question the sustainability of growth after this weeks weaker fundamental reports. In Canada, even the futures market is questioning the timing of the next BOC hike. The Sept. Bax’s are starting to price out a previous hike. For now there is little interest from any corporate on the top side until we approach 1.0800 again. The opposite will occur when following the leader, and that’s the dollar, for major currencies directional play.

The Aussie is heading for the first monthly gain against the USD since Nov. as reports this week showed lending rose in Jan. and business investment rebounded in the 4th Q. The currency was understandably under pressure as Greek concerns reversed investor risk appetite. The AUD weakened, reversing earlier gains, on speculation that investors will continue to sell higher-yielding assets on concerns Greece won’t push through fiscal cuts needed to gain European Union help with its debts. Governor Stevens and his policy makers have been rather vocal ahead of next weeks rate meeting. Earlier last week, the AUD rallied to its strongest monthly print after the RBA said that further ‘increases to the benchmark interest rate are likely if the economy improves’ (3.75%). It’s difficult to bet against the currency. According to the RBA, ‘the economic situation is stronger than expected and it is natural for monetary tightening’ to take place currency. The currency declines have been tempered by Governor Stevens’ remarks that the Australia’s benchmark rate was below normal. He said borrowing costs for ‘businesses and households were still about 50 and 100 basis points below average’. The rhetoric looks like its giving the green light to Capital Markets to expect another hike. So far, the futures market is pricing in a 44% chance of one at the Mar. meeting. On pull backs, expect better buying of the currency (0.8920).

Crude is higher in the O/N session ($78.39 up +22c). Crude came under renewed pressure yesterday after a weaker than expected US weekly jobless claims print coupled with a disappointing core-durable orders headline. With the dollar threatening to advance even further for surety reasons, the black stuff managed to retreat just under 3%, again failing to penetrate that strong $80 resistance level. There has been no bullish technical reason to drag the commodity above the $80 a barrel. This weeks inventory reports, on the face of it, were not that bullish for commodity sensitive currencies. A rise in imports managed to push the weekly EIA crude stockpiles higher last week while at the same time the US’s distillate inventories print fell. Also surprising was that gas managed to retreat too. Crude stocks increased by +3m barrels to reach a total +337.5m, w/w, in total contrast to the private API report on Tuesday recording a shockingly high drawdown (-3.14m barrels). The EIA supplies were forecasted to increase by +1.9m barrels. Digging deeper, imports of the black-stuff has continued its recent upward trend, rising +536k barrels, w/w. In contrast, distillate stocks (heating oil and diesel) declined by -600k barrels to +152.7m. This was the fourth consecutive ‘up’ week, however, it fell short of analysts expectations of a -1.6m drawdown. Surprisingly, gas inventories fell -900k barrels to +231.2m vs. market expectations of a +400k build. It’s worth noting that refiners were running at +81.2% of capacity, up +1.4% vs. an expected ‘no change’. Risk aversion trading strategies and employment fears should continue to price out any speculative element. For market direction, we are now depending on equities and investors ‘on’ again ‘off’ again risk appetite.

The ‘yellow metal’ managed at one point to print a one week low yesterday on speculation that a ‘slothful’ economic recovery will curb the commodity’s appeal as an inflation hedge. Weaker jobs data and core-durable orders had speculators more concerned by the sustainability of economic growth rather than inflation. However by days end rumors that China was buying the IMF ‘lot’ of gold pushed commodity prices much higher. For most of this month, a stronger greenback has curbed the demand for commodities. The big picture concerns about deepening EU deficits becoming contagious could support the yellow metal on ‘much deeper’ pull backs. Various think tanks believe that with the sovereign-debt problems, in the end, gold will be the only hard asset speculators will want, the ‘ultimate currency’ ($1,113). Continue to watch the dollar for direction.

The Nikkei closed at 10,126 up +24. The DAX index in Europe was at 5,577 up +46; the FTSE (UK) currently is 5,328 up +51. The early call for the open of key US indices is higher. The US 10-year eased another 1bp yesterday (3.65) and are little changed in the O/N session. The ‘dovish’ Fed comments this week have managed to push the US yield curve. The theme again is ‘flight to quality’, no matter how much government debt needs to be issued. Treasuries prices advanced yesterday on concerns that Greece’s credit ratings may be downgraded. In reality, no one knows how big their budget deficit is, well, Goldman Sachs perhaps does and is certainly not telling. Other reports showing that US jobless claims unexpectedly rose w/w couples with core-durable good orders actually falling continues to bid up the FI market on any pull backs. Yesterday we saw the last of this week’s $126b funding requirements. Not surprisingly at such low yields the $32b 7-year auction was not well received. The bid to cover ratio was 2.98, the average for the last 4-auctions was 2.75. The indirect bid (Cbanks etc) was 40% compared with 51.1% in Jan. Weak data and European uncertainty is increasing risk aversion trading appetites. Look for better buying on pull backs, even if the product looks expensive on the curve.

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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