EURO mauled by Greco-Turks

Nascent recovery……We can only imagine how many traders had to look that definition up before they executed a trade yesterday. It’s no wonder that we can have volatility with noise ending in a ‘no-score’ draw. Initial reaction, traders were disappointed by Bernanke’s subdued tone. The policy maker’s comments on the job market remaining weak pushed the greenback lower. This will be a temporary move. Two and two is not adding up on the global surface of things. Talks of an attempted coup in Turkey, national strikes in Greece, somewhat peaceful thus far, severe weather warnings and weak US home sales actually pushed equities higher. It seems with Bernanke in this ‘persuasive’ mood there is no urgency to seek sanctuary just yet. One wonders how much extra ‘dosh or moolah’ is sloshing around looking for a home that promises a weak growth outcome. Global equities are walking a fine line!

The US$ is stronger in the O/N trading session. Currently it is higher against 12 of the 16 most actively traded currencies in a ‘volatile’ trading range.

Forex heatmap

Already weighed down by poor consumer confidence numbers this week, throwing New Home Sales onto the ‘surprising’ pile was a ‘done deal’. Sales of new homes, down south, unexpectedly fell last month to the lowest level on record (down -11% to +309k units), strong evidence that government tax credit extensions will most likely not be enough to boost demand. The market had been expecting a projected increase of +354k units. As to be expected, the median sales price fell -2.4% last month and supply of unsold homes increased. On the face of it, foreclosure supply continues to damper demand from new-homes market. The supply of New Homes increased to 9.1-months’ worth (at the current sales rate), the highest level in 9-months. Analysts anticipate that a record +3m US homes will be repossessed this year, because of unemployment remaining high coupled with ‘depressed values leaving borrowers unable to make payments’.

Along the same theme, US MBA purchase index fell -7.3% to +196.8% (down -21.4%, y/y). While the MBA refinancing index fell by -8.9% to 2,605.3% (down -28%, y/y). Analysts highlight that ‘purchase activity remains quiet depressed, about as low as home buying has been in more than 10-years. This would suggest that the previous recovery in home sales appears to have stagnated or even retreated’. The housing market is probably even further from beginning its recovery.

‘Helicopter’ Ben came. He saw them and delivered exactly what they wanted to hear. The US economy is in a ‘nascent recovery that still requires low interest rates to encourage demand by consumers and businesses once federal stimulus expires’. The consumer has been the Fed’s go to variable throughout this recession. They continue to rely heavily on the sector. His presentation to the House Financial Services Committee yesterday is well documented. It now time to return our focus back to Europe and witness potential sovereignty implosion.

The USD$ is currently is higher against the EUR -0.34%, GBP -0.56%, CHF -0.36% and JPY +0.82%. The commodity currencies are weaker this morning, CAD -0.08% and AUD -0.45%. 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 get an initial leg up from Bernanke’s ‘extended period of low interest rates’ yesterday. Technically, speculators were unwinding some of their USD longs, booking profits, going into the Humphrey Hawkins testimony. Already this week we have seen the currency retreat from its 4-month highs after surprisingly poor US and European consumer and business confidence numbers. The overall picture of rising fuel consumption created by yesterday’s EIA report has temporarily helped the loonie. Is the currency’s rise sustainable medium term? That depends on consumer’s perception of growth. Higher unemployment rates in North America may be temporarily negated by the pending ‘unfavorable’ weather patters expected over the next week along the eastern sea board. As long as we continue to see buying in equities, crude will remain supported and by default so too will the loonie. However, the bigger picture will persuade some speculators, that with sustainable global growth being questionable, risk aversion trading strategies waiting to being implemented, the currency can be expected to give back some of its recent market premium. There is little interest from any corporate on the top side until we approach 1.0800 again. For now, do the opposite when following the leader, and that’s the dollar, for major currencies directional play.

The AUD fell in the O/N session as Greek concerns reversed risk appetite. The dollar weakened, reversing earlier gains, on speculation investors will sell higher-yielding assets on concerns Greece won’t push through fiscal cuts needed to gain European Union help with its debts. It’s a flight to surety and is expected to intensify. 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%). Futures traders continue to bet that the RBA will hike rates early next month. 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 (0.8900).

Crude is lower in the O/N session ($79.70 down -30c). Yesterday’s weekly inventory reports on the face of it were not that bullish for commodity sensitive currencies. It was not expected, but 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’. Despite the weaker dollar dragging the commodity higher yesterday, the overall trend remains your friend. This week’s German confidence print has once again ignited the sovereign debt fears that have dominated the EUR’s value this trading year. Risk aversion trading strategies and employment fears should again price out the 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 consumer confidence and sluggish New Home sales data has speculators more concerned by the sustainability of economic growth rather than inflation. For most of this month, a stronger greenback has curbed the demand for commodities. With the Fed’s ‘dovish’ statements yesterday, perhaps the dollar may find it difficult to maintain its recent accent. By default, the currencies actions could provide temporary support for the metal on deeper pull backs. Last year gold rose +24% as the dollar fell -4.2%. However, 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’ ($1,092). Continue to watch the dollar for direction.

The Nikkei closed at 10,101 down -96. The DAX index in Europe was at 5,645 up +31; the FTSE (UK) currently is 5,365 up +22. The early call for the open of key US indices is lower. The US 10-year eased another 4bp yesterday (3.66) and are little changed in the O/N session. The Fed’s comments were ‘dovish’ and managed to push the US yield curve lower yesterday. Treasuries prices rose after ‘helicopter’ Ben said the US economy is in a ‘nascent’ recovery that requires ‘extended’ low interest rates to boost demand by consumers and businesses. Weaker than expected New Home sales data (see above) also boosted prices. All week, surprisingly poor US fundamental headlines have investors seeking refuge in the FI asset class despite another week of record funding. Tuesday’s 2-year auction was well received, but yesterday’s $42b 5-years managed to tail, drawing a bid-to-cover ratio of 2.75 vs. Jan’s 2.80. Indirect bidders were only +40%, less than Jan’s +53%. This morning we get the last of this week $126b funding requirements, $32b 7-years. Even if the economy shows signs of strengthening, its unemployment, by remaining high, continues to have a negative effect on consumer confidence. Dealers will tell you that 2-year product continues to look rich on the curve and are likely to remain that way as long as the Fed’s ‘extended period’ language persists.

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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