Forex is trading on fumes!

When will all this good news end? The market is giddy with excitement and becoming drunk on profits. The US and Chinese record PMI prints have managed to push S&P’s to new yearly highs. Clunkers-for-Cash has got rid of a few vehicles. Treasuries are frowned upon, commodities are rabidly coveted. The have not’s, that’s the nearly +10% unemployed, the individuals that have declared bankruptcy in record numbers, must be wondering what they have done wrong? Don’t worry, we will back to you lot, the US economy needs you! You will have to maintain this ‘less bad is good growth’!

The US$ is marginally stronger in the O/N trading session. Currently it is higher against 10 of the 16 most actively traded currencies in a ‘subdued’ illiquid O/N session.

Forex heatmap

Yesterday’s US Manufacturing PMI managed to shrink less that analysts had predicted. All this on the back of ‘stimulus-induced gains in demand’ helping to revive factories from the worst slump in 30-years. The indicator managed to print an 11-month high (48.9 vs. 44.8), despite it continuing to be in contraction mode, it’s improving. This is becoming a similar theme throughout the world. Manufacturing expanded in the UK, (1st-time in a year), shrank less in Europe than expected and declined at a slower pace in Australia. China managed to print a yearly PMI high, further evidence that government and Cbanks stimulus package are starting to filter throughout the economy. All this can only be positive for Global 2nd-half GDP numbers. Investors are starting to see some stabilization in the flow of bad news. Is it possible to maintain this trend or are we in for a rude awakening this Q?

The USD$ currently is higher against the EUR -0.06%, GBP -0.06%, CHF -0.18% and lower against JPY +0.38%. The commodity currencies are weaker this morning, CAD -0.27% and AUD -0.06%. Even with a Canadian National Holiday, the world continues to covet our beloved ‘loonie’! Nothing has changed, the currency managed to print its strongest level in 10-months yesterday. Last month it was the biggest G10 winner vs. the greenback, and this month like all its commodity traded cousins, it’s starting off on the same foot. Same story board, just a different day. This on-again, off-again recession is bringing risk takers back into the market. With US corporate earning’s beating expectations, this has prompted investors to seek riskier assets such as stocks and commodity-linked currency’s. By default, higher yielding assets like the loonie do much better. The strength of the currency continues to get ahead of fundamentals. This week we get to see North America’s employment numbers. Are we in for more surprises? Let’s see if the domestics want to cash in on the recent surge this morning and sell their own currency.

The RBA kept O/N borrowing costs on hold for a 4th-consecutive month (+3.0%). Governor Stevens said that the Australian economy is stronger than their original predictions a few month’s ago, ‘with both consumer spending and exports notable for their resilience’. Last week Stevens indicated that may not wait for unemployment to peak before hiking rates again. This has heightened speculation that Australia will increase borrowing costs faster than most other nations. After touching its highs, its strongest level vs. the greenback in 11-months, the currency has managed to pare some of the gains after the RBA comments (0.8405).

Crude is lower in the O/N session ($70.49 down -109c). The Bulls are on the rampage, crude prices managed to briefly print $72 a barrel yesterday (+3.5%). This was the 1st time in over a month and all of this on the back of strong US fundamental data yesterday. Even gas prices surged, as increasing US industrial activity has boosted optimism and swayed investors that fuel consumption will rebound. This is a tall order on the back of recent crude fundamentals, where we continue to experience healthy ‘demand destruction’. The recent appreciation of the black-stuffs prices has been too rapid. There is no denying that with growth comes a commodity price increase. We are not seeing growth, but indicators are showing us a ‘less bad is good’ scenario. Investors are getting ahead of themselves. One of the major factors has been the amount of cash that has been left idle in this downturn. Money managers are aggressively trying to put some of it to work. It’s worth noting that OPEC increased their output levels for a 4th consecutive month in July (agreed compliance is slipping as some members states take advantage of the stronger prices).Their output averaged +28.39m barrels a day (up +45k, m/m). The key to this recent rally will be the US economy ability to continue this pick up or if it limps along! Last week crude prices plummeted on the back of a staggering surprise in the weekly EIA inventory numbers. They reported a whopping +5.1m barrel increase to +347.2m, w/w. The market had anticipated an average decline of -1.2m barrels. Refiners cut operations by -1.2% to +84.6%, relative to capacity, while imports climbed +8.9% to +10m barrels a day last week (the highest since Jan.). The commodity market has been drawing most of its ‘new found resurgence’ from a weaker greenback and rallying equity markets. Healthy demand destruction remains. By day’s end demand destruction cannot and will not support higher fuel prices! Gold prices, similar story as crude, the yellow metal advanced to a new 2-month high as the greenback faltered and equities climbed, thus boosting the appeal of the commodity as an alternative investment ($957).

The Nikkei closed at 10,375 up +23. The DAX index in Europe was at 5,373 down -53; the FTSE (UK) currently is 4,637 down -44. The early call for the open of key US indices is lower. The 10-year Treasury’s backed up 13bp yesterday (3.64%) and is little changed in the O/N session. Despite the plethora of US product last week (a record $150b), treasuries managed to grind higher. But, yesterday’s surprising data snapped the 4-day win streak as Treasuries fell the most in more than 2-months, as reports on manufacturing and construction spending topped analysts original estimates. With global equities also managing to rally, has encouraged investors to once again covet riskier assets. Recent US data suggests that the 2nd Q may prove to be the final ‘negative’ US GDP number. If true, there is no reason to see lower yields in the short term. Let’s hope we are not putting the cart ahead of the donkey! Keep feeding him that carrot.

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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