Forex siesta starts!

The summer ranges have commenced as the market waits for this weeks NFP on Friday. This number has the potential to exceed all expectations and reverse some of the USD$ bullish sentiment of late.

The USD$ is little changed in the O/N trading session. Currently it is higher against 9 of the 16 most actively traded currencies in a ‘subdued’ trading range.

On Friday, US durable orders surprised the market and advanced. Despite higher borrowing costs, increased uncertainty and weak consumer demand, business investment rose +1.4% last month. This pushed durable goods orders up +0.8% vs. expectations of a -0.3% decline. Even more impressive was ex-transportation, printing + 2.0% m/m vs. a decline of -0.2% on the back of a decline in aircraft orders. Consensus has us believing that increased foreign demand and the USD$ fluttering near record lows were the main contributors to this headline. Another variable could be a temporary inventory adjustment. The recent tax rebates were bound to have affected consumer demand and many companies may not have stocked up in advance. With the effects of the rebates wearing off, it is anticipated that we will once again see a decline in durable good orders going forward as business investment returns to its more sluggish pace.

The tax rebates are to blame for the lift in US consumer confidence, albeit temporarily, as it rose from its lowest recording in 38 years on Friday. The UOM consumer sentiment jumped to 61.2 vs. 56.4 in July. Once the spending has filtered through the economy, the market should expect the consumer’s mood to taper off once again. Sales of new homes also beat analyst’s expectations (-0.6%, +530k units vs. last months of +533k) as deep concessions were introduced by builders, but, foreclosures may increase the pressure on new home figures as inventories rise. US foreclosure filings more than doubled in the 2nd Q, y/y, as falling home prices left borrowers owing more on mortgages than their properties were worth. A frightening statistic, 1 in every 171 households was foreclosed on, received a default notice or was warned of a pending auction (+121% y/y and +14%, q/q). Year to date that’s +750k properties and it is expected to peak at +2.5m by year end!!

The US $ currently is higher against the EUR -0.03%, GBP -0.32%, CHF -0.08% and JPY -0.11%. The commodity currencies are mixed this morning, CAD -0.13% and AUD +0.05%. Commodity prices are starting to turn the screws on the CAD$. With the USD$ currently been driven by bullish sentiment, the loonie has wilted due its strong correlation to oil, gold and grains. Last weeks CPI report added little value to the currency. Despite the higher headline, the BOC has been very transparent in their elevated inflation predictions. The headline print pushed above +3% for the first time in 3-years, while core-CPI remained at +1.5% for the 3rd consecutive month (+0.1%, m/m). This provides us with stronger evidence that current inflation fears are ‘overblown’ and that there is room for the BOC to reduce rates (3.00%) if need be. The headline inflation will eventually lag into core-inflation, but, expect a weakening Canadian economy to continue to offset these pressures. Traders continue to be better buyers of USD/CAD on pull backs. The medium term target still remains at 1.0250-1.03 level.

The AUD has printed a two week low (0.9565) after another Australia’s bank set aside more funds for US credit losses (ANZ-$1.2b). Investor fear that the subprime-mortgage crisis is adversely affecting their banking sector will temporarily put a lid on any AUD$ advances.

Crude is higher O/N ($124.25 up +24c). Oil hit a 2-month low on Friday after a report indicated that OPEC had boosted output in July (+200k barrels a day) to cut prices as fuel consumption in the US and Asia drop. Similar situation with the Saudis, they can also produce more, but the demand is not there to soak up this excess production. In a two week span, the black stuff prices have retreated by $24 as the oil market has begun to focus on the larger fundamentals, which are bearish. Oil price are anticipated to test the $120 level some time soon. A stronger USD$ has contributed to the rapid decline, but future demand perception remains the markets major concern. The US consumers is quickly changing their consumption and spending habits as their total wealth has been eroded mainly due to leveraged house prices. The short term top of $147 was too expensive for the markets to digest, that’s not to say that these levels will not be revisited. Once the two week wait for Iran’s final decision on their nuclear program ends (a positive response is not anticipated as Iran is expected to continue its nuclear enrichment program) may create another bid. Last weeks EIA report showed that inventories of gas and distillate fuels (include heating oil and diesel) rose, further bearish evidence. Stocks increased +2.85m barrels to 217.1m (largest increase in 3-months). Distillate fuel stockpiles climbed +2.42m to 128.1m. Concluding that demand is been effected by the higher prices of late as consumers change spending habits. Crude inventories dropped -1.5m barrels to 295.3 million. The rate at which refineries operated also declined to 87.1%, down -2.4%, w/w. Gold fell on Friday ($939) as lower energy costs has reduced the appeal of the ‘yellow metal’ as an alternative hedge against inflation.

The Nikkei closed at 13,353 up +19. The DAX index in Europe was at 6,387 down -49; the FTSE (UK) currently is 5,361 up +9. The early call for the open of key US indices is mixed. Yields of the US 10-year bond backed up 7bp on Friday (4.07%) and are little changed O/N. Surprising upbeat data pressurized treasury prices. US new home sales dropping less than forecasted, coupled with consumer confidence unexpectedly rising and increased speculation that the Fed may raise interest rates later this year had investors shying away from FI. I think the market once again is getting ahead of itself, as this data will eventually be recorded as a temporary ‘blib’.

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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