G20 risk aversion strategies applied

In time for the weekend and after a 20-hour marathon session, the US House and Senate reach a deal on financial system reform this morning. They happened to reconcile the multitude of versions with the ‘approval of proposals to restrict trading by banks’. It will be voted on next week and should be passed into law by Independence Day. That’s progress, as opposed to what’s expected from this weekend’s G20 meeting. The universal belief is that no big breakthrough will occur at the summit. The array of differing views on how to achieve economic recovery, on how to regulate banks, and on how the policy mix should look, is too vast for a ‘stop-over’ session. Risk aversion trading strategies continue to rule the day as European credit spreads print new highs over bunds for Portugal and Greece.

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

Forex heatmap

With US policy makers giving the nod to unemployment dampening its recovery earlier this week, unemployment claims were eagerly waited for yesterday. Similar to the Fed’s interest rate announcement, it was no biggie, with no shattering everlasting headline print (+457k vs. +461k). It managed to print its first decline in 3-weeks. The less volatile indicator, the 4-week moving average of jobless insurance claims, fell -1500 to +462.7k. Digging deeper, the report also indicated that the number of individuals receiving unemployment benefits happened to also fall -45k to just over +4.5m. The US unemployment rate stands at +9.7% and continues to pose a threat to a recovery. Higher unemployment and modest income growth coupled with lower housing wealth, as seen by this weeks data, does not provide a recipe of sustainable growth for the world’s largest economy.

A big drop in airplane orders (-29.6%, m/m) pushed total durable-goods orders down -1.1%, m/m (vs. +3.0%), the largest decline in a year. Ex-transportation, orders advanced +0.9%, the third increase in the past 4-months. Digging deeper, analysts note that orders for core capital-equipment rose +2.1% after a -2.7% decline the previous month and provides stronger evidence that the upward trend in manufacturing remains intact. The previous months gains were also revised up to + 3.0% from +2.8%. The Fed indicated this week that growth is not as good as it has been and indicated that financial market tensions as a result of the European crisis was a key reason for the deterioration. European contagion fears are expected to affect export demand and provide an obstacle to manufacturing growth. The shipments of durable goods advanced +0.4% vs. +1.8% in the previous month.

The USD$ is lower against the EUR +0.05%, GBP +0.00%, CHF +0.14% and higher against JPY -0.21%. The commodity currencies are mixed this morning, CAD +0.22% and AUD -0.23%. All good things sometimes temporarily come to an end. The loonies four day weakness on the back of declines in equities and commodities had investors seeking sanctuary in some risk-aversion currencies like the JPY. With the CAD underperforming across the board will only give the stubborn bulls a better average to enter new long CAD positions. Fundamental data this week did not do the currency any favors. Weaker monthly sales figure showing consumer purchases happened to fall in 10 of the 11 subsectors has fueled this four day dive. The commodity currency have fallen as equities and oil slump after weaker US Home data coupled with a Fed determined on extending low rates for the foreseeable future has reignited concerns that growth with Canada’s largest trading partner may stall. Despite domestic fundamental data showing that the Canadian economy is ‘firing on all cylinders’, the recent bid to the loonie may have been a tad overdone and a healthy purge technically was on the cards. Year-to-date the currency has appreciated 8.3% vs. its largest trading partner. Speculators continue to place bets that Governor Carney will raise interest rates faster than other developed countries. Big picture, the CAD is holding its own as the currency is seen as a safer way to play an economic recovery in the US with linkage to commodities and less banking. Now, with talk that the currency is to be used as a Cbanks safe haven destination for capital should lend even more support to the currency in the medium term. Do not be surprised to see the currency trade beyond parity in the coming months.

The AUD has lost ground in the O/N session and ending the week in losing territory as signs that a weak global economic recovery is exhausting demand for higher-yielding assets. Traders are taking the high road ahead of the G20 this weekend on fear that the leaders will discuss proposals to tighten regulations for the financial sector again. Global risk sentiment is weakening which causes growth related currencies such as the AUD to succumb to increased selling pressures. Earlier this week Prime Minister Rudd resigned after a leadership challenge from his deputy Julia Gillard, who becomes the first female Aussi PM, after his plans to boost taxes on the mining industry affected his opinion polls. It’s expected that a mining tax compromise, initiated by Gillard, will end up be significantly positive for the currency. Earlier last week, 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. With European stress test disclosures lined up failing to calm investor’s fears has technical analysts wanting to sell the currency on rallies (0.8608).

Crude is lower in the O/N session ($76.11 down -40c). Crude prices have managed to pare earlier losses yesterday on weaker global bourses after the dollar lost traction vs. the EUR, thus temporarily increasing the investment appeal of commodities. The black-stuff has remained under pressure after this weeks EIA inventory release reported an unexpected gain in supplies and US data showed that the purchases of new homes tumbled the most on record m/m. 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. They have been looking for demand growth to accelerate and this weeks report shows that the opposite will probably occur. 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%. Weaker global economic releases have managed to encourage some ‘risk-off’ trading strategies. Direction is dictated by demand and with ample supply and global growth worries has speculators once again wanting to sell any rallies.

Bigger picture, Gold continues to be a safe heaven attraction. With the Fed indicating this week that they are willing to keep rates low for an extended period of time will weigh on the USD and by default the yellow metal will provide an alternative investment vehicle. The commodity price was better bid again yesterday as renewed credit worries and concerns about a global economic recovery trigger a safe-haven demand for the metal. Technically, all week, 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. The upward bias trend remains intact as the ‘yellow metal’ is trading with a greater consideration of its safe haven status. The asset class is well sought after, technically encouraging individuals to want to own more of it for hedging purposes. Year-to-date, gold has gained +15%. 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 remain under pressure ($1,244 -200c).

The Nikkei closed at 9,739 down -191. The DAX index in Europe was at 6,079 down -36; the FTSE (UK) currently is 5,076 down -24. The early call for the open of key US indices is lower. The US 10-year eased 1bp yesterday (3.11%) and is little changed in the O/N session. All week Treasury prices have remained better bid because of the disappointing US housing data and on the Fed’s announcement that they will keep ‘rates low for an extended period of time’. With the cost of protection insurance from a Greek default surging to a new record has again pressurized equities and pushed the FI asset class back into the limelight. Yesterday, most bonds managed to print the lowest intraday yield in two months. Investors continue to gravitate towards the shorter end of the curve on fears of ‘sluggish economic growth’. Again, and not much of a surprise was the 7-year auction being well received. In total this week the US government auctioned off $108b’s worth of new product. The $30b 7-year sale was a success. Notes yielded 2.575%. The bid-to-cover ratio was high at 3.01, above the 2.82 four auction average. Indirect bidders took 51% of the notes vs. the four auction average of 48.2%. Direct bidders on the other hand took down 10% vs. a 12.2% average. 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