Germany is not the EURs nemesis

It seems that s investors have adopted positions against the EUR not out of conviction about Europe’s economics but instead as a way to hedge bullish stock and other positions. Technically, the EUR would weaken and the dollar would strengthen if global stocks plummet. Last Wed. we witnessed that very scenario. Now that the EUR has dropped three big figures and no momentum to carry on the slide, we sit and wait again? Do we drown out all the noise around us and keep to our convictions? Even the Euro’s GDP numbers this morning has failed to ignite any appetite thus far. The EU expanded more than the market had expected (+1.0% vs. +0.2%), as the fastest growth in Germany in two decades, again shoulders the whole region. Perhaps Germany is the problem. Can this morning US data live up to expectations?

The US$ is weaker in the O/N trading session. Currently it is lower against 11 of the 16 most actively traded currencies in a ‘whippy’ trading range.

Forex heatmap

This market was nervous enough before the release of the weaker than expected weekly claims data yesterday. The number of people filing initial claims for the first week of Aug. jumped to +484k. Capital markets were leaning toward a headline print of +465k. The four-week moving average happens to eliminate the ‘time-noise’, jumped by +14.3k to +473.5k. These weekly prints continue to gravitate away from the comfortable, psychological and growth print of +400k. The four-week average is now the highest average in five-months. The number of people continuing to file for unemployment insurance fell to +4.45m, less than what the market had been expecting (+4.53m). These numbers are rather disconcerting, as analysts had expected to witness a reprieve in this weeks print. So, the print, the highest in 5-months may be the beginning of an upward trend after many months of trading sideways. Some analysts are pointing to the reinstatement of the Emergency Unemployment Compensation program applying some confusion for the elevated prints. For example, not qualify for EUC, claimants may apply for initial claims, even if they are not approved would record some distortion in the release. Is it widespread? The market is not sure, so viewing a couple of weeks samples will give us a better indication of an upward trend.

The USD$ is lower against the EUR +0.28%, GBP +0.42%, CHF +0.18% and higher against JPY -0.03%. The commodity currencies are stronger this morning, CAD +0.50% and AUD +0.55%. Owning CAD by proxy or on the cross looks like a good bet. Being long CAD outright is not paying as the world coverts dollars in times of risk aversion. The intraday liquidity is squeezing the weaker long CAD positions out of a tight trading range. To own it on the cross would be less volatile and a safer heaven investment with its stronger fundamentals working for it. Canadian fundamentals are not immune to its southern neighbor, who is the countries largest trading partner. Frequently, when the US comes under pressure, the loonie is dragged along because of its proximity. With Bernanke stating that the pace of economic recovery is more likely to be modest, it would be foolish not to expect that the bi-lateral trade numbers would not be affected.
Last month, governor Carney predicted that trade would ‘shave -1.6% from Canada’s growth this year’. Investors are implementing risk aversion trading strategies as equities and commodities retreat on the back of capital markets questioning the strength of sustainable global growth. The markets reaction to Bernanke’s announcement earlier this week, futures traders are pricing in a +20% chance of a Governor Carney +25bp hike next month before heading to the sidelines for the remainder of this year at least. Watch the crosses. It will be a good indicator for the loonie buyers running out of ammo!

The AUD rallied in the o/n session, firstly on the back of euphoria for New Zealand retail sales climbing in the second-quarter (+1.3%) and at the fastest pace since 2007. The KIWI has managed to eliminate the last four day’s of losses vs. the JPY and dollar. The AUD also happened to pare its weekly decline against the JPY as Asian bourses snapped a four-day loss and the BOJ indicated that they worried about the currency’s advance. Speculators believe that Japan is moving closer to taking action to stem the appreciation of the JPY. This week the AUD has underperformed because of weaker fundamental data. Last month’s employment growth (+23k and +5.3% unemployment rate) disappointed, it pressurized the currency, as investors bet that the RBA will extend their pause in ‘the most aggressive round of interest-rate increases by a G-20 member’. Signs that the global economic recovery is slowing also damped demand for higher-yielding assets. Data out of China earlier this week did not help the currency’s position. China’s industrial reports last month grew the least in 11-months, further proof of a slowdown in Australia’s largest trading partner. In reality with the outlook for both the US and Chinese economies becoming uncertain, growth-sensitive currencies like the AUD, CAD and KIWI, are unlikely to draw strong buying interest from speculators. In the present environment, there are only two scenarios that would give the AUD a lift. Firstly, without a sharp ‘further dip in US yields’ and secondly, a market belief that RBA rate hikes are imminent can only drive the currency higher in the short term (0.8986). Follow the Asian bourses for guidance.

Crude is higher in the O/N session ($76.48 up +60c). Yesterday, crude prices extended their losses for a third consecutive day on the back of a bearish weekly inventory report, on data showing that economic growth in both China and the US is slowing and on the questionable natural strength of global demand for the product. In the o/n sessions we witnessed a welcomed relief rally. The weekly supply report showed that US inventories of gas and distillates (heating oil and diesel) again climbed last week (+400k vs. a flat expectation, while crude stock fell -3m barrels vs. a loss of -1.9m. Distillate stocks rose by +3.5m to +173.1m barrels (the highest weekly inventory level in 27-years). The demand for oil products also fell, as gas demand hit a 2-month low, while demand for distillates is at the lowest level in 10-months. The report re-confirms the IEA conclusion earlier this week that ‘oil demand could take a substantial hit should economic growth continue to falter’. It’s no wonder that the market continues to pressurize commodity prices. Supplies continue to hover near record highs, introduce the questionable growth variable coupled with recent reports indicating a weakening global economy and we have the making of a stronger ‘bearish run’. The recent macro-data flow indicates that the US activity has slowed down and the market should expect further price pull back as the ‘one directional upward move’ may be overdone. US fundamentals continue to show a market that is still overstocked, particularly on the product side. Speculators remain better sellers on up-ticks in the short term.

Gold rises to a new monthly high as signs that the global economic recovery is slowing increased demand for the ‘yellow metal’ as a protection of wealth. Investors covet the metal as a safer heaven investment, a rising dollar is paying no heed to the historical no’ correlation relationship between the two asset classes. Investors require safer assets at the expense of equities and other commodities. Year-to-date the metal has risen +10%. With treasury yields expected to remain low for sometime and with the Fed announcement earlier this week of their intentions to buy bonds could promote a quickening inflation rate, which would promote pushing commodity prices higher. For most of this year, we have witnessed a gold rally on the back of a weaker EUR. Since the record highs witnessed on June 21st ($1,266), the commodity has fallen -4.7%. Historically and fundamentally, this is the ‘slowest’ season for physical demand and now with China potentially changing the ground rules should temporarily drag the metal higher ($1,217 +60c). Now that the dollar has entered the technical ‘bull’ trading range as a safer heaven investment, will the EUR’s weakness support higher ‘yellow metal’ prices?

The Nikkei closed at 9,253 up +41. The DAX index in Europe was at 6,137 up +2; the FTSE (UK) currently is 5,281 up +16. The early call for the open of key US indices is higher. The US 10-year backed up 2bp yesterday (2.73%) and is little changed in the O/N session. The 2’s/10 spread continue to gravitate around the +220 level. This has occurred despite supply coming down the pipeline. Yesterday we witnessed the last of this weeks government auctions, the $16b long-bond. All week supply was wanting, pushing yields towards record lows after Bernanke’s FOMC comments. It is their intention to reinvest principal payments on mortgage assets into treasuries to support the economy by lowering borrowing costs. However, yesterday’s 30-year bond came in a tad weaker than the previous two auctions. They came with a yield of 3.954% compared with the 3.937% WI’s. The bid-to-cover ratio was 2.77 compared with the average of 2.75 over the past four-auctions. The indirect bid (proxy for foreign demand) was +46%, compared to 32.3% for the past four-auctions. The direct bid (non-primary dealers) was +19%, compared to an average of +24.3%. With a flattening curve bias, the market will be content in owning longer dated product on deeper pull backs.

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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