Is Greece to be cut loose by Europe? Where is the solidarity?

That’s just about the last thing beaten investors wanted to hear this morning. ECB member Juergen Stark stating that the EU would not save Greece. Rating agencies are having a field day downgrading investment countries debt to junk. Even Iceland is pushing the envelope. It will hold a referendum on withholding repayments back to Holland and the UK. What are Ireland, Portugal, Spain and Italy to do? The Euro-zone is now facing some serious solidarity tests and traders are baffled what to do with the currency as we repeat last months trading range. Main focus today will be the ADP employment reports and how strong an indicator it will be for NFP this Friday.

[mserve id=”Central_Bank_ECB.jpg” align=”left” width=”291″ caption=”European Central Bank” alt=”European Central Bank ECB” title=”European Central Bank “]

It’s interesting to note that PIMCO (the world’s largest bond portfolio) is becoming more vocal in its actions and decisions. They believe that financial markets are getting ahead of reality by pricing in three interest-rate increases by the Fed and its policy makers this year. Logically, it cannot be an issue with US unemployment remaining so high and growth and inflation muted at best. However, there are some very bullish individuals out there. By late yesterday, Barclays Bank is forecasting a positive NFP print while Goldman expects a slight negative headline.

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

Forex heatmap

Was it a surprise to see that US pending home sales collapse in Nov.? Not really. The -16% decline is mostly a timing issue. Look at the cash-for-clunkers program. The post tax credit retreat saw auto-sales collapse in Sept. Analysts believe that some transactions were pushed into Sept. and Oct. to beat the original deadline for the program. End result, a weak Nov. print. Perhaps this deep regression may point to a moderate increase in the Dec. Again traders believe that the second phase of the tax-credit program may not generate as sharp a spike in sales next spring similar to the first round last autumn. However, eventually we can expect the combination of the ongoing tax incentives and the ‘future’ improvement in household finances to result in positive growth eventually in the secondary-market. Other data showed that the Factory inventory report was much stronger than anticipated. Both shipments and orders of non-defense capital goods ex-aircraft were revised up from the ‘advance’ report, with orders now rising +3.6% in Nov. vs. +2.9% and shipments now up +1.1% vs. +0.8%. The data can only be but positive for 4th Q GDP. Digging deeper, overall factory inventories decelerated in Nov., but not as much as the market had expected, rising +0.2% after a +0.6% increase in Oct. Manufacturers had enough goods on hand to last 1.32 months at the current sales pace (the fewest since in 16-months). This should prove positive for employment. Overall factory orders rose a larger than expected +1.1%, as non-durable goods shipments jumped +1.8%. An increase in petroleum shipments, because of higher prices, accounted for 80% of the increase in total non-durable shipments.

The USD$ is currently higher against the EUR -0.11%, CHF -0.08%, JPY -0.43% and lower against GBP +0.29%. The commodity currencies are stronger this morning, CAD +0.03% and AUD +0.25%. Commodity prices and the loonie go hand-in-hand. With oil prices firmly trading above the $80 a barrel has pushed the CAD to print its strongest level vs. its southern neighbor in nearly 2-months this week. Currently the loonie trades in a tight trading range. The currency ended last month officially posting its biggest yearly gain in 2-years vs. USD as the Harper led country recovers from the recession pushing the currency closer to parity with the greenback. If everything remains equal, trading at a strong premium within 8-months remains a viable reality. However, expect Governor Carney to eventually throw his weight about preventing that from happening as the BOC said last year’s currency’s gains threaten the speed of growth to the economy. One cannot ignore that Canadian fundamentals remain strong and that emerging countries demand for commodities, which Canada has abundance of, can only support the currency in the long run. Week-to-date the currency has had little data to chew on, traders anxiously wait for tomorrow’s Ivey PMI and Friday’s always surprising employment report. For now, speculators are better buyers of the currency on any USD rallies in the short term.

The AUD rose to a two-year high vs. the EUR and was near its strongest in a month against the greenback on the back of rising commodity prices (they makes up more that +50% of the country’s exports). For a seventh consecutive day it has advanced against the JPY as stronger fundamentals, home building approval +5.9% vs. -1.8%, m/m, has investors seeking to increase their risk appetite and take advantage of the interest rate differentials. Higher commodity prices and positive equity indices have convinced investors that the recent currency ‘softening’ was somewhat overdone. The RBA believes its monetary policy is ‘now back in the normal range’. Expect to see better buying of the currency on pull backs to remain (0.9130).

Crude is lower in the O/N session ($81.67 down -10c). After 8-trading days of gains, oil prices stayed close to home yesterday as various speculators anticipate weather conditions to improve next week. This morning we get the weekly inventory report and traders anticipate the report to show that oil supplies fell for a seventh consecutive week. Forecasts for below-normal temperatures through mid-Jan. are expected to erode fuel stockpiles. For the immediate future any pull backs in gas or oil prices remain better bid. Last week’s EIA report showed a smaller than forecasted decline in inventories. During Dec. crude prices had been rising even as the dollar climbs and as interest rates backed up. There is no correlation and it can only suggest that the market is beginning to believe that global demand is rising. Forget the dollar. The demand ‘variable’ seems to be back on the table again. Oil inventories dropped -1.54m barrels to +326m last week vs. an expected decrease of -1.85m barrels. They were +5.2% above the 5-year average, down from +5.3%. Despite this week’s report, the trend of demand and consumption continues to climb. Year-to-date, oil has climbed +2.9%.

The recent ‘yellow metal’ scenario remains the same. Yesterday the commodity managed to print a fresh two week high as a weaker greenback boosted the demand for the commodity as an alternative investment. The official reserve currency managed to appreciate +4.2% last month and year to date has given back -0.9%. In the month of Dec., the commodity depreciated approximately -12% after printing a record high of $1,227. Yesterday it rallied just under +2%. Not unlike other asset classes, last month’s holiday swings had been somewhat overly exaggerated on liquidity constraints ($1,127).

The Nikkei closed at 10,731 up +49. The DAX index in Europe was at 6,019 down -13; the FTSE (UK) currently is 5,505 down -18. The early call for the open of key US indices is lower. The US 10-year bond eased 4bp yesterday (3.77%) and are little changed in the O/N session. Treasuries pared initial losses and advanced after the weaker than expected US pending home sales report. Most of the ‘dire’ headline print (-16%) is explained away (see above), however, bond prices managed to print their lowest yields in a fortnight. Has the tax credit coupled with low mortgage rates only had a temporary effect on the US housing market? This posing question has speculators taking some risk off the table ahead of North American employment reports. Already this week, US data showed that growth reports were not as strong as some traders had hoped or expected. Despite economic growth, growth overall remains muted along with inflation and in the short term will provide a bid on pull backs for the asset class.

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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