Lack of Confidence in the FED would never happen almost never

Month end flow beats logic, even option expiries and market fix’s beat logic. Yesterday’s stronger US data wilted in its glory as individuals eager to accumulate EUR’s waited in the wings. Stronger manufacturing data out of China and Australia last night is yet to convince the market to go all-in before we get to see the employment data in the US. The market is nervous and lacks conviction proven by the trading strategies being employed thus far this week. Yesterday’s Fed minutes did not exude acute dissension amongst its members to the degree the market had been expecting. In that sense it ended up a non-event.

The US$ is weaker in the O/N trading session. Currently it is lower against 12 of the 16 most actively traded currencies in a ‘whippy’ trading range in the O/N session.

Forex heatmap

Yesterday’s US S&P/Case-Shiller Home Price Index was consistent with Market expectations and advanced +0.3% to +4.2%. This print is considered a victory of sort, especially after the plethora of poor housing data of late. The data is technically a 3-month moving average ending in June. The data would include some of the effects ‘the final boom in sales driven by the tax-credit’.  So be warned and brace yourself as future releases will be dominated by the ‘post-credit collapse in housing market activity’. Analysts expect the month-over-month changes to turn ‘negative’ in the 3rd Q, and the year-over-year growth rate to plummet.

The one piece of poor data yesterday happened to be sandwiched between the surprises. The Chicago PMI was weaker than generally expected.  The headline index fell more than five points to 56.7 and superimposing it, using the ISM-equivalent index, declined by four points to 55.2. The Chicago region is rather sensitive to what goes on in the auto-sector (the reason why it has outperformed the national ISM). Digging deeper, new-orders fell to 55.0 from 64.6 (lowest in 12-month), inventories fell to 46.5 in from 50.8 in July. A strong signal that inventories will not be as significant a contributor to growth as it was earlier in the recovery. It was nice to see that employment managed to hold it together and decline one point to 55.5. Finally, prices paid fell to 57.2 from 58.1. It is now officially at its weakest level in 9-months, proving that inflation pressures
remain subdued.

Last month’s consumer confidence release was no ‘biggie’. Surprisingly, the headline index rose +2.5 points to 53.5. Analyst’s note that the inflated print continues to remain 40 points below its 30-year average! The improvement is attributed to the 5-point jump in the outlook component, as the present situation index fell -1.5 points to a lowly 24.9. In other sub-categories, the labor market differential deteriorated by -1.2 points, to 41.9. Even with this series being loosely correlated to the unemployment rate, the results are proof that the market should expect an up-tick in the UE rate component to +9.7% on Friday. Finally and again, the inflation expectations index was unchanged at 4.9%.
The USD$ is lower against the EUR +0.61%, CHF +0.08% and JPY +0.06% and higher against GBP -0.02%. The commodity currencies are stronger this morning, CAD +0.26% and AUD +1.26%. The loonie is trying to solidify its worst monthly performance in three (-2.4%) this month. Yesterday, the CAD slumped to new lows vs. the greenback after a government report showed that the domestic economy in the 2nd Q contracted more than analysts had predicted (+0.5% vs. +1.4%). A slide in commodity prices also drove investors away from the resource-linked, interest rate and growth sensitive currency. Annualized GDP grew +2% during the 2nd Q quarter, falling short of estimates calling for +2.5%. General global uncertainty has been capable of pushing the currency to test its medium term support levels. Month-to-date, the currency has lost just over -4% vs. its largest trading partner. General nervousness in global markets is testing the loonies resolve. Canada is not immune to weaker data reported south of its borders. This ‘faltering economic recovery means the chances for a further BOC interest-rate increases this year weakens day over day’. OIS have moved to a 50% chance that Governor Carney goes next week. It is only natural that growth and interest rate sensitive currencies would be dumped even more aggressively. Traders are happy to play the risk-aversion card with longer term CAD bulls looking to pick up cheaper loonies on dollar rallies. At least until something new comes along.

It was a pleasant surprise to see the AUD rise from the depths of it lows recorded last week O/N. Government reports showed that the Australian economy grew at its fastest pace in 3-years last quarter and that Chinese manufacturing expanded (+51.7% vs. +51.2%), its largest trading partner. Australian GDP grew for its sixth straight quarter (1.2% vs. +0.9%). The currency has managed to recoup most of this weeks losses vs. both the dollar and JPY. It seems that the currency is ‘more resilient than some other risk currencies’, like the loonie, recently. Earlier this week the AUD fell against the yen on speculation that the BOJ decision to expand its loan program will fail to halt the currency’s appreciation and pared its advance vs. the dollar as the size of the CBanks step disappointed investors, causing Asian bourses to unwind some of their earlier advances. On the whole, concerns that global growth is slowing has damped investor appetite for higher-yielding assets. The currency has underperformed against all of its major trading partners and is expected to do so until there is a new Government formed. The commodity rich currency is not isolated, as other growth sensitive currencies are suffering the same fate. Government data has also happened to put a lid on the recent rally. Net result traders are adding to their bets that the RBA will leave interest rates unchanged for the next 12-months. Risk aversion will likely force the bull’s hand, capping rallies with better sellers on up-ticks (0.9051).

Crude is higher in the O/N session ($72.73 up +31c). Crude prices are making a beeline for that psychological $70 a barrel. The commodity yesterday, for a second consecutive trading session, gave up ground on the back of weaker business activity recorded in the Chicago district. The market seems to be anticipating another relatively bearish inventory report later this morning. The dollar temporarily climbing vs. the EUR had also helped to heap pressure on the commodity. Oil hovers just above this month’s low, on concerns that weaker economic data will push the US into a double-dip recession. The market should be wary that the underlying situation has not changed, the fundamentals remain very weak, demand does not look good and stockpiles of crude and products remain at a record high. Last week’s inventory report showed an unexpected increase for all energy products. Analysts note that the ‘commercial supplies of oil and oil products are at the highest level in nearly 27-years, with gas stockpiles well above 5-year averages’. Speculators remain better sellers on up-ticks in the short term.

Gold prices happened to print a 2-month high this morning as US equity futures fluttered in and out of positive territory, as investors contemplated boosting their demand for the commodity as a safe heaven. For the month of Aug., bullion has appreciated just under +5%. All last week investors have sought sanctuary in the safer heaven asset classes on the back of weaker equity markets. Investors are trying to put there cash somewhere more solid on mounting evidence of a US economic slowdown. Speculators again are supporting the various safe heaven assets on pullbacks, avoiding risky assets due to uncertainties in the markets. With a genuine fear for global growth, by default, should boost the demand for the metal as a protector of wealth in the grand scheme of things. With treasury yields expected to remain close to their lows, could promote a quickening inflation rate, which would promote pushing commodity prices even higher. The opportunity costs of holding gold are low due to falling interest rates ($1,252 +$2.50c).

The Nikkei closed at 8,927 up +158. The DAX index in Europe was at 5,913 down -13; the FTSE (UK) currently is 5,256 up +30. The early call for the open of key US indices is higher. The US 10-year eased 6bp yesterday (2.51%) and is little changed in the O/N session. Treasuries pared some of their earlier advances after the surprising consumer sentiment and house price data recorded yesterday. Investor’s mood seems to be to continue to lower yields, despite economic news being relatively positive. The market has taken back the entire product they offloaded last week and then some. Helping treasuries to maintain their bid was the BOJ’s comments highlighting uncertainty about the US economy and various analysts cutting their US GDP forecasts. The 2’s/10 spread happened to narrow 1-tick to +207bp and again flatten the US curve. Despite product becoming expensive on the curve, NFP uncertainty has debt better bid on 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