This ‘stress’ tension is helping no-one!

19-US Banks ‘may’ get preliminary results from the stress tests tomorrow and at the same time the Fed is expected to release the methodology of the assessments. Oh, to be a fly on the wall and see how they are going to sell this one to the general public on may 4th supposedly. This market is in a ‘wait and see mode’. Have we reached the bottom? Or are we in rest mode for the next onslaught?

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

Yesterday, the IMF has once again managed to deflate somewhat the optimists bubble. They believe that the global recession will be deeper and our recovery slower. They expect the world economy to shrink -1.3% this year, compared with its Jan. projection of +0.5% growth and an expansion of +1.9% next year instead of its earlier +3% view. It seems that policy makers randomly pick numbers and just as easily revise them without any consequences. They conclude that a quick recovery is not assured, it depends on policy makers efforts to cleanse banks’ balance sheets and provide further innovative measures to boost demand. Banks will know about their stress test results this Friday and one should expect leakages until public is notified on May 4th, this speculation can only provide further volatility.

UK Chancellor of the Exchequer, Alistair Darling is expected to borrow GBP269b as the worst recession in over 50-years saps tax revenue. Even more frightening, the US government will have to sell $2.4t in new bills, notes and bonds in fiscal 2009 to finance their own budget deficit! Despite this, the Chancellor sees the UK economy to start to recover by year-end. He highlighted in his budget that the economy will be better than other European economies including Germany, as it’s more flexible and resilient, don’t think so! He foresees the economy retracting -3.9% this year and accelerating to +1.25% in 2010 and +3.5% in 2011. Many analysts believe his projections like most policy makers at the moment are a tad optimistic.

The USD$ currently is weaker against the EUR +0.10%, GBP +0.55% and stronger against CHF -0.27% and JPY -0.13%. The commodity currencies are mixed this morning, CAD -0.03% and AUD +0.15%. This week BOC Carney did not disappoint, he slashed O/N lending rates by 25bp to 0.25%, a record low and expects monetary authorities to keep them on hold for a year as inflation remains below their 2% desired watermark. Policy makers believe it’s the ‘appropriate policy stance to move the economy back to full production capacity and to achieve the 2% inflation target’. He stressed that the BOC will provide updates at each future policy decision, starting this June, on its commitment to leave the key rate unchanged. He also indicated that they have enough flexibility to spur growth, including quantitative and credit easing methods. The BOC is expected to make public today its guidelines on these policies. The loonie has staged a comeback after yesterday’s early morning losses, all this on the back of positive equities and despite the bearish weekly EIA report. One should not expect the black stuff to hold at theses elevated prices in the short term. That being said look to sell the loonie on USD pull backs.

Japanese and Australian fundamentals have pressurized the AUD this week. With Japan being one of Australia’s largest trading partners and a government report showing exports dropping for a 6-month (-45.6% y/y) has only increased concerns that the global recession continues to deeper. Couple this with an Australian inflation report, which fell to the lowest level in 18-months (+2.5% vs. +3.7%) may give the RBA legroom to cut rates again. Investors risk appetite remains fragile and the market seems to realize that the recent recovery may have been excessive. If there is a thaw in the credit market, expect the currency to rise on the back of renewed risk appetite (0.7093).

Crude is higher in the O/N session ($48.94 up +9c). Analysts are on a 29-week hitting streak as they correctly predicted that the weekly EIA report yesterday would show another week of rising inventories. Stocks rose +3.86m barrels to +370.6m (the highest level in 19-years) vs. an expected increase of +2.5m. It was a very bearish report revealing that supplies were up in every category. The 4-week total average fuel demand slipped -6.5%, y/y to +18.5m barrels. Gas stockpiles rose +802k to +217.3m vs. an expected decline of -700k barrels. Finally, the supply of distillate fuel (heating oil and diesel), climbed +2.68m barrels to +142.3m, the biggest increase since the 1st week of this year. On the whole another ugly report that is dominated by demand destruction as global economies continue to contract. The IMF revised predictions yesterday certainly will not help to support the black stuff prices anytime soon. For a number of weeks we were getting ahead of ourselves, a strong USD and so-so equity market combined with record inventory levels does not justify higher oil prices. OPEC next meets on May 28th to review production quotas. Until we see inventories decline substantially and sustainable demand destruction, there will not be a sustainable price gain. Gold continued its rally yesterday. With the fear of further bank losses to be announced it has strengthened the demand for the ‘yellow metal’ as alternative investment for safer heaven reasons. It’s a surprise to see it rally back close to last weeks highs. With inflation a non-issue and the threat of the IMF needing to offload 3500+ tons of the yellow metal, the market continues to want to sell on upticks ($894).

The Nikkei closed 8,847 up +119. The DAX index in Europe was at 4,557 down -37; the FTSE (UK) currently is 4,018 down -12. The early call for the open of key US indices is higher. The 10-year Treasury’s backed up 4bp yesterday (2.95%) and are little changed in the O/N session. Treasury prices tried to stay close to home on the back of investors speculating that the ‘stress tests’ on the largest 19-US banks may show additional loan losses, even after Geithner reassurance otherwise. Expect FI prices to be dominated by equity flows and earning reports, Government buy back programs and a plethora of new supply over the next week. For the time being one should expect the FI asset class to be better bid 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