Tuesday’s are for consolidation!

Green shoots rooting, fear of a double-dip occurring, what gives? All summer we painstakingly grinded higher in equities. Many investors have been afraid that they missed the boat as hedge funds turned the screws and continued to put cash to work on pull backs. Pull-backs, what pull backs? Yesterday was one, albeit a small one! The currency market is back to range trading today after the surprisingly strong German confidence numbers this morning (56.1 vs. 39.5). The headline may persuade some risk takers to take off the shackles. This morning’s US housing data could be the missing piece that gives the EUR some stamina again!

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

Forex heatmap

A slap in the face and back to reality, that’s what global bourses have been telling us of late. A plethora of countries have been queuing up to declare the end of the recession (Canada, Japan, France, Hong-Kong etc). We may have seen the worst of it, but, investors are questioning the ‘growth’ variable of the equation. How long? Could we even double-dip? Are commercial real-estate loans about to create the next tsunami of financial troubles? Despite all this, yesterday’s NY manufacturing data is back in expansion mode (+12.1 vs. +3.0) and more significantly than expected on both current and expected future conditions. It’s worth knowing that the headline print is the best in nearly 2-years and sharply higher than the -38 reading at the beginning of this year! Perhaps the data will be a good omen for this Thursday’s Philly Fed! Digging deeper, nearly all the sub-components showed improvement this month, especially new-orders. Shipments also continued to expand while the deterioration in employment slowed substantially (best print in a year). Inventories declined further, which can only be a positive in this current environment (they have been the scourge of this recession). The future indicator (6-months) shows that the general business conditions improved to the best level in 2-years. With such good news why are investors nervous? The Fed announced an extension to its TALF program yesterday (3-6-months). This emergency program has been utilized to re-ignite credit markets efficiency’s, by extending the length of the program it may ‘cushion the commercial real-estate industry from rising defaults and falling prices’. Should we be worried?

The USD$ currently is lower against the EUR +0.31%, GBP +0.27%, CHF +0.11% and higher against JPY -0.71%. The commodity currencies are stronger this morning, CAD +0.24% and AUD +0.43%. Yesterday, the loonie depreciated to its weakest level in a month, crude and equities continued to fall as investors speculated that a rally in higher-yielding assets was overdone in respect to growth. This has gone some ways to tarnish investors’ risk appetite. Despite CAD being the strongest currency last month of all the developed currencies vs. the USD, this week it’s leading the charge lower vs. its largest trading partner. With equities potentially ending their summer rally, look for commodity currencies to pushed much lower! Last weeks data was mixed, both sales (+1.9%) and trade (deficit narrowed -$55m) were a pleasant surprise, but housing starts took some of the shine off some economists optimistic views (-4.1%). The trade gains can be attributed to the double-digit surge in crude exports (oil had advanced +20.0% in a month!). It’s anticipated that tomorrow’s weekly oil inventories will again show an increase which potentially put more pressure on the loonie. For now, investors are looking to buy USD on pull backs.

Governor Stevens and the RBA is mulling over its decision on when to raise borrowing costs from a 50-year low (3%). They need to balance the risks of inflation without damaging confidence and thus demand. The AUD managed to advance in the O/N session from it 2-week low as investors believed that the last 2-day drop was excessive. Equities are dictating the direction of higher yielding currencies at the moment (0.8247).

Crude is higher in the O/N session ($67.49 up +74c). Finally, crude is starting to take notice of bearish fundamentals that do not warrant elevated energy prices. Yesterday it managed to print a new 2-week low as global equities dropped and the greenback advanced, thus reducing the appeal of commodities as an alternative investment. Even the fear of tropical storms providing a bid never materialized. ‘Claudette’ came ashore without affecting any major US oil and gas installations. Last week’s EIA report recorded another high in crude inventories. The data showed that crude stocks in the world’s largest energy consumer rose by +2.5m barrels last week, against expectations for just a +700k build. The latest data on industrial production for some of the larger countries remains negative and should provide support for further demand destruction. We are now officially over the hump of the US driving season and just about to enter historically a weak demand month of Sept. Despite probably seeing the worst of the recession, global growth will remain very subdued. This certainly does not bode well for any strong rebound for prices in the coming months. Reality continues to tell us that inventories are high, demand is still really weak and the risk is increasing that we could see a $60 print in the medium term. Similar to most commodities, the ‘yellow metal’ managed to print a new monthly low yesterday as the greenback remained stoic and curbed the ‘yellow metal’s’ appeal as an alternative investment. This morning the USD has given it up a bit and commodities has rallied a tad ($940).

The Nikkei closed at 10,284 up +16. The DAX index in Europe was at 5,229 +28; the FTSE (UK) currently is 4,673 up +29. The early call for the open of key US indices is higher. The 10-year bond’s eased 2bp yesterday (3.50%) and are little changed in the O/N session. Treasuries remain coveted in pull backs, after last weeks US data showed that the cost of living was unchanged and that retail sales surprisingly fell last month, confirming that inflation remains subdued. With equities finding it difficult to find consistent traction is persuading some investors to look at the safety of government bonds.

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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