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Job Losses Mount in US

July 2nd, 2009

Market Highlights

  • US Payrolls Disappoint
  • ECB Keeps Rates on Hold
  • Oil Falls Hard

US Payrolls Disappoint

The US dollar is up across the board this morning as non-farm payrolls were released showing a decline of 467 thousand jobs on expectations of a drop of 360 thousand. The unemployment rate was near expectations and is getting very close to double digits, settling in at 9.5% with no signs of stopping in the near term. European shares are down in late trade on the news and North American indexes look set to open in negative territory. Investors turn their focus away from sentiment and back to fundamentals. That being said, the US dollar will continue to find support with bad news, as investors still remain content to park their money in US treasury bonds any time there is uncertainty in the market. Clearly, uncertainty has been the major theme over the past couple of weeks, which has served to stop the slide in the USD. However, any clear signs of recovery would certainly change that.
China is yet again in the headlines vis a vis the US dollar, as reports surfaced yesterday that the nation would like to officially discuss the possibility of a super sovereign currency at next week’s G8 meeting in Italy. This put the USD under serious pressure yesterday, although a senior Chinese official has today denied any knowledge of this and the USD has since reversed course. The dollar really seems to be at the mercy of whoever is saying what on any given day, so stay tuned as the rhetorical back and forth continues.

ECB Keeps Rates on Hold

The European central bank had their policy meeting last night and decided to leave rates on hold at 1% as expected. In their statement the board stated that stabilization and recovery will not be seen in Europe until 2010 and that downside risks still remain to the European economy. The unemployment rate was also released, coming in worse than expected at 9.5%, paralleling the labour situation in the US. The EUR has fallen 1% today on the news but is still trading within the all too familiar ranges we have been seeing lately. There were a few overnight events coming from Switzerland and Sweden that helped stem the fall of the Euro. The Swiss national bank was playing the verbal intervention game again, saying that they would not hesitate to intervene once again in currency markets in order to stem the strength of the Swiss franc. They would usually go about this by selling francs and buying Euros so as a result the Euro found a little support. Sweden’s Riksbank surprised the market overnight by cutting interest rates to an all time low of 0.25% and offering billions in loans in an effort to help the county’s worst downturn since the 1940’s. The Swedish krone is the biggest mover of the currencies as a result, trading down over 2% on the day against the USD.

Oil Falls Hard

The price of crude oil has gapped well lower this morning on the disappointing data out of the US and its negative implications for demand going forward. Crude oil is currently trading at 66.70 per barrel, off over $5 per barrel from yesterday’s highs and 4% on the day. The fall in the Canadian dollar on negative risk sentiment today has gained some steam as oil has sold off, highlighting Canada’s exposure to cyclical commodities. The commodity currencies have been the hardest hit today, with the CAD, AUD and NZD all selling off well over 1% on the day. The data calendar is light for the rest of the week, as people head for the exits early for the Independence day weekend.

By Brendan McGrath, Senior FX Trader

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Commodities Driving the Dollar

July 1st, 2009

Oil Inventories Drop

The US dollar is broadly lower this morning as the price of crude oil reversed its 3% losses from yesterday to find itself above $71 per barrel once again.  Data released from the American Petroleum institute last night showed a massive decline in crude inventories of 6.8 million barrels, well under consensus estimates of a 2 million barrel drop.  Inventory data from the US government’s Energy Information Administration is due out later this morning and is pointing towards a drop of 1.8 million barrels and is considered the more reliable measure.  Either way, continuing tensions in Nigeria and the beginning of the summer driving season ahead of the July 4th weekend will surely keep oil well supported at current levels.  It is no surprise then that the Canadian dollar is the biggest mover today, gaining nearly a percent and a half on the day but still well within its recent ranges.  We will have to see a decisive break below the 1.13 level before we can expect USDCAD to end the current consolidative period.�
ADP non farm employment numbers were released this morning well under expectations, with 473 thousand jobs lost on expectations of a fall of 388 thousand.  This number isn’t as reliable as the official government release due out tomorrow, so it’s no wonder why the market seems to be ignoring this and focusing more on energy prices.  The Dow and S&P 500 have both opened 1% higher today on the back of surging energy and material stocks.  The ADP number could, however, be a harbinger for things to come tomorrow, so if we see an employment drop of significantly more than 360 thousand jobs then that could spark another round of risk aversion and dollar buying as investors question the health of the US economy. On the real estate side of things, pending home sales disappointed today, posting only a 0.1% increase on consensus hopes of a 0.7% rise.  Construction spending also fell more than expected, proving once again that a real recovery will not happen until we see a definite trough in home prices and construction activity.
European PMI’s were released overnight with most posting slightly better than expected numbers.  The EUR is higher this morning on US dollar weakness, but the big issue still remains the state of credit conditions in Europe.  The European Central Bank has been steadfast in their mandate to fight inflation over the past year, even as the rest of the world slashed rates to stimulate growth.  With inflation nonexistent and deflation a real threat we could see some interesting developments on the quantitative easing side from the ECB when they meet tomorrow.  All eyes will be on the official statement to get any idea as to the direction they will take on interest rates and if they change to a more dovish tune. 

Equity Markets Have Huge Quarter

Equity markets in the US had their best quarter since the memorable tech boom of the late 90’s, with the S&P 500 index posting a 15.2% gain while the Dow was up 11%.  This is the first positive quarter for equities in over a year and could be a good indicator of future recovery, although after a drop like we had over the past year stocks do feel like they have gotten ahead of themselves with the sharpness of the rebound.  The VIX index of equity volatility had its largest quarterly drop since 1998 and is at pre-Lehman levels once again, also a good sign for equities.  The USD has decoupled slightly from its correlation to equities as fundamentals are back in play, so all eyes will be on tomorrow’s employment data to give some direction to the greenback.

By Brendan McGrath, Senior FX Trader

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Markets Struggle to Find Direction

June 30th, 2009

Sterling Volatile

Monday was very much a non-event for currencies, as most of the majors are in exactly the same place where we last saw them yesterday.  There was some intraday volatility in the majors overnight, as month- and quarter-end flows dominated markets, but there was clearly no change in overall sentiment.  With a holiday-shortened week in both the US and Canada and no major data until Thursday, the close-to-close volatility will remain low and sideways trading will be the order of the day.  The pound sterling was the big mover overnight, probably because UK house prices made an unexpected increase for the month.  This data helped cable trade to an eight-month high over the 1.67 mark late last night, only to fall steadily throughout the London session on much weaker-than-expected current account numbers and, rather remarkably, the biggest quarterly GDP decline in over 50 years.  UK GDP contracted 2.4% in the first quarter of the year, reinforcing the fragile state of the British economy.  Sterling has fallen over two and half cents since reaching its highs overnight as a result of this poor data.  The pound has gained nearly 20% against the USD since mid-March on hopes of a global recovery but is struggling to hold onto any gains over the 1.66 mark. 

The euro remains mired in its recent range between 1.40 and 1.4150; a slew of mixed data overnight did little to move the common currency.  Money supply growth for May did come in under expectations, which may signal that credit is not easing as much as hoped in Europe, even after the ECB’s $442 billion dollar cash injection last week.  The question of growth and recovery is very much up in the air in Europe (as it is in the US and the UK) as mixed data gives investors no clear picture of where the economy will go next. 

The antipodeans (AUD and NZD) tried to make a move overnight, with the Aussie failing to test the all-important 0.82 level against the USD.  Relative to its G10 peers, Australia has been a story of resilience over the past year, as it has never entered a technical recession (two consecutive quarters of falling GDP).  The key ingredient here is Australia’s role as a supplier of key commodities to China, with demand well supported by the world’s most populous nation and its aggressive growth plans.  The AUD does look to be stalled out for the time being around 0.81 cents, but it has gained nearly 30% against the USD since March, and the upward trend is still very much alive.  As soon as more good news comes into this market and investors embrace risk once again, we can be sure that the AUD will outperform.

Oil continues its march higher, trading to $72 overnight on continuing concerns over capacity problems in Nigeria.  The Canadian dollar, on the other hand, has definitely decoupled from its correlation with oil over the past few sessions.  Canadian GDP figures were released this morning right on expectations and, as a result, nothing happened to the Loonie.  It is now becoming evident that Canada cannot survive by commodities alone and that high oil prices will not make us immune to economic problems.  We are so closely linked to the fortunes of the US that, until we see a broad-based recovery in employment and manufacturing activity at home and abroad, we will not see real growth in the economy.

US Real Estate Decline Slows

Housing data out of the US this morning has come in better than expectations, albeit still at very negative levels.  The S&P Case Schiller house price index came in at -18.1%, showing that real estate prices in the states are still falling, although the speed of the contraction appears to be bottoming.  This is the bottom that investors really want to see, as it would signal an end to what caused our current predicament in the first place.  The Chicago purchasing managers index also came in better than expectations, while consumer confidence numbers were decidedly worse than expected.  It seems that a mixture of improving consumer sentiment and rising real estate prices will be the formula to get the US economy back on track.  This divergence is emblematic of the current uncertain market environment as investors struggle to find direction. 

Have a great day.

By Brendan McGrath, Senior FX Trader

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Traders on the Fence

June 29th, 2009

Currencies Little Changed in Thin Trade

Currency markets were little changed over the weekend as most traders seemed content to sit on their hands and wait for something to shake them out of their complacency.  The US dollar is modestly higher, however, on comments made over the weekend by Chinese officials ruling out any sudden shifting of their foreign exchange reserve policy.  This comes on the heels of comments made last week by China’s central bank calling for the creation of a super-sovereign reserve currency to replace the USD as the world’s standard go-to.  Regardless of who is saying what, though, it seems that only political rhetoric is moving the markets these days, as investors worldwide debate whether or not a recovery is underway or whether we are in for a prolonged period of stagnant growth.  In Europe, the euro is trading slightly higher this morning on better-than-expected (or “not as bad as expected”) consumer confidence numbers.  The common currency has been gyrating between the 1.38 and 1.41 levels over the past couple of weeks as it struggles to find some direction.  The pound sterling is also slightly higher this morning, even on poor mortgage approval numbers.

It seems like after the recent consolidation that we have been seeing in equity and currency markets, we are in for another move higher, and this will most likely come at the expense of the Greenback.  US fundamentals will eventually have to pull the USD down even further as their massive debt load and increase in money supply will start to weigh.  The key data out this week is US non-farm payrolls on Thursday, while north of the border we get monthly GDP on Tuesday.  Position squaring and defensive trading should be the order of the week as traders square positions ahead of the all important employment data from the US.  A worse-than-expected number there could lead us to another bout of safe haven US dollar buying, while a better-than-expected number should bring out the dollar bears and bring a little risk back into this market.  The Dow and the S&P are both up nearly 1% in early trade to start the week.

Oil Rises Above $70 on Nigerian Tensions

Nigeria’s main militant group is claiming this morning that they have attacked an oil platform owned by Royal Dutch Shell.  Although there has been no outside verification of this report, the company has shut down some of its production in the region as they investigate the situation further.  This was enough bad news for traders to push the price of oil above the $70 mark yet again, a level we have been oscillating around for the past few weeks.    Clearly the Nigerian situation is the main supporting factor in the oil market these days, as demand forecasts continue to be cut in the face of an uncertain economic recovery.  On the technical side of things, the West Texas Crude 50-day moving average is converging with the key 200-day moving average, and if it crosses over, it could mean further gains for the price of oil.  A continually-rising oil price will definitely weigh down any hopes of a broad-based global recovery and lead to stagnant growth for the foreseeable future if it continues.  Holidays in Canada and the US later this week should lend support to the price of oil as families pile into their station wagons and head to the beach.  The Canadian dollar is slightly lower this morning in subdued trade with very little economic data to drive price action.

By Brendan McGrath, Senior FX Trader

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China Reiterates Call for International Reserve Currency

June 26th, 2009

Risk, Reserve Status Weigh on USD

The Greenback ran into decent selling interest throughout much of the Asian and European sessions overnight as risk appetite has come back in favour.  Yesterday’s rebound in equities started things off on the wrong foot for the USD as traders saw less of an appeal in the currency and fled into historically riskier asset classes.  While Asian and European stocks were modestly higher while we slept, so was the EURUSD.  Along with the overall improvement for risk, the USD is also once again under pressure caused by questions about its future status as the world’s reserve currency.  Overnight, China’s central bank repeated a call for the creation of a “super sovereign currency” as anxieties about the health of the U.S. banking system remain in the forefront.  Although China is the largest foreign owner of United States treasuries, they continue to urge IMF (International Monetary Fund) officials to have less of a dependence on a limited set of reserve currencies.  Realistically, employing an international currency for reserve purposes would take an unforeseeable amount of time to be put into place.  Nonetheless, the USD is reeling this morning, even if we’re years away from any sort of diversification from the Greenback.  In trading, the EURUSD has hung on to yesterday’s New York close and is about 100 points higher, currently fighting to get over the 1.41 hump.  While gains look to be stalling out, look for the pair to trade within a fairly tight range as traders tailor positions ahead of the weekend.

Pound Strength Steals the Show, CAD Struggles to Follow Suit

While EURUSD is humbly higher, the GBP is just plain higher, once again stealing the show.  From battling to remain ahead of the significant 1.6200 level as early as yesterday; the GBPUSD is now hovering around 1.6500.  Sharp buying interest, along with positive European equity markets have propped up the cable for the time being while long-term traders assess which direction to take the pair.  For the better part of the month (June), GBPUSD has roughly traded in a 400 pip range between 1.62 and 1.66.  Long-term sentiment in the pound continues to be somewhat positive, although more of an uncertain tone is beginning to creep into the picture.  Sub-par data releases out of the UK this week has shrouded the currency in doubt, as previous forecasts that growth will be seen before the end of the year may now be disputed.  As the GBPUSD sits within the aforementioned range, one can safely assume that the pair will continue to trade between those posts until the market collectively makes a decision.  Nevertheless, on the short term, upside potential continues to loom above 1.6480, making 1.6520 the next stop on the rise upwards.  On the flipside, for the pair to fade, GBPUSD must descend south below a collective of SMA’s around the 1.6420/00 region.  In CAD news, after picking up steam in yesterday’s trading, USDCAD is once again trading beyond the 1.15 figure.  This, in the face of weak PCE data released this morning that briefly took the duo south of 1.1480.  Upside trading should see a struggle to get up and over 1.1560 on the short-term, while 200 hour SMA support sits at the 1.1430 region.

By Jamie Heighway, Market Analyst

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