FOREX, COMMODITIES & STOCKS OUTLOOK 20th August 2010
Dealers’ Room Commentary
Overview
Not much scheduled data due out during today’s session with the Canadian Core CPI m/m rate expected at 11.00 GMT (Forecast 0.1%) and then later at 14.00 GMT we have the Banco de Mexico interest rate decision, no change expected here with rates holding at 4.50.
All eyes will be on Australia this weekend as the country is set for a very close run Federal Election with the governments campaign chief saying a “hung parliament is a real possibility”. EUR/CHF hits lows not seen since July and US jobless application and manufacturing figures disappoint (See stories below).
Currencies
EURUSD:
The EUR/USD opened in Asia around 1.2825 after a whippy US session that saw the EUR/USD jump to 1.2903 after very weak US data and then fall below 1.2800 when that same data sent risk assets and risk currencies lower. U.S. initial jobless applications rose by 12,000 to 500,000 last week, Labor Department data showed. Claims exceeded all estimates from economists polled by Bloomberg News, beating the median forecast of 478,000. The Federal Reserve Bank of Philadelphia’s general economic index fell to minus 7.7 this month, signalling contraction in the area covering eastern Pennsylvania, southern New Jersey and Delaware. Economists forecast the measure would rise to 7. The EUR/USD came under pressure in early Asia when Tokyo and US accounts sold EUR/JPY down to 109.03 and within spitting distance of stops lined up below 109.00. The EUR/USD fell to 1.2793 before “semi-official” bids ahead of 109.00 in the EUR/JPY underpinned the cross and the EUR/USD. The EUR/USD spent the rest of the morning session quietly consolidating between 1.2795/2825. There is a divergence of views with some believing the run of weak US data should support the EUR/USD while EUR/USD bears argue that a faltering US economy will severely impact the EZ growth outlook and the ability of peripheral Europe to climb out of the fiscal hole they find themselves. Analysts feel that the EUR/USD is likely going to stay in a range through the European session, as there is no data out of Europe or the US today. Buyers are lined up ahead of 1.2660 while sellers are crowding above the 1.2900 level. The pair is currently trading at 1.2806/09 (0530GMT).
GBPUSD:
After the third consecutive failure ahead of the 1.5700 level overnight, cable began the day in Asia at 1.5602, little changed from the previous two days opening levels. Cable initially made a high for the day at 1.5605 before being sold off to a low of 1.5564 so far on residual momentum from NY. From there profit taking in Asia saw cable bounce back to 1.5594, coinciding with a move off the lows for Asian bourses. With Asian bourses returning to their lows in early afternoon trading the pressure is likely to remain on risk trades leading into London, and with little data on the horizon tonight to change market views we could see the negativity flow through to NY also. Comments by Japan’s Noda over lunch said nothing that hasn’t already been said, but did help most JPY crosses to their highs for the day. GBP/JPY opened at 133.20 and headed lower initially as Asia sold first up, taking the pair down to a low of 132.65 before bouncing on profit taking in the majors and paring of losses in Asian bourses with Noda’s comments pushing it to a 133.25 high for the day so far. EUR/GBP traded a narrow 0.8215/25 range. No major sterling news today, with cable trading at 1.5576/80 (0530GMT).
USDJPY
The yen rose toward a seven-week high against the euro on signs the global economic recovery is slowing, supporting demand for Japan’s currency as a refuge. The yen headed for a weekly gain versus 15 of 16 major counterparts before reports next week that may show U.S. home sales fell, Japanese export growth slowed and German business sentiment weakened. EUR/JPY rose to 109.60 in Tokyo from 109.49 in New York yesterday, after reaching 109.02, the highest since July 1. The yen was at 85.30 per dollar from 85.39. The yen has gained 14 percent this year, the best performance among 10 developed-world currencies. The currency typically strengthens in times of financial and economic turmoil because Japan’s trade surplus frees the nation from dependence on overseas capital. Gains in the yen were tempered on speculation the Japanese government will take steps to counter this week’s 1 percent appreciation versus the dollar. The probability the Bank of Japan will intervene in currency markets is at a six-year high of 51 percent, according to a Morgan Stanley model that uses factors such as net positions in Japan’s currency. Japan hasn’t intervened to weaken its currency since 2004. The yen’s climb to a 15-year high of 84.73 against the dollar on Aug. 11 has stoked concern that exporters’ earnings could weaken and deflation might deepen. Finance Minister Yoshihiko Noda said today he will meet with Prime Minister Naoto Kan next week to discuss the economy and currency.
EUR/CHF: Drop to lowest level since July
The euro fell to the lowest since July versus the Swiss franc before French President Nicholas Sarkozy meets Finance Minister Christine Lagarde today to prepare for next month’s budget. The euro declined to 1.3194 francs from 1.3233 francs yesterday, after touching 1.3188 francs, the weakest since July 1. Europe’s common currency slipped to $1.2801 from $1.2823.
Sarkozy has promised to cut France’s deficit to 6 percent of output next year and 3 percent by 2013 from about 8 percent this year. France’s finance ministry is working on the hypothesis that the country’s economic growth in 2011 will be about 2 percent, daily Le Figaro reported, without citing anyone. That compares with the government’s current forecast for growth of 2.5 percent.
AUD/USD: Markets await election this weekend and possibility of “Hung Parliament”
AUD/USD opened in Sydney at 0.8927 and has traded a 0.8885-0.8930 range so far; last at 0.8917. It has been a choppy and somewhat directionless session. The market has taken a decidedly hands off stance ahead of tomorrow’s Federal election with the governments campaign chief saying a “hung parliament is a real possibility”. Under normal circumstances one might have expected AUD”s losses to be larger today given the falls on Wall Street (on the back of more poor US Data) and stock losses around the region (Nikkei -1.1%, Shanghai -1.2%, ASX -1.2%) but it appears that players positioning has been set for the elections with no one willing to initiate new positions. Deputy RBA Gov Battellino made some upbeat comments regarding the AUS and global economy. Battellino said the RBA saw further growth in AUS jobs and they expected the global economy would grow at a reasonable pace over the next couple of years.
Whilst elections tend to have only a fleeting impact on currencies the possibility of a “hung parliament” might cause a steeper sell-off if Australia is left in “limbo” for a few weeks until we have a final outcome. Australia’s dollar approached a four-week low versus the yen as polls signalled tomorrow’s election may result in a hung parliament. The Australian currency fell to 88.91 U.S. cents from 89.27 cents in New York yesterday, heading for a 0.4 percent loss this week. The currency declined to 75.86 yen, after sliding to 75.70 yen, the lowest since July 22.
Commodities
Oil
Crude oil traded near a six-week low as rising U.S. jobless claims and a contraction in manufacturing added to concern growth in the world’s biggest oil-consuming nation is slowing. Oil, down 1.3 percent this week, fell yesterday after the Labor Department said weekly claims for unemployment benefits climbed to the highest level since November. The Federal Reserve Bank of Philadelphia’s general economic index dropped to the lowest reading since July 2009. Total U.S. petroleum inventories reached the highest in at least 20 years, Energy Department data showed earlier this week. Crude for September delivery was at $74.42 a barrel in electronic trading on the New York Mercantile Exchange, up 2 cents, at 0545GMT. The contract expires today. Yesterday, it fell 99 cents, or 1.3 percent, to $74.43, the lowest settlement since July 7. The more actively traded October contract was up 3 cents at $74.80. Futures are set for a second weekly drop. Oil, which topped $87 a barrel in early May, has fallen 6.2 percent this year amid concern the slow pace of economic growth would curb the global recovery in fuel demand. U.S. total petroleum stockpiles climbed 5.3 million barrels to 1.13 billion in the week ended Aug. 13, the highest level since at least 1990, an Energy Department report showed Aug. 18. Oil may fall next week on signs the U.S. economic recovery is slowing, bolstering stockpiles, according to a Bloomberg News survey. Seventeen of 44 analysts and traders, or 39 percent, forecast crude will decline through Aug. 27. Fourteen respondents, or 32 percent, predicted futures will increase, and 13 said there would be little change. Last week, 56 percent of survey respondents projected a drop.
Gold
Gold, trading little changed, may extend gains and approach a record as investors step up purchases to protect their wealth amid concern that the global economic recovery is faltering. The metal touched a seven-week high yesterday and is headed for a third weekly climb, the best run since June, when the price surged to an all-time high. Holdings increased in the SPDR Gold Trust, the biggest exchange-traded fund backed by bullion. The price jumped to $1,237.50 yesterday after U.S. jobless claims climbed. That was the highest intraday level since July 1 and compares with the June 21 peak of $1,265.30. Many believe that the gains on Gold will continue into next week. Initial U.S. jobless claims in the week to Aug. 14 jumped to the highest level since November, Labor Department data showed, while manufacturing in the Philadelphia region shrank for the first time in a year. Asian equities declined today. Gold has climbed 12 percent this year, heading for a tenth annual gain and outperforming equities, on signs that global growth may be losing momentum. December-delivery futures dropped 0.1 percent to $1,234.30 an ounce on the Comex in New York. Holdings in the SPDR Gold Trust gained 3.95 metric tons to 1,299.47 tons as of Aug. 19, according to the company’s website. Holdings are 1.6 percent less than of June’s record.
Markets
US Markets
The frail U.S. economy received fresh setbacks as new U.S. jobless claims scaled a nine-month high last week and Mid-Atlantic manufacturing shrank in August for the first time in more than a year. Other data released on Thursday, including a lackluster gain in a gauge of future activity last month, also implied that expansion had lost momentum after a brisk first quarter, though economists cautioned against interpreting the reports as signs of an impending double-dip recession. Initial claims for state unemployment benefits increased 12,000 to a seasonally adjusted 500,000 last week, the highest since mid-November, the Labor Department said, and the third straight week of gains — a trend last seen in January. Financial markets had expected claims to slip to 476,000. Separately, the Philadelphia Federal Reserve Bank said its business activity index dropped to minus 7.7, the lowest since July 2009, as new orders and shipments fell and the employment situation deteriorated. The index was at 5.1 in July and August’s fall confounded markets that had expected a rise to 7.0. It also raised the risk of contraction in overall national manufacturing activity, which has been leading the economy’s recovery from its most painful recession since the Great Depression of the 1930s. Stocks on Wall Street tumbled and the broader Standard & Poor’s 500 index suffered its lowest close in nearly a month. U.S. government debt prices rallied, with the yield on the two-year Treasury note falling to a record low. Bond yields move inversely to prices. The U.S. dollar fell to a near 15-year low against the yen but rose against the euro. The latest data, including a third report showing the Conference Board’s index of leading economic indicators rose 0.1 percent in July after dropping 0.3 percent in June, reinforced signs of sluggish third-quarter growth. The economy’s poor health, characterized by a 9.5 percent unemployment rate, has handed President Barack Obama a tough challenge and put at risk the Democratic Party’s majorities in the U.S. House of Representatives and Senate in November’s congressional elections. Obama on Thursday cited the weak data as he implored the Senate to pass a stalled bill to help small businesses, which have been hit hard by tight access to credit.”They need help and if we want this economy to create more jobs more quickly we need to help them,” Obama said.
European Markets
European shares are expected to fall for a third straight day on Friday, with sharp declines in Asia and on Wall Street following disappointing U.S. economic data seen prompting investors to stay cautious in holiday-thinned trade. Financial bookmakers predicted Britain’s FTSE 100 to open 5 to 8 points lower, or as much as 0.2 percent; Germany’s DAX to open 9 to 20 points down, or as much as 0.3 percent, and France’s CAC-40 to fall 11 to 12 points, or as much as 0.3 percent down. U.S. stocks tumbled to their lowest close in nearly a month on Thursday, while the FTSEurofirst 300 index of top European shares fell 1.5 percent to 1,036.84 points, the lowest close since July 21. Volumes on the index were 70 percent of its 90-day daily average.
Asian Markets
Asian stocks fell, halting the five- day stretch of gains in the MSCI Asia Pacific Index as concern that international demand is slowing. Japan’s Nikkei 225 Stock Average slumped 1.8 percent as a stronger yen dented the outlook for the country’s export earnings. South Korea’s Kospi index lost 0.7 percent. Australia’s S&P/ASX 200 Index retreated 1.4 percent. China’s Shanghai Composite Index declined 1.3 percent. Hong Kong’s Hang Seng Index sank 0.7 percent. Japan’s Nikkei 225 has fallen 0.7 percent this week amid mounting speculation the government will take new steps to stimulate the economy. Prime Minister Naoto Kan asked ministers to consider fresh measures after a government report on Aug. 16 showed the country’s economy grew 0.4 percent last quarter, less than a fifth of the pace economists estimated. Chinese banks fell after the Securities Times reported they may need to take a 600 billion yuan provision on bad local government loans. The report cited calculations by the Securities Times based on figures announced by the government. Toyota retreated 1.4 percent to 3,040 yen. Canon Inc., which gets 28 percent of its sales in the Americas, dropped 2.2 percent to 3,600 yen.
Cliff Wachtel, Chief Analyst, AVAFX
