The Canadian Dollar extended its pre-holiday rally this past week on the back of rising oil prices. OPEC leaving their production quotas unchanged initiated the support for crude with a large extended cold spell fueling the rally. Weak Canadian fundamental data has slowed the “loonie’s” appreciation against most currencies. The Ivey PMI reading for December fell more than expected to 48.4 against an estimate of 52.0, which was the first contraction in manufacturing in seven months. Meanwhile, the Canadian economy lost 2,600 jobs in December which significantly missed estimates of a 20,000 gain. The manufacturing sector led the decline which was a bit surprising despite the contraction in the sector because the employment component in the Ivey PMI reading rose to 49.2 from 42.6. This could be a sign that this month’s weakness is a minor setback in an otherwise strengthening labor market.
The prices paid component in the manufacturing gauge showed a decline in prices paid which is significant because if inflation continues to remain at bay then expect the Bank of Canada to remain committed to leaving rates unchanged until mid-2010. In fact if we continue to see “loonie” appreciation then the central bank may refrain from a rate hike for a longer period as it is their desire to limit the local dollar’s appreciation. Verbal intervention from Governor Carney has kept bulls cautious and led to the prior period of range bound price action. Although, physical action from the policy makers is unlikely as their track record is miserable at best but the mere threat could provide a layer of resistance.
The central bank is aiming to limit Canadian dollar appreciation in order to inspire demand for exports which lends importance to the upcoming industrial merchandise trade balance report. If we continue to see “loonie” bulls lose conviction a weak trade report could be a catalyst for a reversal. The report isn’t typically market moving and outside of it there isn’t any fundamental releases that have the potential to significantly impact price direction. Therefore, traders should continue to monitor crude prices as they are currently explaining 60% of USD/CAD volatility. The pair may look to test the 2009 low of 1.0205 before any significant reversal.
Monday, January 11, 2010
Swiss Franc Forecast Remains Bullish Despite Economic Surprises
The Swiss Franc finished the week modestly higher against the Euro and US Dollar despite fairly disappointing economic data releases. Recent improvements in leading indicators and other measures of economic health have generally supported a healthy outlook for the landlocked economy. Yet a surprise decline in the SVME Purchasing Managers Index, modest deflation through December, and a jump in the national Unemployment rate all moderated recently-aggressive recovery forecasts.
Economic disappointments nonetheless had little impact on the domestic currency, however. A quiet Swiss National Bank showed absolutely no signs that it would halt the CHF’s appreciation and speculators showed little fear of official action in sending the currency higher. Two top-tier economic releases are somewhat unlikely to force major Swiss Franc volatility in the week ahead, and traders may instead remain on the lookout for any and all official rhetoric regarding the broadly resurgent Swiss currency.
Sharp moves in Swiss Retail Sales results or Producer and Import Prices could ostensibly force volatility for the domestic currency, but the major risk to the Swiss Franc remains any and all SNB rhetoric on its recent strengthening. The SNB had frequently intervened and aggressively sold Swiss Francs on the open market when the Euro/Swiss Franc exchange rate dipped below SFr 1.5000. Yet the lack of reaction to the currency pair’s clear break of the psychologically significant number is telling; it seems that the SNB has grown relatively tolerant in the face of EURCHF weakness.
The country’s strong dependence on trade with the Euro Zone leaves domestic producers at a disadvantage if the EURCHF falls significantly, and weakness in import prices could likewise worsen the risk of deflation for the mountainous country. It may be important to watch the upcoming Swiss Producer and Import Prices report, but it will be critical to monitor any and all official rhetoric on the Euro/Swiss Franc exchange rate.
Economic disappointments nonetheless had little impact on the domestic currency, however. A quiet Swiss National Bank showed absolutely no signs that it would halt the CHF’s appreciation and speculators showed little fear of official action in sending the currency higher. Two top-tier economic releases are somewhat unlikely to force major Swiss Franc volatility in the week ahead, and traders may instead remain on the lookout for any and all official rhetoric regarding the broadly resurgent Swiss currency.
Sharp moves in Swiss Retail Sales results or Producer and Import Prices could ostensibly force volatility for the domestic currency, but the major risk to the Swiss Franc remains any and all SNB rhetoric on its recent strengthening. The SNB had frequently intervened and aggressively sold Swiss Francs on the open market when the Euro/Swiss Franc exchange rate dipped below SFr 1.5000. Yet the lack of reaction to the currency pair’s clear break of the psychologically significant number is telling; it seems that the SNB has grown relatively tolerant in the face of EURCHF weakness.
The country’s strong dependence on trade with the Euro Zone leaves domestic producers at a disadvantage if the EURCHF falls significantly, and weakness in import prices could likewise worsen the risk of deflation for the mountainous country. It may be important to watch the upcoming Swiss Producer and Import Prices report, but it will be critical to monitor any and all official rhetoric on the Euro/Swiss Franc exchange rate.
British Pound to Face Limited Event Risk, 200 SMA Resistance
The British pound was a laggard across the majors over the course of the past week amidst mixed signs of recovery in the UK. Though mortgage approvals and manufacturing PMI rose, consumer confidence slumped. Meanwhile, the Bank of England made no monetary policy changes, as expected, and left the Bank Rate at 0.50 percent and maintained their asset purchase target of 200 billion pounds. That said, a statement that the program would take another month to complete adds to evidence that a key decision will be made in February, when the BOE will also release their Quarterly Inflation Report.
The final piece of UK news came on Friday, as the UK producer price index (PPI), showed that input costs are on the rise, and producers are raising output prices to accommodate for that. The input PPI rose by 0.1 percent during the month of December, while the annual rate shot up to a 13-month high of 6.9 percent from 4.0 percent. Likewise, output PPI jumped 0.5 percent during the month, leading the annual rate up to an 11-month high of 3.5 percent from 2.9 percent. Nevertheless, input costs are still outpacing output price increases, suggesting that profit margins remain under pressure.
Looking ahead to the coming week, the economic indicators due to be released are not likely to be groundbreaking for the British pound and may not provide enough impetus to push the GBPUSD back above its 200 SMA, barring another steep drop in the greenback. On Monday, the RICS house price balance is projected to rise to a three-year high of 36.5 percent for the month of December, adding to signs of stabilization in the UK housing market. Furthermore, the visible trade balance is anticipated to show that the deficit narrowed to 7.0 billion pounds in November from 7.108 billion pounds, suggesting that exports continued to rise into Q4. Likewise, Wednesday’s release of industrial and manufacturing production may reflect rising demand for UK goods, as industrial output is anticipated to rise by 0.3 percent while manufacturing output could rise by 0.2 percent.
The final piece of UK news came on Friday, as the UK producer price index (PPI), showed that input costs are on the rise, and producers are raising output prices to accommodate for that. The input PPI rose by 0.1 percent during the month of December, while the annual rate shot up to a 13-month high of 6.9 percent from 4.0 percent. Likewise, output PPI jumped 0.5 percent during the month, leading the annual rate up to an 11-month high of 3.5 percent from 2.9 percent. Nevertheless, input costs are still outpacing output price increases, suggesting that profit margins remain under pressure.
Looking ahead to the coming week, the economic indicators due to be released are not likely to be groundbreaking for the British pound and may not provide enough impetus to push the GBPUSD back above its 200 SMA, barring another steep drop in the greenback. On Monday, the RICS house price balance is projected to rise to a three-year high of 36.5 percent for the month of December, adding to signs of stabilization in the UK housing market. Furthermore, the visible trade balance is anticipated to show that the deficit narrowed to 7.0 billion pounds in November from 7.108 billion pounds, suggesting that exports continued to rise into Q4. Likewise, Wednesday’s release of industrial and manufacturing production may reflect rising demand for UK goods, as industrial output is anticipated to rise by 0.3 percent while manufacturing output could rise by 0.2 percent.
Japanese Yen Outlook Clouded by Opposing Yield Trends
The near-term trajectory of the Japanese Yen against the US Dollar is veiled in uncertainty after mixed cues from December’s US jobs report jumbled relative yield expectations between Japan and America.
Japan’s savings rate is high relative to other developed countries, reflecting the expense of living on an island with limited space and scarce home-grown resources. This translates into Japanese investors’ preference for safe, liquid assets that offer stable income over a long period of time. Typically, this means a choice between either US or domestic government debt, with the favored asset determined by the yield difference between US and Japanese bonds. These underlying capital flows are the dominant driver behind USDJPY, with the pair now nearly 84% correlated with the spread between the yields on the two countries’ 10-year Treasury notes.
The outlook for US interest rates took a hit after December’s labor market figures fell short of expectations, showing the world’s largest economy shed 85,000 jobs versus forecasts of a flat result. However, the outcome was not without a silver lining as November’s numbers were revised higher to reflect a 4,000 jobs gain versus the originally reported 11,000 loss, which amounts to the first positive outcome in two years. Still, the market’s first reaction was that of disappointment as the 10-year yield spread moved by nearly a full basis point in favor of Japanese notes while a Credit Suisse gauge tracking the market’s priced-in US interest rate outlook for the next 12 months dropped to a four-week low.
Meanwhile, short-term interest rates seem to be telling a different story. Much of the Dollar’s weakness through 2009 was attributed to the fact that the cost short-term (3-month) borrowing in Japanese Yen surpassed that of the greenback for the first time since 1995, leading to the widespread proliferation of the short-USD carry trade. As of Friday, this yield advantage has narrowed to the smallest since August, suggesting the Yen is well on its way to reclaiming the dubious honor of the most favored funding currency.
On balance, it is unclear which one of these relationships will prove dominant in the near term. If the initial reaction seen in the 10-year bond spread sees follow-through in the week ahead, USDJPY is set to decline. Alternatively, if short-term rates take center stage that should encourage a repositioning of carry trade portfolios away from a short-USD to a short-JPY bias, leading USDJPY higher.
Euro Range against US Dollar at Risk Ahead of European Central Bank
The Euro finished the week modestly higher against the US Dollar despite a fairly disappointing string of European economic data. Soft Purchasing Managers Index survey results and disappointing Retail Sales data may have normally been enough to sink the Euro against its US counterpart, but likewise disappointing US Nonfarm Payrolls results left the EURUSD higher. Euro Zone consumers spent 1.2 percent less on retail goods through the month of November—substantively worse than consensus forecasts of no change. The true fireworks may nonetheless wait until the coming week’s key European Central Bank Interest Rate Decision. Relatively aggressive market interest rate forecasts suggest that unexpectedly dovish ECB rhetoric may force substantive Euro pullbacks and it will be critical to monitor any and all commentary from the central bank.
The Euro’s relatively narrow trading range against the US Dollar suggests that markets have reached an impasse. On the one hand, fairly steady improvements in US economic data and a strong surge in US Dollar-long positions suggests that the tides may have turned in the Greenback’s favor. On the other, Euro Zone data has likewise generally improved and the longer-term trend favors continued Euro appreciation against the US currency. A key question in traders’ minds is simple: which major central bank will begin tightening monetary policy the soonest?
Overnight Index Swaps show that interest rate speculators and hedgers predict that the ECB will raise rates by a cumulative 99 basis points in the coming 12 months—noticeably more than expectations of 77bp in Fed rate moves. Relatively lofty expectations may nonetheless be put to the test by the upcoming ECB meeting. Though the bank will almost certainly leave rates unchanged, any suggestions that they may soon raise rates could easily force Euro volatility against the US Dollar and other counterparts. Considerably more dovish rhetoric would likely force the biggest moves, however; comparatively lofty Euro rate expectations leave it at clear risk of pullback on any disappointments.
The Euro Zone economic calendar is otherwise devoid of historically market-moving economic releases, and it will be far more important to watch market positioning and sentiment through various measures. As we wrote recently, CFTC Commitment of Traders data shows that large speculators remain the most net-short EUR/USD since it bottomed in late 2008. Whether or not history repeats itself may be a question of key fundamental developments out of the world’s largest economies.
US Dollar: A Breakout is in the Forecast but what will be the Spark?
How bearish is an 85,000-count drop in net payrolls? This is the question many were asking themselves when the US dollar tumbled following the release of the December NFPs figure this past Friday. In reality, though the indicator was well below the unchanged forecast that was projected; the market was likely little concerned about the headline figure. Instead, a revision to the November reading that officially bumped the month up to a 4,000-job increase hit a milestone that many speculators were waiting for. The first positive increase in US labor trends in two solid years offers a tangible objective that is akin to a business finding itself breaking even. Had the increase been larger, the resultant rally in risk appetite (and subsequent tumble from the market’s favorite funding currency of the momentum: the US dollar) would have been greater. However, now that this hurdle has been crossed; the market can move on. The dollar needs a true catalyst to force a breakout from the tight range that has set in over the past three weeks. And, there are few factors strong enough to truly spark a trend.
In the week ahead, the likelihood of a breakout is very high. Yet, there is a difference between a technical breakout and the development of a new trend. A technical break can develop out of necessity with speculation generating too much volatility to maintain such a constrictive trading band. In contrast, a drive that develops into a meaningful and lasting trend is a different outcome all together. The follow through on the latter scenario would call the official beginning of 2010’s trend for the US dollar. And, having already field-tested many potential catalysts already; it seems the only driver with the necessary influence is risk appetite itself. Through 2009, the currency was pushed into a steady descent as investors diversified away from dollar-based safe havens and in turn started to fund trades through cheap dollar-based leverage. Risk appetite waned into the final months of the year, however; and speculators have essentially waited for a sign to either add to positions or take profit for two months now. Someone could point out that the dollar and other risk-sensitive currencies have seen momentum since the onset of this lassitude; but that is merely the other fundamental interests coming back to the forefront – and ultimately the reason the dollar has been unable to establish a clear and consistent trend. To establish a true bearing and momentum, the dollar (and all currencies) needs a market-wide (stocks, Fixed Income, commodities, FX, etc) shift in risk appetite. And, the best fuel for such a fire is momentum behind sentiment itself. When such an effort is made, it will be more than obvious. All the asset classes will be moving on the same course and at the same pace; but it is probably a break from the Dow that will carry the most weight.
The influence of risk appetite – once triggered – cannot be denied. We have already seen its effects on the dollar; and they produce incredible opportunities. However, making that first critical push is clearly difficult (otherwise it would have been made already). Looking across the economic docket, there are many indicators (retail sales, durable goods, consumer confidence, CPI, etc) that can perhaps tap dollar volatility. But to reach underlying risk appetite, it may take the confluence of all the releases working together or perhaps something all-together more intense. At this point, we need to be less concerned about ‘how’ the move will happen and more focused on the ‘when.’
US Dollar: A Breakout is in the Forecast but what will be the Spark?
How bearish is an 85,000-count drop in net payrolls? This is the question many were asking themselves when the US dollar tumbled following the release of the December NFPs figure this past Friday. In reality, though the indicator was well below the unchanged forecast that was projected; the market was likely little concerned about the headline figure. Instead, a revision to the November reading that officially bumped the month up to a 4,000-job increase hit a milestone that many speculators were waiting for. The first positive increase in US labor trends in two solid years offers a tangible objective that is akin to a business finding itself breaking even. Had the increase been larger, the resultant rally in risk appetite (and subsequent tumble from the market’s favorite funding currency of the momentum: the US dollar) would have been greater. However, now that this hurdle has been crossed; the market can move on. The dollar needs a true catalyst to force a breakout from the tight range that has set in over the past three weeks. And, there are few factors strong enough to truly spark a trend.
In the week ahead, the likelihood of a breakout is very high. Yet, there is a difference between a technical breakout and the development of a new trend. A technical break can develop out of necessity with speculation generating too much volatility to maintain such a constrictive trading band. In contrast, a drive that develops into a meaningful and lasting trend is a different outcome all together. The follow through on the latter scenario would call the official beginning of 2010’s trend for the US dollar. And, having already field-tested many potential catalysts already; it seems the only driver with the necessary influence is risk appetite itself. Through 2009, the currency was pushed into a steady descent as investors diversified away from dollar-based safe havens and in turn started to fund trades through cheap dollar-based leverage. Risk appetite waned into the final months of the year, however; and speculators have essentially waited for a sign to either add to positions or take profit for two months now. Someone could point out that the dollar and other risk-sensitive currencies have seen momentum since the onset of this lassitude; but that is merely the other fundamental interests coming back to the forefront – and ultimately the reason the dollar has been unable to establish a clear and consistent trend. To establish a true bearing and momentum, the dollar (and all currencies) needs a market-wide (stocks, Fixed Income, commodities, FX, etc) shift in risk appetite. And, the best fuel for such a fire is momentum behind sentiment itself. When such an effort is made, it will be more than obvious. All the asset classes will be moving on the same course and at the same pace; but it is probably a break from the Dow that will carry the most weight.
The influence of risk appetite – once triggered – cannot be denied. We have already seen its effects on the dollar; and they produce incredible opportunities. However, making that first critical push is clearly difficult (otherwise it would have been made already). Looking across the economic docket, there are many indicators (retail sales, durable goods, consumer confidence, CPI, etc) that can perhaps tap dollar volatility. But to reach underlying risk appetite, it may take the confluence of all the releases working together or perhaps something all-together more intense. At this point, we need to be less concerned about ‘how’ the move will happen and more focused on the ‘when.’
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