JPY intervention 15-years later

Verbal threats are never idle and we are hearing more and more of them from various interested parties. JPY at fifteen year highs vs. the dollar brings back memories. The world was so different then, not! We were still worrying about intervention, when it happened, because of the lack of technology, the impact took longer, but the positioning was the same. Data this morning confirms the Euro-zone industrial production recovery continues (-0.1%) and is the regions main engine of growth. The small drop has followed three consecutive months of healthy rises, one cannot state that the recovery has come too a halt just yet. With most of the stuffing knocked out of them in yesterday’s moves, expect sideways trading action to be the norm for the moment and FI prices to grid higher as risk aversion tries to dominate.

The US$ is weaker in the O/N trading session. Currently it is lower against 11 of the 16 most actively traded currencies in a ‘whippy’ trading range.

Reality, the US Trade deficit (-$49.9b vs. -$42b) is actually speeding up their economic downturn. Fact, the US economy cannot rely on overseas demand for the current domestic weakness. June’s +4.1% rise to a 20-month high experienced no oil-effect in the headline depreciation. Analysts expect theta net-external trade will have wiped off -2.7% from the 2nd Q GDP growth. Digging deeper, annual import growth for the month was +29.2%, while exports recorded +17.7%. Consensus has both slowing from here on out. The import growth was buoyed by the strength in both the capital and consumer gains. The Capital growth will ‘just fade away’ once the projects, once postponed during the recession, are finally completed. Export growth will be affected by a lackluster overseas demand and because of the strengthening dollar. An ongoing eyesore for US trade is the bilateral, seasonally adjusted trade deficit with the world’s second largest economy, China. At a new record high of -$26.4b, one can expect the ‘slow’ pace of the renminbi currency appreciation to re-ignite US/China tension!

The USD$ is lower against the EUR +0.32%, GBP +0.16%, CHF +0.23% and higher against JPY -0.37%. The commodity currencies are mixed this morning, CAD -0.04% and AUD +0.06%. Not dissimilar to its neighbors announcement, the Canadian trade balance release disappointed yesterday, widening last month as exports fell at the sharpest pace in 10-months (-$1.1b vs. -$0.1b). Specifically, there was a decline in shipments of gold, energy and cars. The headline print would suggest trade numbers for this year may be more of a drag on the economy than initially thought. Expect to see analysts readdressing and revising their GDP forecasts. Last month, governor Carney predicted that trade would ‘shave -1.6% from Canada’s growth this year’. Yesterday’s report was one of the variables that happened to push the loonie to a new 3-week low and technically open the door for a mini-dollar rally towards the 1.0650 level. Investors are implementing risk aversion trading strategies as equities and commodities retreat on the back of capital markets questioning the strength of sustainable global growth. Despite the markets reaction to Bernanke’s announcement earlier this week, futures traders are pricing in a +60% chance of a Governor Carney +25bp hike next month before heading to the sidelines for the remainder of this year at least. Watch the crosses. It will be a good indicator for the loonie buyers running out of ammo!

Firstly, lets looks at the data down under, employment releases last night caused some two way action for the AUD. Initially, after last months employment growth (+23k and +5.3% unemployment rate) disappointed, it pressurized the currency, as investors bet that the RBA will extend their pause in ‘the most aggressive round of interest-rate increases by a G-20 member’. Signs that the global economic recovery is slowing also damped demand for higher-yielding assets. Data out of China earlier this week did not help the currency’s position. China’s industrial reports last month grew the least in 11-months, further proof of a slowdown in Australia’s largest trading partner. In reality with the outlook for both the US and Chinese economies becoming uncertain, growth-sensitive currencies like the AUD, CAD and KIWI, are unlikely to draw strong buying interest from speculators. In the present environment, there are only two scenarios that would give the AUD a lift. Firstly, without a sharp ‘further dip in US yields’ and secondly, a market belief that RBA rate hikes are imminent can only drive the currency higher in the short term. We all know that global yields are dropping like hot-cakes, as investors grab yield. Because of the equity actions, the market is a cautious buyer on pullbacks, wary that the recent strong rally technically may be overdone. During this morning’s session, the AUD has managed to reverse its declines vs. the JPY and the dollar on ‘speculation Japanese officials will act to halt an advance in their nation’s currency’ (0.8936).

Crude is lower in the O/N session ($77.07 down -95c). Crude prices extended their losses for a second consecutive day on the back of a bearish weekly inventory report, on data showing that economic growth in both China and the US is slowing and on the questionable natural strength of global demand for the product. The weekly report showed that US inventories of gas and distillates (heating oil and diesel) again climbed last week (+400k vs. a flat expectation, while crude stock fell -3m barrels vs. a loss of -1.9m. Distillate stocks rose by +3.5m to +173.1m barrels (the highest weekly inventory level in 27-years). The demand for oil products also fell, as gas demand hit a 2-month low, while demand for distillates is at the lowest level in 10-months. The report re-confirms the IEA conclusion earlier this week that ‘oil demand could take a substantial hit should economic growth continue to falter’. It’s no wonder that the market continues to pressurize commodity prices. Supplies continue to hover near record highs, introduce the questionable growth variable coupled with recent reports indicating a weakening global economy and we have the making of a stronger ‘bearish run’. The recent macro-data flow indicates that the US activity has slowed down and the market should expect further price pull back as the ‘one directional upward move’ may be overdone. US fundamentals continue to show a market that is still overstocked, particularly on the product side. Speculators remain better sellers on up-ticks in the short term.

Gold prices eased yesterday as the dollar surged the most intraday since Dec. This eroded the demand for the precious ‘yellow metal’ as an alternative investment, temporarily at least. It seems that the natural negative correlation between the two assets is ‘back-on’, but for how long? Initially after the Fed announcement earlier this week, the market bought into the idea that policy maker’s buying of bonds would promote a quickening inflation rate. By default, this initially pushed commodity prices higher. On should expect a limited pull back now that ‘fear variable’ has reared its ugly head. Last week, after another disappointing employment report, speculators sought sanctuary in the safer heaven asset class. For most of this year, we have witnessed a gold rally on the back of a weaker EUR. Since the record highs witnessed on June 21st ($1,266), the commodity has fallen -4.7%. Historically and fundamentally, this is the ‘slowest’ season for physical demand and now with China potentially changing the ground rules should temporarily drag the metal higher. Year-to-date, the commodity has gained +7.6% ($1,202 +$3.00c). Now that the dollar has entered the technical ‘bull’ trading range as a safer heaven investment, will the EUR’s weakness support higher ‘yellow metal’ prices?

The Nikkei closed at 9,212 down -80. The DAX index in Europe was at 6,129 down -25; the FTSE (UK) currently is 5,235 down -10. The early call for the open of key US indices is lower. The US 10-year eased 4bp yesterday (2.70%) and is little changed in the O/N session. The 2’s/10 narrowed again (+219) with the 10’s touching the lowest yield on a closing basis in more than a year. This has occurred despite supply coming down the pipeline. Yesterday’s $24b 10-year note came in at a record low yield of +2.73% compared with 2.732% WI’s. The bid-to-cover ratio was 3.04 compared with an average of 3.09 over the past eight auctions. With global bourses in the ‘red’, demand for safer assets remain strong amid economic worries as the Fed is set to buy Treasuries to support a slowing economy. The indirect bid (proxy for foreign demand) was +46% (the highest in 11-months), compared to 37.4% for the past eight auctions. The direct bid (non-primary dealers) was +11%, compared to an average of +16.2%. With a flattening curve bias, the market will be content in owning longer dated product on pull backs.

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