Other Dollars trade in a Vacuum

The loonie (1.0126) has been doing what’s expected of her when there is no domestic interest involved and that is move on innuendo and little volume. Big picture, the currency is performing rather well despite being put under pressure from a shift in risk assets and as oil prices appear to be technically retreating from recent highs. The currency continues to outperform the other commodity and risk sensitive assets. This mornings Bund issuance, a German January 2022 Bund bid-to-cover ratio of 1.3 for EUR+5.14b and Euro PMI has the EUR on the back foot, confirming in black and white that the EU zone is heading for a recession, assuming that the first quarter will also be in contraction.

The global investor is consistently worried about Euro refinancing. Italy, the recent focus of the crisis, must borrow to cover €53b in expiring debt in the first quarter alone in a series of debt auctions beginning next week. The CAD had started this year on a constructive note yesterday, climbing to its strongest level against its larger neighbor and biggest trading partner, the US, in nearly four-weeks, as rising oil prices and stronger than expected global economic data encouraged investor risk appetite. A day later and the markets are able to give back all and then some, allowing the loonie to wallow in a non constructive trading range. Investor’s interests seem to be elsewhere.

In truth, traders are looking to North American employment data this Friday for reassurance the US will be able to avoid slipping back into recession. The market expects that the US economy will been able to crank out about +140k jobs during December, up from +120k in November and an unemployment rate to edge up a tick to +8.7%. In Canada, many are just hoping for a positive print (+15.3k and unemployment rate of +7.4%), in contrast to last months surprisingly poor return (-18.6k). Before then we will have CAD Ivey PMI (57.5) and ISM non-manufacturing PMI to contend with. For now expect the market to play the percentages and recent range until they can get some fundamental guidance to “hang their hat on”.

The Aussie dollar outright (1.0354), like other risk and commodity sensitive currencies, has retreated from their yearly highs after traders again applied some of there risk aversion tactics on the back of recession data out of Europe. Already this year the currency reached a record high versus the EUR as concern that the regions sovereign-debt crisis is worsening fueled speculation that the Australasian currency is attracting investors away from European assets. It is not a surprise that European investors are looking for more solid investment strategies.

However, today the AUD snapped its four-day gains against the US amid bets that a slowdown in Europe will weigh on growth prospects for the global economy. Euro data confirming that inflation in the region slowed and Italy’s biggest bank said it needs to raise more capital has investors temporarily retreating from risk loving trading strategies. The AUD bulls are betting that the currency will win out. This will occur if investors change their attitude to why they own the currency, shift from being a high-yield risk play to becoming a safer alternative to Europe. The recent Australian PMI added more signs of the ongoing recovery down-under, which could reduce pressure on the RBA after “it had to use a dovish stance and cut the interest rate to support the economic recovery”.

Later this evening the Australian economy will issue the Trade Balance for November, where the prior reading showed a surplus of +1.6b and it’s expected to show a surplus of +2b. Like all commodity sensitive currency’s, the AUD direction will depend on investor attitude towards risk. At the moment markets are moving light volume with no true conviction. Let’s hope Friday’s NFP brings back some of this and next week will see the end of this “holiday’ trading mentality.

Other links:
Bunds and PMI to hurt EUR?

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