YEN Yada Yada

We wake up and hope, but, it’s ugly again today. Two consecutive days of ‘no’ North American data has the market grasping for any excuse to sell the EUR. Speculators have been throwing everything out there to justify pushing the EUR to test its medium term support levels. Excuses ranging from the ‘no’ consensus on behalf of the BOJ and MOF, when it comes to currency intervention, to risk on and off again, or China’s appetite slowdown for commodities are being used. Sellers across the board line up to take a pot shot. Japanese operating profits will not start to decline until we hit 80 USD/JPY, they will not be erased until we hit 67. So, the market has room to maneuver and to squeeze the yen even more!

The US$ is stronger in the O/N trading session. Currently it is higher against 13 of the 16 most actively traded currencies in a ‘volatile’ trading range.

Today we are back to some sort of normality, in the sense that we will get some data to gorge on later. This mornings US home sales report could be the tipping point to push capital markets into a trading a ‘defined recession’ again. The Euro-zone Industrial new orders advanced more than the market had been expecting in June (+2.5% vs. +1.5%, m/m). Annualized, that is an impressive +22.6% gain. However, it has provided little comfort for the EUR in the session, as the JPY continues to remain the main driver of volatility this morning.

The USD$ is higher against the EUR -0.32%, GBP -0.81%, CHF -0.12% and lower against JPY +0.76%. The commodity currencies are weaker this morning, CAD -0.61% and AUD -0.82%. Weaker global equity and commodity prices have pushed the loonie to a new six-week low this morning. Inflation data last week has the market questioning if Governor Carney will back away from a normalization of rates policy and take a break from hiking next month. Futures traders are beginning to price a less than 38% chance of rates backing up and probably higher after last nights overseas moves. A couple of weeks ago it was a foregone conclusion that policy makers would hike +25bp. Expectations in the bond market for a boost have reversed after reports from Canada and the US showed the economic recovery may be faltering and inflation is slowing, July’s inflation data rose less than expected (core +1.6% vs. +1.9%). The loonie is not immune to the weaker data out of the US. North America was sold as a unit across the board on the back of the region as a whole could be losing steam. With risk being pared, it was only natural that growth and interest rate sensitive currencies would be dumped even more aggressively. Canada happens to be the US’s largest trading partner, with 70% of all exports heading south. Traders are happy to play the risk-aversion card with longer term CAD bulls looking to pick up cheaper loonies.

Investors hate uncertainty and the outcome of the Aussi election to date is well documented. The result of a hung government initially pressurized the AUD, now it’s all about the JPY. The demand for the safe heaven currency has pushed the AUD to test its one month lows. Concerns that global growth is slowing has damped investor appetite for higher-yielding assets. The currency has underperformed against all of its major trading partners and is expected to do so until there is a new Government formed. The commodity rich currency is not isolated, as other growth sensitive currencies are suffering the same fate. Over the past 2-trading sessions the AUD has come under pressure vs. the JPY on speculation that the BOJ are not ready to intervene on behalf of their currency, dampening the demand for riskier assets. Government data has also happened to put a lid on the recent rally. Net result traders are adding to their bets that the RBA will leave interest rates unchanged for the next 12-months. Interest rate differentials play a big part of the currency’s attractiveness. Risk aversion will likely force the bull’s hand, capping rallies with better sellers on upticks (0.8856).

Crude is lower in the O/N session ($72.41 down -69c). Crude prices this morning have printed new 7-week lows, as a rising US jobless claims and a contraction in manufacturing added to concern growth in the worlds biggest oil-consuming nation is slowing. The dollar strengthening vs. the EUR discourages investors to hedge against inflation using dollar-priced assets. Last weeks EIA report continues to provide fodder for the ‘bears’. Oil stockpiles declined -0.8m bpd vs. a market expectation of a -1m barrel print. Inventories fell to +354.2m barrels w/w. Not to be left out, gas stocks dropped -39k barrels to +223.3m. On the flip side, distillate supplies (heating and diesel) climbed +1.07m barrels to +174.2m. With this bearish report successfully penetrating the $75 support opens up the way to test the $72 surroundings. Prices have also gravitated towards these lows on the back of data showing that economic growth in both China and the US is slowing. The demand for oil products also fell, as gas demand hit a 2-month low, while demand for distillates is close to its lowest level in 10-months. The report re-confirms the IEA conclusion earlier this month 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. Speculators remain better sellers on up-ticks in the short term.

Gold could not hold on to its early morning gains, fluctuating from positive to negative territory, as investors eyed equities. With global bourses under pressure, investors are trying to retain cash on mounting evidence of an economic slowdown. In the O/N session investor again supported the various safer heaven assets on pullbacks, avoiding risky assets due to uncertainties in the markets. With a genuine fear for global growth, by default, should boost the demand for the metal as a protector of wealth in the grand scheme of things. Year-to-date the metal has risen +10.9%. With treasury yields expected to remain low for sometime and with the Fed announcement earlier this month of their intentions to buy bonds, could promote a quickening inflation rate, which would promote pushing commodity prices higher. For most of this year, we have witnessed a gold rally on the back of a weaker EUR ($1,221 -$6.70c). Even with the dollar strengthening, the historical negative correlation is only tentatively holding true at the moment. It’s about preserving wealth that is driving metal and keeping commodities in demand on bigger pullbacks.

The Nikkei closed at 8,995 down -122 The DAX index in Europe was at 5,954 down -56; the FTSE (UK) currently is 5,174 down -60. The early call for the open of key US indices is lower. The US 10-year eased 1bp yesterday (2.61%) and another 5bp in the O/N session (2.56%). US Treasuries remain close to last weeks lows as disappointing US data continues to be digested. Investors remain concerned for the strength of the global recovery. If the Fed does expand its balance sheet then the curve should flatten to analysts medium term projection of +200bp 2’s/10’s (+2209bp). The market seems content in owning longer dated product on these deeper pull backs. This week, the US plans to sell $102b of 2’s (+$37b), 5’s (+$36b) and 7-year notes (+$29b), starting with today’s shorter end. Of note, this will be the smallest monthly offering of ‘the’ combination thus far. Longer term buyers continue to control the market.

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