The short-term speculative market likes the Mexican peso. The net long speculative position at the IMM has risen sharply in recent weeks. The net long non-commercial position rose to 70.8k as of last Tuesday up more than 6-fold since late July. A number of investment houses have recommended long peso positions as a way to take advantage of the global upturn and in particular the revival of the auto sector in the US.
Monday, August 31, 2009
The dollar is finding little succor from the falling equity prices. The yen remins firm in the wake of the election and amid speculation of repatriation ahead of the end of the fiscal half year at the end of Sept, especially given the tax incentives (via the Japaense equivalent of the US Homeland Investment Act). Trading conditions appear a bit lighter than normal but it is month-end with re-jigging of portfolios and hedges expected.
Sweden's central bank, the Riksbank, meets on Thursday. It is the same day as the ECB meeting and is likely to be overshadowed by it. Yet there is something important happening in Sweden that is worth looking closer at.
Riksbank Adopted Negative Deposit Rate in Early July
Central banks in Europe place their key rate between a deposit rate, what the central bank pays on reserves or some fraction of them, and the lending rate, what the central bank receives on certain types of loans to banks.
Friday, August 28, 2009
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In recent days, a number of prominent people have warned of the downside risks facing the U.S. dollar.
Warren Buffet argued while aggressive U.S. monetary and fiscal policy response is necessary, Congress must bring spending back under control in a timely fashion or the ensuing inflation will undermine the value of the dollar.
Joseph Stiglitz, the former White House economic advisor and World Bank economist, warned of the downside risks to the dollar and wants a new international monetary regime because the current reserve system is fraying.
EPFR Global tracks flows into mutual funds. It reports that in the week through Wed Aug 26 investors put $168 mln into Asia x-Japan funds after the previous week recorded the largest outflow (~$810 mln). Data from the local stock exchanges suggest that foreign investors have been net sellers of Philippine shares this month. South Korea has been among the largest draws, pulling in $3 bln this month and a little more than $15 bln year to date. Interest in Taiwan began off slowly but has come on stronger as the month progressed. The stock exchange says foreign investors bought $798 mln of Taiwanese shares this week, but only $239 in the month.
Wednesday, August 26, 2009
Official Chinese news is reporting that the State Council is studying curbs on industries that are plagued with over-capacity, including steel and cement. Separately, the Aluminum Corp of China, warned Chinese smelters, traders and warehouses hold as much as 600k metric tons of inventories because of excess production. The Shanghai Futures Exchange warehouse holdings are about a third of that. And the problem is being aggravated by Chinese smelters coming back on line to take advantage of a 30% increase in prices.
As we noted in the North American daily comment, we suspect the market has exaggerated the likelihood of Bank of Canada intervention and this is presenting a lower risk opportunity to buy the Canadian dollar. Meanwhile, a lot of good news has been priced into the Swedish krona, which has appreciated nearly 13% against the US dollar since early July. Today's news of a smaller than expected trade surplus warns that the market may have gotten ahead of itself and that like elsewhere, the Swedish recovery will be slow. The US dollar has found support over the past few days near SEK7.0.
Tuesday, August 25, 2009
Poland reported strong retail sales today in contrast to Hungarian retail sales which posted their 29th consecutive monthly decline and a drop in economic sentiment in the Czech Republic. The Polish zloty is outperforming in the region, but all the (region's) currencies are gaining against the dollar today. After taking good money out of the long zloty short czech position last month, we have re-entered the position, looking for a test on the Aug 5 high near CZK6.34, from the current CZK6.2175.
The talk of the day is that Bernanke will be re-nominated by President Obama for a second term. It was hardly surprising. As of yesterday, www.intrade.com had a it the most likely outcome by a a 3 to 1 margin. The real surprise was that NY AFL-CIO leader Denis Hughes was named the chairman of the NY Fed's board for the remainder of the year. He was appointed by the Federal Reserve Board. He has been a member of the board since 2004 and has been acting chairman since May. He replaces Stephan Friedman, who resigned in May amid controversy stemming from his relationship to his former employer, Goldman Sachs. Also announced yesterday, the deputy chair was also named, Columbia University President Lee Bollinger. Bollinger's appointment also lasts for the remainder of the year.
Monday, August 24, 2009
We have suggested that the recent Sino-American SED talks may be an early indication both sides are backing off of their more bellicose rhetoric. Since Geithner's confirmation hearing, in which he cited Obama's campaign rhetoric and the manipulation of the yuan, the US appears to have backed away from at least public pressure on China to re-float or allow its yuan to appreciate or be more flexible. China, which appears to be wrestling with the possibility of its own equity and real estate bubbles, has not been pressing very hard in public forums for international monetary regime change as it did prior to the last G20 meeting earlier this year. Of course, officials in the US and China have not confirmed that this shift has taken place, but if our hypothesis is correct, there should not be an much rancor about the currency issues around next month's G20 meeting.
Since Aug 10, the euro pulled back about 1.5% against the Swiss franc through last week low set on Friday near CHF1.5135. The fundamental backdrop has not changed. The Swiss National Bank remains committed to the quantitative easing strategy, which given the size of its domestic bond market, requires the purchases of foreign bonds and entails the sales of the Swiss franc. The euro is seen as the go-to-currency, given the pattern of good world economic news being good for the euro and as the market alternative to the US dollar.
Friday, August 21, 2009
The staffs of policy makers from around the world are preparing for the G20 meeting that will be held in Pittsburgh in a month’s time. Why should it be on your radar screen now? It is timely because it is in this run-up that agenda is shaped and outcome orchestrated.
Tuesday, August 18, 2009
The SNB's Jordan has been quoted on the news wires today. He seems content with current Swiss franc exchange rates. He claims as have other Swiss officials that the intervention has been to prevent currency appreciation, which may remind one of the guy in the city who sells whistles that purport to keep elephants away. When a boy informs the salesman that there were no elephants in the city, the sales guys says, "see how good it works."
Canada reported that foreign investors bought a net C$10.5 bln of Canadian securities in June. This brings the total net foreign purchases in Q2 to a little more than C$38 bln compared with about C$23.5 in Q1 and less than C$1 bln in Q4 08. Foreign investors were net sellers of Canadian asset (~C$7 bln) in Q3 08. June was the sixth consecutive month of foreign net purchases and Q2 was a record.
Sterling extended its recovery from the recent slide that took its lowest level since July 17th yesterday against the dollar. It had already risen above yesterday's high near $1.64 by the time the unexpectedly firm CPI report was released which sent it near $1.65 (~$1.6479).
Monday, August 17, 2009
Sterling was the market's darlings over the last five months and was the best performing G7 currency. Between March 10 and Aug 5, sterling appreciated by more than a fifth against the US dollar and by 10% against the euro. However, since the BOE unexpectedly extended its quantitative easing, sterling has been pounded. It is the worst performing major currency since Aug 5, losing a little more than 4% against the dollar and almost half as much against the euro.
With the recent stream of macro-economic news, leaving aside today's Empire State survey, has been disappointing that this has helped trigger a dramatic wave of profit-taking. Last week China reported exports are still falling and today it reported that direct investment inflows extend their decline into the tenth consecutive month. Japan's Apr-June GDP missed expectations. Last week, the US reported a disappointing retail sales report.
Friday, August 14, 2009
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The bulk of the U.S. earnings season has past. While many companies missed their revenue numbers, they still achieved, or bettered expectations for earnings. This was accomplished through dramatic costs cuts, especially in labor.
In explaining their quarterly results a number of companies cited the impact of foreign exchange developments. The impact varied from company to company but the net impact was the same: negative.
Many officials and private investors are concerned about the deterioration of the commercial real estate market. It is been widely discussed and on radar screens. What appears to have gone largely unnoticed though was the jump in secondary credit to depository institutions revealed Thursday with the Fed's weekly report on its balance sheet, credit facilities and custody holdings.
Thursday, August 13, 2009
Chinese banks have signaled the intention to cut back on new loan issuance, but the PBOC has not changed its declaratory or operational policy. It is not imposing new and lower loan quotas. It appears to be using its moral suasion. This initially weighed on Chinese stocks. July-Aug is typically a slow month for loans in any event, but the resumption of IPO sales seemed to compound the impact of the removal of the punch bowl and the Shanghai Composite fell 10% from its high set earlier this month.The longest losing streak of the year--four days-- for the Shanghai Composite was snapped earlier today. It is becoming clearer that as the banks ease the growth rate of new loans, the government is stepping into the breech.
Wednesday, August 12, 2009
As widely expected Norway's central bank left rates on hold at 1.25%, but reaffirmed a slight hawkish bias that saw the krone rally nearly 1% in a few minutes. Norges Bank said that it anticipates its key rates to be 0.75%-1.75% by year end. That would seem neutral, 50 bp on either side of the current target. However, it also added that it may have to raise rates earlier than projected. It has completely shrugged off the disappointing retail sales report earlier today (-2.5% vs consensus -0.5%). The krone was among the strongest currencies against the dollar last month but has seen the enthusiasm fade, perhaps with the easier oil prices, amid unwinding of last month's gains. But today's hawkish comments, which have seen short-term Norwegian rates firm, but the Nokkie bulls back in the driver's seat. Look for the euro to slip back toward NOK8.70 and then NOK8.65. One NOK6.15 goes, there is little to stop the US dollar from testing NOK6.0 again.
The US dollar is getting hit as the market adjusts positions ahead of the FOMC meeting. It will not go unnoticed that US equities opened broadly higher and that this represents a continuation of the previous pattern that was called into question last Friday when the dollar rallied after the better than expected jobs data while stocks rallied. The euro is staging an outside up day. A move above $1.4215 now would likely signal near-term gains toward $1.4300. Sterling needs to rsie above the $1.6525 area to also post an outside up day, which will likely be seen as signaling the end of the 4-5 day correction. The dollar, however is gaining against the yen. It is re-establishing a foothold above JPY96, but stronger resistance is seen near JPY96.50. Part of the drama of today's move is that many short-term players had covered short dollar positions and now are being forced to re-enter them, chasing the market.
The sharp rise in auto sales is widely understood to boost the July retail sales. The report will be published tomorrow. Excluding autos, retail sales are expected to eke out a small gain. However, there is another potential source of demand that many are probably overlooking. In late July, the federal minimum wage was increased by 10.7% to $6.55 an hour. Over the past two years, the minimum wage was been increased three times for about 38% in real terms--the largest two year increase in more than 50 years. This will likely show up in the August employment data and help boost hourly earnings. Although the minimum wage hike was implemented the week after the survey was conducted for the July payroll figures, some may have passed on the raise earlier in July. Also the impact may be muted by the fact that some states have higher minimum wages than set by the Federal government. On the margins then, the retail sales report, ex-autos may be slightly than economists are forecasting.
There is much talk today, circulating NY dealing rooms, that the Bank of Canada is getting ready to intervene in the foreign exchange market. We are dubious are that the BOC would intervene unilaterally on the CAD/USD exchange rate. In fact, we cannot recall a single episode of BOC intervening on CAD/USD in recent years, if ever. Last week, when US dollar had a CAD1.07 handle and Euro-Cad was near 1.5350 that the Canadian dollar looked vulnerable. We thought the risk of verbal intervention was great. The Fates smiled and within an hour our our comment Canadian Finance Minister Flaherty noted that the strength of the Canadian dollar could slow the recovery. The Canadian dollar sold off. However, to go from verbal intervention to actual material intervention is beyond the pale. In fact even Flaherty seems to be de-emphasizing the significance of the exchange rate in today's comments from his trip to China. Anticipating the market was getting too worried about intervention yesterday, our proprietary desk expressed this view by buying Canadian dollars against the Mexican peso yesterday. Although we did not expect such immediate results, we do expect the Loonie to continue to trend higher against the peso. We look for a move initially to MXN12.05 and then back to the early Aug high near MXN12.33. For its part, the dollar briefly took out the resistance we identified yesterday near CAD10.50, but it has snapped violently back. Initial support is seen near CAD1.0865 now and then CAD1.08.
Tuesday, August 11, 2009
Last week's US employment report triggered a sharp shift in Fed expectations. The market was aggressively pricing in Fed tightening. We warned of the risk that the Fed's statement following this week's FOMC meeting would reaffirm, in some fashion, the commitment to keep rates low for an extended period. The market is already adjusting in the anticipated direction, but there seems to be scope for additional scaling back the likelihood of Fed aggressiveness.
The Canadian dollar's losing streak has extended into its fourth session, the longest such streak since early Q1. The main driving force seems to be position adjusting. The Canadian dollar was the strongest of the major currencies last month, gaining almost 6.7% against the US dollar. This of course reflected buying of Canadian dollars and the net speculative position at the IMM grew from long 9.2k in late June to 36k contacts as of Aug 4, the largest net long position June 2008.
Financials are the weakest sector in US equities today, losing a little more than 2.6%. In addition to simple profit-taking, some contacts are playing up the FASB board meeting Thursday. One of the issues reportedly on the agenda is to expand mark-to-market accounting requirements to a broader array of bank assets, including loans intended to be held to maturity. American Banker reports that the proposals may be formalized this week. The American Banker report that the key issues are when to apply mark-to-market and the current proposal seeks to increase its usage. The eminently practical issue of how to value a broader range of bank assets on a mark-to-market basis remains unresolved. Nevertheless, some observers are concerned that the FASB proposal could lead to a new round of write downs of bank assets.
Monday, August 10, 2009
The price of gold is off about 1% today, roughly matching the slide before the weekend. What is noteworthy about gold's heavier tone is that last Friday 16 European central banks agreed to limited their gold sales to about 400 metric tonnes a year for the next five years. This is 100 metric tonnes less than the current 5-year agreement that expires next month. There was talk in the market that the quote could have been raised by 100 metric tonnes. The IMF's planned 403 metric tons would appear to be included in these figures, though some had previously anticipated they would be viewed separately.
The Norwegian krone is the hardest hit of the major currencies today, losing 1.5% against the dollar and 1.2% against the sagging euro. The krone has fallen now for the third consecutive session. The ostensible trigger for today's drop was the unexpectedly soft inflation report that showed core inflation back to the central bank's target for the first time in a year. After the unexpected strong rise in the June CPI and signs of the resilience of the domestic economy, many had leaned toward a Norges Bank rate hike later this year or early next year. The softness of the July inflation figures--the 0.6% decline on the headline rate and the core rate was three-times greater than the market expected--and has been enough to ease expectations for this week's policy meeting. Some participants had looked for the central bank to adopt more hawkish wording to prepare the market for a hike, but this has been dashed now.
The US dollar has enjoyed a firm tone in the North American morning, but once European markets closed for the day with the 11:00 EDT/15:00 GMT fix, the dollar has extended its gains. The next level of support for the euro is the lows set in late July near $1.40. Ahead of that is a trend line drawn off of the early and late July lows, which comes in near $1.4080. Sterling is flirting with the $1.6500 level. Strong support is not seen until closer to $1.6350. Meanwhile the dollar has recouped most of its losses against the yen, but cross rate demand for the yen may prevent the buck from breaking above the JPY98 level.
The FOMC holds a two day meeting starting tomorrow. No one is expecting a change in the Fed funds target of 0-25 bp. Nor is there much expectation that the FOMC announces an extension of its Treasury purchases--though no one expected the BOE to increase its purchases by GBP50 bln, announced last week, either. If the Fed were to announce an increase in its Treasury purchase program, which is to be completed next month, it would be a surprise and while it might lead to a quick uptick in the bonds, it would likely undermine the dollar.
Friday, August 7, 2009
After initally being sold off on the better than expected jobs data, the dollar has rebounded smartly to new highs for the day, chopping up traders. There has been a shapr backing up of US interest rates and the Fed fudns futures has fully discounted a Q1 rate hike. Our weekly thematic piece that will be distributed shortly identifies three factor that will help define the dolalr's bottom: rising interest rates relative to Europe, the dollar responding positively to good news, and techncial reversal patterns.
Today is a busy day: US jobs data is unambiguously a favorable economic development, China's banks, including the world's second largest bank announcing intentions to cut lending back by 70% in H2 from H1, and a sharp rising in interest rates and and extension of equity market gains, with the S&P 500 moving at least on an intra-day basis through the 38.2% retracement of the bear market.
We retain a favorable medium term outlook for the US dollar, its recent fall to new lows for the year against a broad swath of currencies. However, we are not prepared to call a dollar bottom now and issue a strategic buy recommendation. Here is a brief discussion of three factors than can help fine-tine the timing of a dollar bottom.
Non-farm payrolls lost 247k jobs, a great deal lower than nearly every expected and the unemployment rate fell 0.1% to 9.4%. The manufacturing sector lost "only" 52k jobs, compared with a revised 131k loss in June. Hourly earnings rose 0.2% instead of 0.1% that was expected and a flat reading in June. The work week rose 0.1 hours the market had expected a flat report. Bottom line is the data is good in detail as well as headline and revisions are in the right direction. This will likely strengthen the green shoots story and take some pressure off the Obama Administration's defenders that the stimulus plan is not working. On the other hand, rear guard action to cut next year's spending if the economy is already recovering. Shades of 1937? The knee jerk reaction was to sell the dollar on good news.
Worse than expected Canadian employment data pushed the Canadian dollar broadly lower and may be seen reinforcing the Finance Ministry's concerns repeated earlier this week that the Canadian dollar's strength was undermine the economy.
Thursday, August 6, 2009
Germany's Economic Minister Guttenberg suggested that Europe's biggest economy might not have contracted in Q2. The market consensus is for a 0.3% quarterly contraction. The data is scheduled for release on Aug 13. The market is leaning in Guttenberg's direction but not until Q3. For the current quarter, the market consensus is for around a 0.2% quarter-over-quarter expansion.
The dollar is trading firmly with the key events of the day out of the way. The big surprise of course is the BOE decision to extend its QE, helping send sterling sharply lower, and serving as a drag on the other major currencies. ECB did nothing and said nothing new. It reinforced expectations policy is on hold for some time. US weekly intial jobless claims were a bit lower than expected, but continuing claims rose more than expected.
Wednesday, August 5, 2009
As part of the quarterly refunding announcement, the US Treasury indicated that is considering canceling the 20-year TIP and re-introducing the 30-year TIP. The decision will be announced in November and auctioned in January 2010. TIP issuance is likely to increase next year.
The consolidative phase is threatening to turn into an outright correction as the the dollar firmed toward session highs on news that the service ISM fell to 46.4 from 47.0 and consensus expectations for a 48 print. New orders fell and the the jobs component fell to 41.5 from 43.4. Factory jobs data looks better. ADP had the smallest loss of mfg jobs since last Sept. Cahllenger had the fewest auto worker offs since June '08. And ISM mfg reported its highest employment reading in 11 months.
The ADP report showed a private sector jobs loss of 371k, not far statistically speaking from the loss of 350k the consensus was looking for. It follows on the heels of a softer Challenger report as well. There had been some risk of a stronger than expected number due to the distortions picked up by the weekly initial jobless claims data. Although exact details are not immediately available, the fact the distortions do not seem to have impacted the ADP data may boost confidence in this report and continue recent pattern where it takes some of the limelight from the government's monthly report. Still the market's estimate for Friday's non-farm payrolls is unlikely to change very much from the -325k-350k the market is looking for. There does not appear to be a significant market impact from the modest disappointment, suggesting that it takes more than a little disappointment to derail current trends. Separately we note that the Fed funds futures are moving to discount a rate hike in January, which we think is premature.
Tuesday, August 4, 2009
In recent weeks we have recommended long Canadian dollar positions against the US dollar and the Mexican peso. Over the past month, the Canadian dollar has been among the best performing currencies, gaining 8.6% against the dollar and more than 7.5% against the Mexican peso. We are concerned that from a fundamental perspective, much of the good news for Canada has been discounted--such as higher commodity prices and the recovery in the auto sector. The persistent strength of the Canadian dollar risks some condemnation by Canadian officials who are worried that it may hamper the recovery. At the same time the technical indicators are stretched for the Canadian dollar, suggesting that the risk is for a deeper correction.That said, sentiment toward the US dollar is poor and we are wary of Mexico's fundamental backdrop, especially with the peso trading on the strong side of its range. Therefore, for those who share of concerns about the Canadian dollar, consider selling the Canadian dollar against the euro or sterling.
Economists and policy makers under-estimated the attractiveness of the cash-for-clunker scheme. The US was among the laggards in adopted such a program. It has been fairly successful where ever it has been implemented. Germany, for example, was among the first to adopt the scheme and auto sales rose by nearly a quarter year-over-year. Overall, sales in Europe were off by 10%. However, as other countries tried their hands, of course with some national variance, auto sales rose on a year-over-year basis in France, Italy and South Korea in July, while Japan and Spain reported smaller declines in sales.
Personal income in June fell 1.3%, a little more than expected and completely offsets the revised 1.3% gain in May. Spending fared better, rising 0.3% after a revised 0.1% increase in May (originally 0.3%). The PCE core deflator was sopt on expectations, rising 0.2%, but the headline has fallen into a year-over-year decline. The May rate was revised to -0.3% and the June figure came in at -0.4%. This should help temper any near-term inflation fears.
Monday, August 3, 2009
Both the manufacturing ISM and construction spending was stronger than expected in the the current environment greenshoots are greeting with dollar selling as participants boost their reflation/risk trades. July mfg ISM rose to 48.9 from 44.8 in June. New wires consensus was near 46.5. This is the best showing in 11 months. Of note, new orders came in 55.3 from 49.2. Employment improved to 45.6 from 40.7. Note that the import index rose more than export index and warns the trade contribution to GDP may not be as great as in Q2.
The Economist recently published an update of their popular Big Mac measure of purchasing power parity. One of the key metrics behind our conviction in late '07 that the dollar was poised to rally was the fact that on PPP basis the dollar's bilateral exchange rates were stretched more than ever. The dollar's rise began against sterling and Canada in late '07 and then Swiss in March 08 and finally the euro in July 08. The acute financial crisis saw bilateral pairs move close to fair value as measured by PPP.
At the risk of exaggeration, there is only one story today and it is growth. The story began on Friday with the Q2 GDP showing a smaller contraction than most expected, and more importantly, the unexpectedly sharp decline in inventories, has even the likes of Alan Greenspan recognizing the risks of the strong bounce in the economy in this quarter. The Bloomberg consensus for US growth has firmed in recent weeks to 1.0% and this is likely to be revised sharply. Greenspan himself mentioned 2.5% and there is at least one investment house forecasting 3%. Most US officials that hit the weekend media also were relatively upbeat. This has been followed by today’s better than expected European purchasing managers surveys. The euro zone came in at 46.3, a bit better than the 46 flash and the 42.6 reading in June. It is the best in 11 months. The magnitude of the rise itself is the second biggest in the 12-year history. Output and new orders gained and near 50. Outside the euro zone, there were notable upside surprises by the UK and Sweden. The UK surprised with a 50.8 print. The consensus was for 47.7 after 47.4 in June, which was originally reported at 47.0. New orders were particularly impressive; rising to 55.9 from 49.9, the highest since late 2007. Turning to Sweden, recall that at the end of last week it reported a flat Q2 GDP (quarter over-quarter) defying expectations of a contraction. Today it reported its PMI rose to 54.3 in July, up from 50.5 in June and well above expectations of 51.5. Lastly, we note that Switzerland’s PMI was reported at 44.3, up from 41.8 in June. Output was just below 50, though new orders.