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Fundamental Forecast for Canadian Dollar: Bearish


What’s there to say about the recently uninspiring Canadian Dollar? While the European currencies posted strong gains against the U.S. Dollar and oil surged to over $110 per barrel at one point on Friday, the Loonie fell by 0.23 percent against the Greenback. During the first few weeks of the year, the USDCAD and crude oil held a significant -0.538 daily correlation, which suggests higher oil begets a weaker USDCAD, or vice-versa (correlation does not equal causation). Yet this week, with oil gaining 6.21 percent, one would expect to have seen a substantially weaker USDCAD; and as noted earlier, the USDCAD gained.
What could be the reasons for this decoupling? I can point to two reasons for broad Loonie underperformance. First is the change in the United States’ position as an oil consumer. In late-2011, the United States flipped from a net importer of oil to a net exporter of oil. As the United States’ largest trading partner with respect to energy, Canada is thus hurt by the fact that the U.S. is producing more oil than it consumes. I liken this relationship to Australia’s mining sector and China: if Chinese demand for base metals decreases, then the Australian economy and thus the Australian Dollar would weaken.


Second are the deteriorating fundamentals for the Canadian economy, which are expected to come into focus this week. As per the most recent growth reading, the Canadian economy contracted by 0.1 percent in November on a monthly basis. According to a Bloomberg News survey, while the Canadian economy is forecasted to have grown by 0.3 percent in December, it is expected to have slowed down to 1.9 percent from 2.0 percent in November, on a yearly basis. On a quarterly basis, forecasts peg the Canadian economy slowing to a 1.8 percent growth clip in the fourth quarter of 2011, well-below the 3.5 percent reading in the third quarter.


Despite the recent uptick in data, global growth prospects remain a concern, and I firmly believe that without substantial monetary policy easing by many Western central banks (mainly the European Central Bank and the Federal Reserve), commodities would be trading lower and thus so too would the commodity currencies. Of course, it is worth noting that Iranian saber-rattling has helped propel oil to its elevated price levels, and that too has helped support the commodity currency complex. Any deterioration of global risk trends or signs of easing tensions out of the Middle East will weigh on crude oil, taking away one of the few reasons for the Canadian Dollar to rally. As such, on the back of expected weakening economic data, the Canadian Dollar looks to weaken in the coming periods. – CV
Feb 25, 2012 00:36

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Fundamental Forecast for Australian Dollar: Neutral


The Australian dollar ended the week relatively unchanged after paring the advance to 1.0815, but the high-yielding currency may trend higher going in to March as we’re expecting to see a slew of positive developments coming out of the $1T economy. Indeed, the economic docket is expected to show a rebound in retail sales paired with another rise in private sector credit, and the data could spur a run at 1.10 as the Reserve Bank of Australia talks down the risks surrounding the region.


Indeed, RBA Governor Glenn Stevens talked down speculation for lower borrowing costs, stating that the benchmark interest rate is ‘about right for the moment,’ and went onto say that the recent appreciation in the local currency is ‘happening at a time when the terms of trade have actually peaked and started to come down’ while testifying in front of the House of Representatives Standing Committee on Economics. Although Mr. Stevens talked down speculation for a currency intervention, the central bank head did not exclude the measure as ongoing strength in the local currency dampens the prospects for an export-led recovery, and the RBA may have little choice but to expand monetary policy further in 2012 as the slowing recovery dampens the outlook for inflation. However, Fitch Ratings cut its long-term default rating for three major banks in Australia amid the regions reliance on international financing, and the ongoing turmoil in the global financial system could pose an increased threat to the $1T economy as the region faces a protracted recovery.


Nevertheless, as the less dovish tone held by RBA Governor Stevens props up interest rate expectations, a slew of positive developments should push the AUDUSD higher over the following week, but the bearish divergence in the relative strength index may spur a sharp pullback in the exchange rate as the pair struggles to hold above the 10-Day (1.0701) and the 20-Day (1.0708) moving averages. In turn, a break below 1.0600 would expose the 23.6% Fibonacci retracement from the 2010 low to the 2011 high around 1.0350-60, and we may see the high-yielding currency face additional headwinds in March as the slowdown in global trade casts a weakening outlook for the region - DS

Feb 25, 2012 00:38

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ECB to launch 2nd round of 3-year bank loans


FRANKFURT, Germany (AP) -- The European Central Bank is preparing to make a second round of large-scale three-year loans to the continent's banks — a key tool in its efforts to dampen the eurozone debt crisis.


Banks snapped up euro489 billion ($657 billion) in cheap credit when the ECB made its first round of such loans in December. As was the case then, there's no limit on the amount of money the central bank is offering Wednesday.
The loans have helped lower borrowing costs for Italy and Spain because some banks have used the money to buy those countries' bonds.


The loans also are aimed at making sure banks have plenty of ready money so they don't reduce credit to businesses and consumers. That could weaken a eurozone economy that already shrank 0.3 percent in the fourth quarter.


Feb 29, 2012 07:58

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Australian Dollar, New Zealand Dollar Jump on Rising Chinese PMI


Both the currencies drove upward as better-than-expected Chinese Purchasing Managers Index appears to forecast a warming importer of Aussie and Kiwi goods.


THE TAKEAWAY: Chinese Purchasing Managers Index Rises to 51.0 from 50.5 > Increase Beats Expectations, but Trader Response Is Muted > AUDUSD, NZDUSD Steam On Upwards

Data released by the China Federation of Logistics & Purchasing shows an unexpected increase in the country’s Purchasing Manager Index (PMI) in the month of February. The PMI index rose to 51.0 from 50.5, topping analysts’ expectations of a bump up to 50.8. The increase indicates that the Chinese manufacturing sector is growing at a faster rate than it was in January.


The unanticipated Chinese PMI boost added onto buying pressure for both the AUDUSD and NZDUSD. Both currency pairs had been trending upward before the release, and the better-than-expected data fed the positive trends. The rising index suggests that the Chinese market will be more receptive to importing raw materials and intermediate goods from Australia and New Zealand. In addition, there is also the encouragement to risk taking through speculative interests and carry trade.
Mar 01, 2012 01:25

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Euro unemployment hits new high in January
Euro unemployment hits 10.7 percent in January, new high since euro established in 1999


LONDON (AP) -- Mass unemployment in Greece and Spain combined to push the jobless rate across the 17-country eurozone up to its highest rate since the euro was established in 1999, official figures showed Thursday
The rise in the eurozone unemployment rate to 10.7 percent, reported by Eurostat, the European Union's statistics office, was unexpected and is likely to trigger renewed concerns over the outlook for the wider economy. If unemployment — and the accompanying fear of unemployment — is rising, consumers may rein in their spending. This could further dent an already-contracting eurozone economy.


Consumers' appetite to open their wallets will likely be further constrained by the accompanying news that inflation in the eurozone unexpectedly also rose in February to 2.7 percent from the previous month's 2.6 percent. The markets had been pricing in no change from January, and the increase takes inflation further above the European Central Bank's target of keeping price rises at just below 2 percent. Inflation has been above target for 15 months now.


This is particularly bad news for consumers as they are not only facing high and rising unemployment but also still squeezed purchasing power, said Howard Archer, chief European economist at IHS Global Insight. It had been hoped that eurozone consumer price inflation would be heading down markedly by now but these hopes are being scuppered by high oil prices.


In recent weeks, oil prices have edged up to nine-month highs on the back of brighter economic news out of the U.S., the world's largest economy, and ongoing tensions over Iran's nuclear plans. Without the recent increase, analysts reckon inflation would be much closer to target.


Since the ECB's primary role is maintain its measure of price stability, persistently-high inflation has reined in market expectations of any further interest rate reductions any time soon. Early this year, there had been a growing consensus that the ECB would push its benchmark interest rate below 1 percent for the first time ever.


The ECB holds its monthly policy meeting next week and all expectations are that it will keep its benchmark rate unchanged at the record low of 1 percent, especially after its massive injection of cash into the banking system on Wednesday.


The latest eurozone data revealed a combination of stubborn inflation and rising unemployment at the start of the year, suggesting that the recent rebound in consumer sentiment may falter before long, said Ben May, European economist at Capital Economics.
The figures come as EU leaders gather in Brussels to discuss a strategy to boost economic growth. Eight of the 17 countries in the eurozone are, according to the European Commission, are expected to contract during the first three months of 2011.


Those sort of projections aren't likely to do much to help turn round the unemployment rate in the eurozone, which is at alarming levels in some countries. The consensus in the markets was for the January rate to remain unchanged at December's previously reported rate of 10.4 percent. Instead, December's rate was instead revised upward to 10.6 percent.


Europe's unemployment rate has been steadily ticking up all year as the wider economy wanes in the face of a protracted debt crisis that's meant widespread austerity measures being pursued across the single currency zone. The eurozone economy contracted by 0.3 percent in the final three months, though recent indicators have suggested that it may avoid a recession — defined as two consecutive quarters of negative growth.


Spain had the highest unemployment rate in the eurozone at 23.3 percent in January, while Greece's had edged up to 19.9 percent in December, the last available figures for the debt-ridden country.

Mar 01, 2012 10:22

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Yen slips broadly, nears 9-month low vs. dollar


SINGAPORE (Reuters) - The yen slipped broadly on Friday and neared a recent nine-month low versus the dollar, retreating due to yen-selling by Japanese importers and as traders took aim at stop-loss levels.


The dollar rose 0.4 percent against the yen to 81.44 yen, nearing a nine-month high of 81.661 yen hit earlier this week on trading platform EBS.
The Japanese currency has taken a hit after the Bank of Japan's surprise monetary easing in February, while the dollar found some reprieve this week after U.S. Federal Reserve Chairman Ben Bernanke stopped short of signaling more stimulus.


The dollar is likely to stay firm versus the yen in the near term, said Satoshi Okagawa, senior global markets analyst for Sumitomo Mitsui Banking Corp in Singapore.


"As you can see in yen crosses for example, there is now a strong trend of betting that market strains will calm down, and U.S. economic data has been recovering to some extent as well," Okagawa said.


The low-yielding yen tends to come under pressure when market optimism about the outlook for global economic growth improves. That can trigger more risk-taking among investors and increase the popularity of carry trades, in which investors sell low-yielding currencies against higher-yielding currencies.


Higher-yielding currencies such as the Australian dollar and Brazil's real may head higher against the yen, Okagawa said.


While the dollar may not see a speedy rise versus the yen, it is hard to bet on the downside at this point, he added.


Traders said the dollar's rise versus the yen on Friday gained additional momentum after stop-loss bids were triggered near 81.40 yen, with more stops said to be lurking at levels above the nine-month peak hit earlier this week.


In addition, dollar-buying by Japanese importers helped support the greenback against the yen, said a trader for a major Japanese bank in Tokyo.


The euro and the Australian dollar also pushed higher against the yen, with the euro rising 0.3 percent to 108.38 yen and the Australian dollar hitting its highest level since May 2011 of 87.97 yen at one point.
News that Japanese brewer Asahi <2502.T> is emerging as a front-runner to buy eastern European brewer StarBev, helped lend support to the euro versus the yen, traders said.


EURO
Against the dollar, the euro held steady at $1.3306. The single currency inched up 0.1 percent versus the Australian dollar to A$1.2320, after having touched a 1-1/2 week low around A$1.2300 at one point on Friday.


Analysts said the European Central Bank's massive cash injection this week (LTRO) has made it more attractive to use the euro as a funding currency to buy higher yielding assets.


"Risk-on positioning could continue to be funded by short euro positions following the LTRO," said BNP Paribas.


Market players believe the cash bonanza from the ECB will ease bank funding strains and support the euro zone's sovereign bond market. That, in turn, could help spur more risk-taking among investors.


Still, while the ECB's LTRO is positive for high-yielding currencies and emerging market currencies against the euro, one factor that could limit their gains is market positioning, said Olivier Desbarres, head of Asia-Pacific FX strategy for Barclays Capital in Singapore.


Recent price action shows that market players are not aggressively pushing the euro lower versus emerging market currencies, he said.


For example, the euro is still within ranges seen since the start of the year against currencies such as Brazil's real and the Singapore dollar.


This may be partly because emerging market currencies have already seen a decent rally year-to-date against the euro, and may also be a result of intervention by emerging market central banks to stem the pace of appreciation in their currencies, Desbarres said.


In addition, if it becomes clear that the recent rise in oil prices is tempering global economic growth, that may eventually weigh on high-yielding currencies and emerging market currencies.


"I'm curious to know, how will the market react to signs that high oil prices are starting to shave a little bit of that feel-good factor and shave a little bit of that global growth momentum that we've seen in the past few months," Desbarres said.
Mar 02, 2012 07:02

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Australian Dollar at Risk as Global Growth Fears Return to Spotlight


Fundamental Forecast for Australian Dollar: Bearish

A week of heavy event risk has established a broadly negative environment for risk appetite, threatening to undermine the sentiment-sensitive Australian Dollar by extension. The first scene-setting development was marked by the second 3-year ECB LTRO operation, where the central bank allocated just over €529 billion to EU financial institutions. This brought the total cash war-chest available to lenders to offset the damage from a possible default of a Eurozone member state to about €1 trillion, enough to prevent a blow-up in Greece, Portugal and Spain from turning into a wider credit squeeze. Next, Federal Reserve Chairman Ben Bernanke tellingly said that the improvement in US labor-market conditions has been “more rapid” than anticipated while conspicuously omitting any mention of further stimulus, which makers took to mean a QE3 program would probably not materialize.


Neither of these developments can be called overtly negative for sentiment. On the contrary, a downgrade in the threat posed by the Eurozone debt crisis to the broader markets is decidedly good news. As for the Fed, while the markets were disappointed with the likely dismissal of further easing, investors’ spirits were quick to recover. This makes sense: opting out of additional stimulus is not necessarily bad news if the economy is able to continue to recover on its own, which recent data flow suggests is increasingly likely to be the case. Rather, what these outcomes produced was broad-based resolution to the major sources of uncertainty in the global economic outlook, cementing in place a generally defined outlook for global growth in 2012. With the Armageddon-level scenario in Europe dismissed at least for now and the US recovery left to its own devices, the markets can generally return to monitoring familiar fundamental news-flow to get their bearings. It is this that sets the stage for the return of downward pressure on risky assets as the spotlight turns to the consensus outlook for GDP growth, which continues to call for a slowdown at the global level this year. With the Australian Dollar still heavily correlated with the S&P 500 – the benchmark gauge for sentiment trends – the high-yielding currency can be expected to follow shares lower in such an environment.


On the domestic fundamental calendar, the RBA interest rate decision is in focus but fireworks following the outcome appear unlikely. Central bank chief Glenn Stevens made it abundantly clear over recent weeks that monetary policy is in neutral for the time being, arguing that absent unforeseen developments growth and inflation are expected to fall close to long-term trend levels over the medium term. At the very least, similar rhetoric is likely to hold up for a several months from here as the RBA evaluates developing trends in leading economic data. The markets appear in agreement, with data compiled by Credit Suisse suggesting traders are pricing in a mere 15 percent chance of a rate cut this time around. Big-ticket data releases are also expected to print in relatively neutral territory. The annual GDP growth rate is expected to register at 2.3 percent in the fourth quarter, a hair slower than the 2.5 percent in the three months through September 2011 but not worryingly below the long-run average of 3 percent. Likewise, February’s job report is forecast to see the jobless rate tick narrowly higher to 5.3 percent, putting it squarely at the 10-year average and comfortably below the longer-term mean north of 7 percent. – IS


Mar 03, 2012 04:22

Dollar firms as euro, yen struggle


SYDNEY (Reuters) - The dollar touched a fresh two-week high against a basket of major currencies in Asia on Monday, benefiting by default as both the euro and yen appeared to be used as funding currencies to buy higher yielding assets.


Since the European Central Bank second injection of around half a trillion euros of cheap three-year funds last week and a surprise policy easing by the Bank of Japan a few weeks ago, both currencies have come under pressure.


That has seen the dollar climb to its best level since mid-February, recovering from a slide to a three-month trough. The dollar index <.DXY> last stood at 79.459, having reached a peak of 79.500.
BNP Paribas analysts said the theme at play was the notion that hedge funds and real money accounts were switching their allegiances with regards to favoured funding currencies, from the U.S. dollar to the euro and to a lesser extent the yen.


Hard data showed currency speculators have turned short on the yen for the first time since at least September, according to latest figures from the Commodity Futures Trading Commission.


"We see further U.S. dollar strength versus the euro, yen and sterling," Barclays Capital analysts wrote in a report.


"The main risks to our cautiously constructive outlook continue to be Europe, weaker-than-expected Chinese data and higher oil prices. We continue to like Canadian dollar and Mexican peso, but are less confident about a further rally in the Australian dollar in the near term."


The euro bought $1.3195 on Monday, well down from last week's high of $1.3485. Support is seen around $1.3170, the 61.8 percent retracement of the Feb 16-24 rally from $1.2973 to $1.3486.


Not helping the single currency, Spain on Friday set itself a softer budget target for 2012 than originally agreed under the euro zone's austerity drive, putting a question mark over the credibility of the European Union's new fiscal pact.


Comments from the Austrian Chancellor that Greece's second bailout may prove insufficient and a topping up of the euro zone's permanent bailout fund cannot be ruled out, also reminded investors that Europe's debt crisis was far from over.


The euro zone will decide whether to increase its debt crisis firewall before the end of March, probably at an informal gathering in Copenhagen set for March 30/31.


Against the yen, the dollar fetched 81.76, not far off a nine-month peak of 81.86 set Friday. Traders said the weekly close above a major retracement level at 81.60-65 was positive. The next major hurdle is seen at the 100-week moving average around 82.20.


While the G3 currencies appeared to be playing the funding-currency musical chairs, commodity currencies remained well supported, albeit vulnerable to bouts of profit taking.


Suffering one such episode, the Australian dollar fell to $1.0737, but was still close to a seven-month peak of $1.0857 hit last week. The Canadian dollar was also just off a 5- month high.


The focus in Asia is the HSBC China Services PMI, which provides a snapshot of conditions in businesses from restaurants to banks in the world's second biggest economy. The data is due out at 0230 GMT.


In Europe, markets are awaiting the latest business survey on the euro zone's private sector economy.


Mar 04, 2012 23:27