Intraday Market Thoughts

The Dollar-Risk Trade

Jul 2, 2015 1:04 | by Adam Button

The US dollar once again demonstrated on Wednesday how interconnected it has growN with the general risk trade.  The dollar was the top performer on the day while the Swiss franc lagged.  Australian trade data is due later. We issue a new trade on GBPUSD with 3 supporting  charts as the existing trade nears our stop.

FX correlations shift over time and sometimes even reverse. Throughout the crisis, the US dollar was the carry funding trade. Rates were at zero and the Fed pinning Treasury yields to the floor.

But the US economy has left the crisis and ECB printing has driven carry trades into funding with euros. The high-yielding commodity currencies are also damaged with the RBA, BOC and RBNZ cutting rates. The dollar also benefits from good news anywhere now as it nudges the Fed towards hiking.

On Wednesday, ADP employment rose 237K compared to 218K expected and the ISM manufacturing report slightly beat expectations. That helped send USD/JPY to 123.21 and the US dollar about a cent higher right across the board.

The Greece story is adding to general market optimism because it's looking like Tsipras overplayed his hand. Referendum polls are showing his 'No' vote trailing or very close. EU finance ministers are now betting that he loses the vote or abandons it and takes the deal. If so, risk trades (and the US dollar) could finish the week strongly.

Asia-Pacific traders will continue to focus on the rock-and-roll Chinese stock market but it will be briefly interrupted but Australian trade balance at 0130 GMT. The consensus is for a A$2.225m deficit. Also, don't forget that non-farm payrolls is coming up in US trading.  

Act Exp Prev GMT
ADP Employment Change (JUN)
237K 218K 203K Jul 01 12:15
ISM Manufacturing (JUN)
53.5 53.2 52.8 Jul 01 14:00
ISM Prices Paid (JUN)
49.5 51.0 49.5 Jul 01 14:00
Trade Balance (MAY)
-2,200M -1,322M Jul 02 1:30
Nonfarm Payrolls (JUN)
230K 280K Jul 02 12:30

Bund Yields See no Grexit

Jul 1, 2015 16:17 | by Ashraf Laidi

The Bunds-Euro relationship remains intact, as both continue to converge along the crucial trendline support since the April bottom. With yet another yields bounce off the support today, bunds are further eliminating Grexit scenario for now as does the single currency.   

The initial rise in the euro and bund yields emerged upon PM Tsipras' announced counterproposal to creditors, expressing his acceptance of their conditions along 5 amendments on pensions, VAT, fiscal/structural measures and labour markets.  But the euro rally was quickly eroded as soon as German finance minister Schauble and later Chancellor Merkel announced that any counterproposal from Tsipras were considered null as long as Sunday's scheduled referendum was not cancelled.

The “Yes” momentum in favour of creditors' proposals is reportedly on the rise in Greece, which would be fatal to Tsipras' position and political future. Despite the seeming change in public opinion, Germany insists that Tsipras halts the referendum, sensing that it is gaining increased leverage over Syriza's position.

Scrapping Sunday's referendum promises to be an explosive catalyst for bund yields & the euro, since it is a German pre-condition for any negotiations to continue. The speech from Tsipras moments ago re-iterating his stance in favour of holding a referendum dealt a fresh blow to global stocks.  As we face further developments/retractions ahead, it's important to keep the above relationship in mind.

Act Exp Prev GMT
Eurozone PPI (MAY) (m/m)
0.1% 0.2% Jul 02 9:00
Eurozone PPI (MAY) (y/y)
-2.0% -2.3% Jul 02 9:00

Is Canada in Recession Already?

Jun 30, 2015 22:53 | by Adam Button

The Greek drama continues but we change gears today and take a closer look at the Canadian dollar after a soft GDP report. We also look at the quarter and Japanese Tankan report due later. On Tuesday, the Aussie was the top performer while its kiwi cousin lagged.  A new EUR trade was added to the Premium Insights, with 3 charts supporting the technical case. Our long AUDNZD from 1.1100 is 280 pips in the green and nears its final target.

The market moving news on Tuesday was Canadian GDP. It's April data so it's a bit stale but that didn't stop a more than 120 pip move in the loonie. Growth contracted 0.1% compared to +0.1% expected. That left year-over-year growth at 1.2% compared to 1.5% expected.

USD/CAD was trading at 1.2360 and finished the day at 1.2485, despite a 1% rally in oil prices. The pair closed at the highest since June 3. The move may be overdone given the lag in the data, quarter-end and other flows because Wednesday is a holiday in Canada but worries in Canada are mounting.

The Canadian economy contracted at a 0.6% annualized pace in Q1 and contracting growth in the first month of Q2 raises the chance of a probability and, by extension, a Bank of Canada rate cut. The OIS market went form pricing a 25% chance of a cut by year-end to a 60% likelihood.

BOC Gov Poloz's defining characteristic in the past few months has been optimism about growth but his defining trait throughout his tenure has been the ability to change his mind when he's wrong, sometimes quickly. There isn't enough evidence yet but if Canadian numbers continue to disappoint and oil begins to slide, the loonie could easily be the worst performer in Q3.

Looking at Q2, the pound was the top G10 currency after election nerves were soothed and economic data was strong. The kiwi was the worst performer on the heels of a surprise rate cut. In stock markets, China was tops but the volatility has been extraordinary. The average trading range so far this week is 11%.

Another market that performed well was Japan. That was partially on a weak currency but the economy has also been solid. Today features a critical look at what's next with the Q2 Tankan at 2350 GMT. The large manufacturing index is expected steady at 12 with the outlook improving to 14 from 10.  Another spot to watch is the All Large Industry CAPEX metric; it's expected to rise 5.3% in a critical sign of investment from Japanese companies.

Act Exp Prev GMT
GDP (APR) (m/m)
-0.1% 0.1% -0.2% Jun 30 12:30
GDP (APR) (y/y)
1.2% 1.5% 1.5% Jun 30 12:30
AIG Performance of Manufacturing (JUN)
52.3 Jun 30 23:30
Tankan Large Manufacturing Index (Q2)
12 12 Jun 30 23:50
Tankan Large Manufacturing Outlook (Q2)
12 10 Jun 30 23:50
Tankan Non - Manufacturing Index (Q2)
22 19 Jun 30 23:50
Tankan Non - Manufacturing Outlook (Q2)
23 17 Jun 30 23:50

Euro's Falling Share of Reserve Allocation

Jun 30, 2015 19:34 | by Ashraf Laidi

The IMF's latest quarterly FX reserves figures show central banks' euro share of global official currency reserves fell to 22.1% of total official reserve allocation in Q1, the lowest level since 2002. The US dollar's share of disclosed currency holdings rose to 64.1%, the highest since March 2009, which is the peak of the USD's rise during the global financial crisis.

The IMF notes these figures are a reflection of “allocated” reserves, defined as those identified by central banks as their specified currency holdings. There is no disclosure from the People's Bank of China –-the world's biggest holder of FX reserves, nor on the Chinese yuan.

The Role of Valuation

Notably, central bank allocation of foreign exchange reserves is largely determined by the overall change in the value of a currency, which explains the rise in USD allocation from Q3 2014 occurring simultaneously with the gain in the USD bull market during the same period. Similarly, the euro's fall accelerated in mid Q1, which occurred parallel to the decline in reported euro allocation.  

This also explains the rise in allocation to the Aussie and Canadian  dollar in late of 2012-early 2013, in line with the rally in  these commodity currencies following the  Federal Reserve's renewal of QE.

Allocation to both GBP and JPY remain similar at about 4% of reported allocation. Interestingly, the rise in JPY allocation occurred despite the Bank of Japan's increase of its monthly asset purchases in October 2014. This phenomenon goes in line with the yen's appreciation of recent days during the Greece-triggered losses in global equities, which continues to emerge as a result of unwinding of the oldest carry trade in the FX market. 

Euro Reversal a Powerful Signal

Jun 29, 2015 22:58 | by Adam Button

A rout in the euro turned into a rally in an impressive reversal Monday. Global stocks were beaten up as the yen led the way and loonie lagged. Japanese housing and wage inflation data is due later but the focus will remain on Chinese stocks. Despite the initial plunge in the euro, the currency closed Monday about 40 pips above Friday's close. 4 of the Premium trades are in progress, including EURCAD. EURJPY was stopped out, before returning to the initial entry level.

The euro reaction to bad news on Greece over the past month has been tough to reconcile. We highlighted skews in bunds and carry trades that made it a tricky trade. The price action on Monday confirmed it.

A nearly 200 pip gap down at the open in EUR/USD was filled and that was followed by a squeeze to 1.1270. The chart is daunting and shows an enormous bullish engulfing candle. It may finally set the stage for a breakout above 1.1450 but most traders are rightfully gunshy of the euro at the moment.

The more straight-forward trade has been in the yen as risk aversion dominates. Stocks in Europe fell 3-5% and the S&P 500 fell 2.1% to wipe out the year-to-date gain. The yen remained well-bid throughout the day and the close in USD/JPY was the lowest in a month. With US and Chinese stocks breaking down, along with continued uncertainty in Greece, the yen may continue to find bids as a safe harbor.

Looking ahead, the Japanese labor cash earnings report is expected to show a 0.7% y/y rise in May. It's due at 0130 GMT and followed by housing starts at 0500 GMT. The pace of home construction is expected to rise to 0.915m from 0.913m.

The Japanese data will probably have little effect on markets. Instead, the focus will be China where shares fell 3.3% Monday after an initial 2.7% rally at the start of the day. The drop broke below the May lows and will no-doubt concern the PBOC.

Act Exp Prev GMT
Labor Cash Earnings (MAY) (y/y)
0.7% 0.7% Jun 30 1:30
Housing Starts (MAY)
0.913M Jun 30 5:00
Housing Starts (MAY) (y/y)
5.8% 0.4% Jun 30 5:00