HS: Euro Rally Leads Currencies Higher, Dollar Lower
EUR Violates Recent Change, Inspires Dollar Sell-off
The European common currency is rallying firmly this morning, driven higher by a decrease in real currency flows that have weighed on the unit in recent weeks as well as comments by Finnish central bank head Erkki Liikanen that Euroland rates will have to move substantially higher after a global economic recovery gains traction. In trading back into the mid-1.32 region, the EUR has now violated much of the upside resistance it has faced in recent weeks and could be poised to run higher in the short-term, especially amid a global sell-off for the dollar.
USDCAD has also broken lower this morning, violating both the bullish trend line that we've been discussing in this newsletter, as well as the 23.6% Fibonacci retracement from the September 29th low that we've been monitoring. In short, today's sell-off in USDCAD represents a technical breakout to the downside and could accelerate much like the rally in the EUR. However, the relative strength of the move is signalling that we may be entering oversold levels in the short-term.
Supporting the move higher in the Canadian dollar was news that Canada's merchandise trade balance for October narrowed less than expected, to $3.8B, as compared to the market's consensus call for $3.3B. The details of the report, however, paint a picture that is perhaps more fundamentally sound than the headline suggests, in that it was largely the 10.7% decline in the CAD over the month that accounted for the large downward move. Import prices rose 8% whereas export prices increased only 4.2% in real terms as a result of the declining Loonie. The move in USDCAD also comes despite the fact that the Canadian new home price index posted a monthly decline for the first time in October since 1999.
The economic data coming out of the US this morning has failed to inspire any buying interest as both the trade balance figures for October and weekly initial jobless claims printed substantially worse-than-expected results. That in and of itself, however, marks what could be a very important change in market sentiment. Leading up to today, bad news for the US economy has largely been interpreted as bad for the global economy and, therefore, leading to risk averse capital inflows for the US as market participants rush to US Treasuries. That expected flow has yet to materialize this morning as the dollar remains under pressure while global equities are mixed (not decidedly negative as has been the trend of late with such data). Could it be that market sentiment is shifting and poor US economic readings in and of themselves are no longer a reason to get long the dollar and Treasuries? Only time will tell.
As mentioned, initial jobless claims increased substantially in the past week, posting a reading of 573K vs. analysts consensus estimate of 525K first time filings for unemployment insurance, which marks the highest level in 26 years. The previous week's figure was also revised higher from 509K to 515K - just in case you weren't aware that it's a tough job market out there. The October trade balance registered at -$57.2B against a consensus estimate of -$53.5B, a substantial miss especially when you consider that crude oil prices plunged $33 during the month.
After a listless overnight session with moderate gains in Asia and mixed results as we head toward the European closes, North American equities are pointing to a softer open on the poor economic figures and worries that the automaker bailout bill will stall in the US Senate. Commodities, however, remain well supported amid the general dollar weakness as crude oil trades over $46.50 and gold moves beyond $827. The CRB index of commodity prices is trading 1.32% higher on the day, providing support to the dollar bloc commodity currencies.
Swissy Rate Cut Fails to Dampen Safe Haven Buying
The Swiss National Bank delivered its expected cut to its three-month LIBOR target rate of 50 basis points to 0.50% this morning and although the Swissy has now regained its low yielding status, traders have continued their week-long play of flocking to the unit as a safe haven. Much had been made both in this report and elsewhere in recent months of how the CHF had fallen out of favour of traders and risk managers through this credit crisis. Simply put, in these times of economic turmoil Switzerland was no longer seeing the safe haven flows that have characterized their banking system and currency for the better part of the last century. Instead, traders focused on the negative readings for the domestic economy and sold the currency aggressively, driving it 21.5% lower last week from levels seen in back in late August.
A four-cent rally in the past four sessions, however, now has the SNB talking about further quantitative easing and outright currency intervention to stem the buying pressure and force the currency lower in an effort to support export markets. Traders are once again flocking to the Swissy as a safe haven, low yielding play in risk averse markets and the question now on everyone's mind is how far does the CHF retrace its steep losses racked up in the last 4 months? The decline in global commodity prices and the overall softening of domestic economic conditions have slackened inflationary pressures to the point where the SNB is now more concerned with asset devaluation and re-inflating the local economy. Going forward, it will be interesting to see just how committed both the currency speculators and the SNB are to their views as we are quickly approaching the proverbial shootout at the OK Corral.
