Safe Haven Currency Choices

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Includes: AUNZ, FXA, FXB, FXC, FXE, FXF, FXY, UDN, UUP
by: Dean Popplewell

Capital markets reached a tipping point yesterday, pushed over by euro bank funding concerns and weaker U.S. data. The market has been seeing red from the bourses ever since. In currencies, it has been eerily quiet, even with the fall of global risk appetite continuing. The FX market has been trading these moves essentially flat. Perhaps the lack of price action has to do with the lack of positions. Trading safe haven currency choices are limited and getting smaller all the time.

What are FX traders using for safe heaven other than gold? Japan’s finance minister Noda continues to warn the market about intervention and states that further yen strength would "elicit measures in the new supplementary budget." That’s one strike against using JPY.

The SNB continues its charge for a weaker franc. The Bank has revised its year end forecasts and expects EUR/CHF to reach 1.14, previously forecast at 1.13 and USD/CHF at 0.84, previously at 0.83. Everyone knows that sustained CHF depreciation will only occur with improving global economic conditions.

The Fed is telling foreign exchange that they do not need to worry about the funding rate for at least two years. With rates at zero, they have now created the perfect "funding currency," weakening the dollar without making that an "official policy statement."

With the historical reserve currencies impeding the markets natural appetite in these times of stress perhaps the market should be looking more at a basket of Asian currencies, despite their own Cbank’s intervention or a commodity growth sensitive basket? Domestically there the cracks are appearing. Australia dependence on China and Canada’s 70% trading ties with the U.S. are obvious reasons. Natural choices are been limited, perhaps the reason for lack of volatility, or are we just waiting for that Jackson Hole QE3 announcement?

The US$ is mixed in the O/N trading session. Currently, it is higher against 10 of the 16 most actively traded currencies in a "subdued" session.

Forex heatmap

Red and redder, that’s what the market sees. Yesterday’s U.S. data was just another nail in the in the growth coffin. First, CPI surprised on the upside with a +0.5% seasonal increase. The market was expecting +0.2%, the blame comes from the positive seasonal adjustments for gas, though food and energy with +0.4% gains both exceeded the core rate which came in at +0.2%. It was the largest monthly gain since March. With short term rate expectations already anchored close to zero, yesterday’s headline print ‘handcuff’s the Fed’, giving them little room to ease a lot more. Policy makers have made it very clear that economic growth and jobs are in trouble. However, with little improvement in the labor market, and given what’s going on with economic growth, pricing power should weaken going forward, for the time being it remains stubbornly high.

No one wanted to hear that more Americans filed applications for UI last week. Initial jobless claims rose +9k to +408k. The number was above market expectations. Is the rise sufficient to conclude that the recent positive trend has been broken? The four week average is +402.5k, the lowest level in five months. Continuing claims paints the same picture, at +3.702m the outcome is just above expectations of +3.695m. Again revisions were applied to previous weeks, and they rarely go in ones favor! The four week continuing claims average of +3.716m is the lowest in two-months. All the numbers have been seasonally adjusted, before seasonal, initial claims fell-12k and continuing claims-45k. There was nothing in the report to imply that the recent financial turmoil has caused the U.S. economy to slow further during this month. All the market knows is that the U.S. economy has a long way to go to return to a healthy job market.

It was the disappointing Philly Fed survey (-30.7) that had investors running for the exits. With negative readings on overall activity, orders shipments and employees do support this week’s unexpected drop in Empire State business conditions (-7.7). When you include existing home sales unexpectedly dropping last month (-3.5% to +4.67m units) as cancellations of pending contracts continued to depress buying activity, you have the variable to create a highly volatile nervous illiquid trading environment whose priority is to that seek a safe haven trading strategy.

The dollar is higher against the EUR -0.03%, GBP -0.00% and lower against CHF +0.71% and JPY +0.26%. The commodity currencies are mixed this morning, CAD +0.14% and AUD -0.21%.

Parity looms again for the loonie ahead of this morning inflation data. Fears about the stability of the European banking system, weaker data from its largest trading partner has been affecting crude and weighing on commodity, growth sensitive currencies.

Yesterday, Canadian monthly wholesale sales rose unexpectedly in June (+0.2%-$47.7b), but a decline in sales volume (-0.5%-because of a declining CAD driving import costs higher) was yet another sign for the market to expect a weak GDP print in the second quarter. Add this to a disappointing trade and manufacturing data for the month and we should have Governor Carney staying on the sidelines even longer.

The governor speaks today in testimony at a special parliamentary meeting. Market expects him to sound more dovish than he did last month and again will probably reiterate the risks to the economy already identified.

This month, the loonie has dropped -3.8% as global equities tumble on renewed concern that the eurozone’s sovereign-debt crisis is getting worse. In the O/N market, investors have been better sellers of dollars on rallies (0.9890).

The AUD for a second consecutive day fell outright in the o/n session as Asian stocks extended global losses, curbing appetite for higher-yielding assets. The Aussie is on course for a fourth weekly drop against the JPY as traders increase bets for an interest-rate cut from the RBA amid concern that global growth is slowing. The RBA’s August minutes showed policy makers are concerned that turmoil in financial markets could slow global economic growth. Concerns over developments in Europe and the U.S. continue to overshadow the RBA’s robust medium term domestic outlook. Many now expect Governor Stevens to remain on hold for the remainder of the year, as "risks for the RBA have become more evenly balanced and the outlook remains conditional on the strength of the global economy."

If global turmoil continues, it could temper domestic inflation over time and ease pressure on the RBA to raise interest rates. Some futures traders now expect the RBA to reduce its key interest rate by-128bp over the next 12-months. Even with core inflation still running above the RBA’s target range, the policy makers can afford to step aside, unless there a dramatic collapse in global financial markets. That can be said for all other Cbanks. Just like the loonie, the AUD will trade with the swings in global risk appetite. Currently, investors are better sellers of the currency on rallies (1.0382).

Crude is lower in the O/N session ($79.97 down -$2.41c). Crude declined the most in a week yesterday after growth forecasts were cut and on the back of disappointing U.S. data pushing global equities further into the red. The Philly Fed survey showed manufacturing activity contracted sharply in the U.S. this month. Investors continue to run away from risky assets due to the uncertainty surrounding how policy makers will act to contain the crisis in Europe.

This weekly inventory report is also bearish for the black stuffs prices. Oil stocks rose +4.23m barrels to +354m versus an expected inventory decline of-500k barrels, and are above the upper limit of the average range for this time of year. In contrast, gas inventories fell by -3.5m barrels, a week after dipping by -1.6m barrels in the prior week, but are in the upper limit of the average range. Oil refinery inputs averaged +15.4m barrels per day during the week, which were-205k below the previous week’s average as refineries operated at +89.1% of their operable capacity. Over the last four weeks, imports have averaged +9.30m barrels per day, which were-606k below the same four-week period last year.

For the moment, crude prices continue to hold just above strong support levels ahead of $75, but those levels look vulnerable this morning. The Fed’s monetary policy will be bearish for the dollar and so should be bullish for crude in the longer term. However, markets appetite is telling U.S. different in the short term.

Gold has hit a new high this morning, up just under +2.5% since yesterday, on disappointing weekly jobless claims last week. Investor’s fears again are being tested with various global growth forecasts being cut and on questionable concerns for Chinese growth. The commodity has jumped +20% since the start of the third quarter, with many analysts being forced to revise yearly forecasts as a combination of eurozone and U.S. debt crises has renewed buying pressures.

Apart from the administration side effects of owning the commodity (CME’s +22% margin), the metal continues to be a recipient of safe-haven flows. Gold’s prices have more than doubled since the recession began in late 2007. Big picture, with the Fed’s efforts to drive interest rates lower to support lending are curtailing the dollar’s appeal as a safe haven and by default, support commodities. The commodity is heading for its eleventh consecutive annual gain. In this trading environment, $2,200 is very much in the realms of possibility over the next six months ($1,863 +$41.60).

The Nikkei closed at 8,719 down-224. The DAX index in Europe was at 5,410 down-192; the FTSE (U.K.) currently is 5,000 down-91. The early call for the open of key U.S. indices is lower. The U.S. 10-year eased 12bp yesterday (2.07%) and is little changed in the O/N session.

A disappoint Philly Fed had investors seeking shelter in treasuries and at one point pushing 10’s to new record low yields below 2%. Investors panicking managed to aggressively flatten the yield curve. The 2/30’s spread fell-7bp to a 10-month low on speculation the U.S. economic recovery is stalling.

Yesterday’s CPI data is trying to handcuff the Fed on easing monetary policy further. However, with slower growth and a fragile jobs market should, over time, influence pricing power and inflation. With the short end of the yield curve resigned to trading on top of or close to o/n fed funds, dealers will expect longer-dated product to trade more volatile as investors reach for yield and on speculation that the Fed may extend bond buying away from shorter-dated notes and towards 10-year product to help stimulate the economy. For the near term, bond investors are likely to continue to keep a close eye on equities as they dictate these treasury moves.