Tag Archives: Saxo Bank

No Hope For The Dollar?

A very ugly batch of data today from the US, particularly the new spike in jobless claims, will have the market cooking up fresh imaginings of QE to infinity. Here’s a fresh update from Saxo Bank.

“At some point, it becomes a very fearsome thing to contemplate a disorderly demise of the world’s reserve currency and what that could mean for the world’s markets.”

John J. Hardy

It’s a perfectly timed question, as the USD struggle to recover from a three-year low, and the US FED signals zero interest rate practically forever if necessary. So, what does Thursday’s data mean for risk appetite and for the USD – could it be slightly supportive in the near term, or is there simply no hope for the greenback?

“Remember in our look at the last couple of FOMC meetings, that the pattern we saw in both rates and in the USD. Those meetings produced a short additional weakening in an already weak USD, followed by a period of consolidation. So far, the pattern is holding,” FX strategist John J. Hardy writes in an update.

Adding: “This time around, Bernanke did all he could to make us all want to run out and buy survival supplies and alternative investments with every greenback we could scrounge up. The question is what percentage of the market has waited until this point to get short of the USD, considering the very stretched move we have seen up to this point. In the nearest term, in other words, there could be more risk of a two-way market developing as long as the market’s largest participants (central banks and others) don’t press the panic button.”

A Disorderly Demise of the Dollar?

But beyond the immediate term, we have to wonder, Saxo Bank concludes.

“As our Chief Economist pointed out in a column this morning, whether this latest performance from Bernanke and company raises the risk of a true USD crisis rather than just a USD slide. While this game of everything up versus the greenback has so far been a relatively risk benign development – at some point, it becomes a very fearsome thing to contemplate a disorderly demise of the world’s reserve currency and what that could mean for the world’s markets,” Hardy writes.

Odds and ends

It is increasingly clear from the stream of data from Japan that the economy took a very serious hit.

The overall household spending level for March was out overnight at -8.5% YoY and the Industrial Production figure for the month was down a stunning -15.3% MoM.

These data only include the effects of the first three weeks of the crisis.

“The market may be willing to give the country some leeway and wait for the May numbers to see how well things are bouncing back, but until then, the sheer magnitude of the fallout is frightening. Meanwhile, the push and pull of the bond rally (JPY supportive) and the worry over sovereign debt levels (JPY negative) is seeing plenty of churning in JPY crosses,” Saxo Bank notes.

Just More Trouble

New Zealand’s RBNZ threw the market a surprise in stating that it expected the cash rate level would be “appropriate for some time”, as it noted that the “outlook for the New Zealand economy remains very uncertain following February’s Christchurch earthquake”.

“The market wasn’t particularly well positioned for this and the NZD was weaker across the board – even against the US dollar relative to yesterday’s levels.”


This chart looking toppish for the moment with divergent momentum after the RBNZ looks to stay on hold longer than the market expected.

“The 80 level is also a psychological barrier for the market. But look how far we have come over the last several weeks – it would take quite some doing to reverse the trend. If 80 fails on the close today, we may have to shift the focus to support a bit further to the south,” John Hardy points out.

Very Ugly and Downright Awful

A significant bite was taken out of the pound’s rally against the USD overnight on the release of a very ugly GfK confidence survey, which showed a strong dip to -31, the lowest level since early 2009.

“The UK is in a very similar boat as the US – though the UK government at least taking a step in the direction of austerity while US politicians are divided on even inconsequential budget moves still seems to be giving sterling a premium. But eventually, a sovereign debt crisis theme could weigh as heavily on the pound as well,” Saxo Bank comments.

Today’s US jobless claims data was downright awful.

“We can always toss the GDP data out the window as yesterday’s news, but the weakness is still remarkable considering the massive support from the FED and from the Obama stimulus that provided a strong tailwind from the turn of the year. But the weekly initial jobless claims number has to make us all uncomfortable with the prospects for the US job market, as this week’s claims are the highest since January and now we have three 400k+ readings in a row,” Hardy writes.

Looking Ahead (Trying)

“As US long treasuries are rallying to new local highs (lows in yield) today in the wake of the weak US data, we have a 7-year US treasury auction that offers another test of demand for treasuries, which still appears rather robust at the moment (a phenomenon that continues to stick out like a sore thumb considering developments in other markets, perhaps reflecting the increasing signs of a weakening in the US economy, not to mention the background excuse of FED buying, though it’s important to remember that treasuries sold off consistently for a long time once QE2 became a reality).”

Yesterday’s 5-year auction saw results in line with recent averages despite the uncertainty of the FOMC proceedings that took place in the auction’s wake.

“Could a strong bond market and a weakening risk appetite today pummel some of the pro-risk JPY crosses? Also – is the ugly US data USD bearish because of an increased likelihood the market prices in of QE3+ or is it USD supportive for a little while considering how far we have already come and due to the potential for some risk aversion?” Hardy writes.

And perhaps the most valuable trading tips of today:

“Be careful out there – volatility potential is higher than ever. Don’t forget that tomorrow is the last trading day of the month and could therefore see strong end-of-the month fixing flows.”

John J. Hardy

John J. Hardy is Consulting FX Strategist for Saxo Bank.

John has developed a broad following from his popular and often quoted daily Forex Market Update column, received by Saxo Bank clients and partners, the press and sales traders.

Read also: Saxo FX Monthly April 2011.

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By the way, here’s Saxo’s latest update on equities:

“The first quarter earnings season continues in a strong way – with 224 S&P 500 companies having reported so far and 77% of these having surprised to the upside. Peter Garnry, Equity Strategist, Saxo Bank takes a look at some of the strong performers across a few sectors. He discusses the earnings from Amazon and UPS, which are both benefiting from more consumers buying products on line, plus European banks which are now well into their quarterly reporting but are struggling more than their U.S. counterparts. He also comments on automakers like Ford Motor which reported its best earnings since 1998 and a possible sales boost for U.S. and European car makers collectively due to the post earthquake production and supply struggles of their Japanese competitors. Volvo is also mentioned in terms of an emerging heavy vehcile replacement cycle.”

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The Economic Impact of Higher Oil Prices

Crude oil is rapidly closing in on the 100 dollar mark, most analyst believe it will break through the barrier in 2011. The impact of this on global production and economic recovery, is a slackening of consumer demand, according to future and commodity expert Ole S. Hansen at Saxo Bank.

“In other words, the only cure for higher oil prices is higher oil prices!”

Ole S. Hansen

The commodity shock and subsequent financial crisis back in 2008-09 led to a dramatic reduction in the global demand for crude oil. Demand from OECD nations fell off a cliff. This initially resulted in a 110 dollar collapse of the price of WTI Crude oil from 2008 to the early part of 2009.

Over the past two years the price of oil has steadily recovered half of that collapse on the back of continued strong demand from non-OECD members, especially China. OECD nations began seeing a pick-up in demand during the second half of 2010. According to the IEA, total global demand reached an all time high of 88.7 million barrels per day during 3Q10, a rise of 3.3 million bpd year on year.

“Given the continued positive growth assessments among emerging market nations and the boost that the US economy is receiving from the second round of quantitative easing and the new payroll tax break, global oil consumption is expected to expand by 1-1.5 million bpd in 2011. A rise of this magnitude will mean tight supply lines and the risk of higher prices,” Hansen writes in his latest analysis.
The average price of WTI crude during 2010 was just under 80 dollars per barrel after having traded in a relatively tight range for most of the year. Only in the last quarter did we see a sustained rally above 80 dollars a barrel on the back of the strong pick-up in demand. Most of the major research houses now predict average prices above 90 dollars for 2011 with the risk pointing towards a move above 100 dollars during the year.

“What kind of impact will this have on the still fragile economic recovery among OECD nations? To answer this question let us have a look at the U.S., which consumes approximately 22 percent of global production, of which nearly half goes to gasoline consumption.”

Above is the chart of the U.S. daily average gasoline price compiled by the American Automobile Association. The annual average price has moved higher over the last two years after the price shock back in 2008.

Prices during 2010 were relatively stable as the supply and demand situation on WTI crude was relatively balanced. Towards the end of the year the gasoline price began to move higher in line with crude oil and is currently sitting some 32 cents above the 2010 average.

“The annualized economic impact for every one cent rise in gasoline prices in the US is approximately 1.5 billion dollars, so US consumers are faced with a bill of an extra 48 billion dollars this year (approximately 0.3% of GDP) if gasoline prices stay at their current levels. And even if crude oil prices remain the same, gasoline prices will likely rise at least another 10-15 cents due to the shift to more expensive summer blends that occurs every spring. Even a rise of that magnitude would put us back at the 2008 average price, and a rise above 100 dollars a barrel would put us above that level in the spring and summer.”

A one dollar increase in the price of gasoline from the 2010 average to 3.78 dollars per gallon would result in 150 billion dollars less to the consumer and would be the approximate equivalent of a one percent reduction in GDP.

According to Saxo Bank, is the biggest risk of higher prices is a squeeze on margins and the relative in-elasticity of demand means a higher percentage of consumer spending goes to gasoline expenditures – particularly in the US, where taxes make up a much smaller percentage of the price, relative to other developed nations. Oil increases will come straight out of the bottom lines of corporations with energy intensive inputs, because their pricing power is still relatively modest considering the hangover and output gap from the last recession.

“This would put a huge additional burden on local authorities, whose budgets are already very hard pressed (school buses, city buses, etc..) and road construction activity would have to slow unless budgets are expanded to compensate for higher costs,” Hansen points out.
Adding: “Hardest hit by any increase would be emerging markets, however, as their use of oil per unit of GDP is still far higher than in the developed world. It will be interesting to see how the superior emerging market growth story will function of crude oil trades above 100 dollars a barrel for any significant period of time.”

Ole S Hansen

“Eventually, the only cure to higher oil prices is higher oil prices, which experience shows us do eventually crimp demand and bring supply and demand back into balance. During hurricane Katrina in the US, for example, the spike in gasoline prices saw year-on-year gasoline demand fall as much as -3% in the absence of a recession. As prices rocketed well above 100 dollars per barrel and the US lurched into a recession, demand fell even further. We would suggest that any further rise in prices from here will begin to see a slackening in demand,” he concludes.

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Equities: A Reason For Consern

The market has obviously moved its focus away from the earnings and is now closing in the on the FED meeting Wednesday – the expected launch of QE – and the US labor market report on Friday. So far, it has been a strong earnings season, but there are at least one reason to be concerned.

“Most companies have so far been very reluctant in giving any guidance as to how they expect the sales in 2011 to perform. And this should raise concern.”

Christian Tegllund Blaabjerg

There are  few earnings releases of importance Monday, but tomorrow we have some major releases that have potential to move the market. In broader terms, markets have priced most of the earnings results in by now, and it has been a surprisingly strong earnings season with massive surprises to the upside and growth in terms of EPS, but also  remarkably on the sales side.

“The surprise in terms of sales is flat, but the average growth of almost 10% in sales year-over-year is good news. The less good thing is that most companies have so far been very reluctant in giving any guidance as to how they expect the sales in 2011 to perform. And this should raise concern,” market strategist Christian Blaabjerg at Saxo Bank writes in Monday’s Wake-Up Call.

“We have a very busy week ahead of us and we start out with US ISM Manufacturing report day. We expect the index to decline to 53 in October (consensus: 54) from 54.4 as the growth in the manufacturing sector slows. This will also bring the national index more in line with the regional reports, which has been signalling weaker ISM Manufacturing for quite a few months now; and they still do despite the mostly positive regional reports released so far for October,” Blaabjerg notes.

Chinese PMI figures rose to 54.7 and 54.8 in October from 53.8 and 52.9, respectively, which have fuelled risk appetite in the Asian session.

It is the fastest growth in manufacturing in six months in China, driven by higher input prices.

Christian Blaabjerg

“This suggests that inflation will rise even faster in the coming months and could fuel speculation of more rate hikes by the PBoC,” Saxo Bank comments.

The US economy grew 2% QoQ (annualised) in the third quarter.

Private consumption grew 2.6%, which is the fastest growth rate recorded since 4Q2006.

“This contributed 1.8%-points to GDP, while also inventories – as expected – contributed handsomely by 1.4%-points. In fact, without inventories and government spending, GDP would have declined by 0.1%,” Blaabjerg points out.

Today’s Watchlist:


GMT Event Saxo Bank Consensus Previous
08:30 SZ SVME-PMI (OCT) 59.3 59.7
09:30 UK PMI Manufacturing (OCT) 53.0 53.4
12:30 US Personal Income MoM (SEP) 0.0% 0.2% 0.5%
12:30 US Personal Spending MoM (SEP) 0.5% 0.4% 0.4%
14:00 US ISM Manufacturing (OCT) 53.0 54.0 54.4
14:00 US ISM Prices Paid (OCT) 70.0 70.5
14:00 US Construction Spending MoM (SEP) -0.3% -0.5% 0.4%

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