The Punch Drunk ‘dollar’ is Another Headache!

Easy come easy go, that’s the story of the greenbacks strength this year. Just when you thought that it was going to defy its critiques and stamp some sort of authority in the world’s currency market, like a petulant school kid it’s banned from the playing field. The ‘mighty dollar’ has left with a whimper and its tail between its legs in the O/N session. The Asian Development Bank applied the pressure declaring that the ‘emerging markets’ could grow by +6.4% next year. The rest of us on the side lines wait for G20, where it’s expected that the US will urge world leaders to launch a new push in Nov. to rebalance the world economy. Sounds like an accounting exercise where we can lie with statistics! Their solution is that exporters (China, Germany and Japan) should consume more, while debtors like themselves ought to boost their savings ratios. Do not expect ground breaking announcements in Pittsburgh. Policy makers most likely will end up agreeing to cooperate more.

The US$ is weaker in the O/N trading session. Currently it is lower against 16 of the 16 most actively traded currencies in another ‘whippy’ trading range.

Forex heatmap

Yesterday was a quiet but an expensive trading day for the USD bears. With a ‘larger’ percentage of the trading regions on holidays, the ‘big’ dollar actually found some traction and made it uncomfortable for the ‘weak’ dollar shorts. Last months US leading economic indicators (+0.6% vs. +0.9% revised) managed to climb for the 5th-consecutive time yesterday. Technically, this is the longest winning streak in 5-years and provides stronger evidence that ‘the economic recovery is on the way’. The gains in equity prices, consumer confidence and homebuilding continue to be the backbone of the stronger headline print. Obviously the very reasons why ‘helicopter’ Ben declared that the worst recession since the depression has probably ended. On the flip side, rising unemployment and tight credit is a strong reminder that ‘this rebound’ will be painfully slow!

The USD$ is currently lower against the EUR +0.70%, GBP +0.42%, CHF +0.71% and JPY +0.78%. The commodity currencies are stronger this morning, CAD +0.62% and AUD +1.28%. Yesterday it’s the same painting with a new canvas! After printing an 11-month high last week as both global equities and commodities pushed the currency to dominate its southern neighbor, it had neatly pared some of its strength ahead of the FOMC meeting this week. Investor had been speculating that the global recession is ‘over’ which boosted the appetite for higher-yielding assets including commodity-linked currencies like the CAD and AUD. Is it sustainable was the question that had pushed the greenback to new yearly lows last week. Rumors were rife that the BOC was checking rates and gave the illusion that they would enter the fray. It was exactly that, just rumors. Year to-date the loonie has appreciated +15% vs. its southern trading partner, last year it depreciated -18%! Dealers continue to play the range and will take their cue from commodities and equities.

Higher yielding currency’s got a boost on two fronts O/N. China import data showed a large commodity demand which of course can only be bullish for commodity-bloc currencies. Secondly, the Asian Development Bank (ADB) said that Asia (ex-Japan), will grow +3.9% this year, much improved from March’s estimate of +3.4% and that growth may strengthen next year to +6.4%! This announcement managed to push regional bourses higher and the AUD close to its 3-week highs (0.8736).

Crude is higher in the O/N session ($70.30 up +59c). Too far too fast! The 61% appreciation for crude this year is out running current fundamentals. Investors were happy yesterday to pare some of their profitable positions as oil had its 3rd consecutive day of losses. The USD gaining temporary strength vs. the EUR had also helped to reduce the investment appeal of commodities. Technically we are caught in a $10 range and fundamentally with record high inventories (gas and distillates) further losses are warranted. The theme of demand destruction remains healthy. That being said, last week’s EIA report temporarily supported higher crude prices. US oil stockpiles fell much more than expected as imports continued to decrease while inventories of refined fuels increased. Crude inventories fell by -4.7m barrels w/w to +332.8m, beating analysts’ forecasts of a drop of -2.4m. Imports fell -192k barrels per day. It’s worth noting that refiners cut crude runs by -56k bpd as refinery utilization was off -0.3% to 86.9% of capacity. The market was anticipating a -0.5% fall. Inventories of distillates fuels (heating oil and diesel) were up +2.2m barrels at +167.8m, vs. forecasts for a rise of only +1.3m. On the flip side, gas supplies increased +500k barrels to +207.7m, w/w. The data would have included the Labor Day holiday, which historically marks the end of the US summer driving season. Surprisingly, the API report painted a slightly different picture. Crude stocks gained +631k barrels last week as refiners slowed run rates by -146k bpd. Inventories of distillates rose +5.2m barrels and gas inventories were up by +1.3m barrels. Follow the ‘buck’!

Gold advanced in the O/N session and in doing so ended a 3-day decline as the greenback weakened against all its major trading partners, thus boosting the appeal of the yellow metal as al alternative investment ($1,014).

The Nikkei closed at 10,370 down -73 (holiday). The DAX index in Europe was at 5,736 up +68; the FTSE (UK) currently is 5,185 up +51. The early call for the open of key US indices is higher. The 10-year bonds eased 2bp yesterday (3.44%) and backed up 6bp (3.50%) in the O/N session. Treasury prices caught a small bid on two fronts yesterday. Firstly, with global stock indexes retreating had investors grabbing yield and secondly dealers managed to make the Fed pay up for their scheduled buy-backs. This week the US will sell $43b in 2’s (today), $40b in 5’s (Wed.) and $29b in 7-years (Thurs.). Look for dealers to cheapen the curve accordingly.

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Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell