Robust US$ Remains!

Analysts and dealers are starting to sing to a different tune. Some dealers are now convinced that the US$ has seen the bottom, as the ‘contagion’ spreads to other global economies. This is a bold predicament with a US housing debacle and credit crisis ongoing. Despite slower growth and an ailing job market, it seems that traders want us to believe that they have priced in the worst. Is this premature?

The US$ is stronger in the O/N trading session. Currently it is higher against 14 of the 16 most actively traded currencies in another ‘whippy’ trading range despite part of Europe on holiday (Assumption day).

FX Heatmap August 15th, 2008

Yesterday’s US CPI, initial jobless and continuing claims continue to highlight the difficult situation that Bernanke and Co. still face. The headline inflation unexpectedly jumped to +5.6%, y/y, while the core rallied to +2.5%, y/y (very much in line with estimations). But, digging deeper, most of the gain in headline prices was unexpectedly due to a large increase in food prices (+1.0% m/m-largest increase in 17-years). This will of course be worrisome for policy makers, as it seems that producers are finally passing on input costs to the end consumer that they have experienced over the last Q. As to be expected, the softer energy prices we have witnessed over the past few weeks seem to have reduced upward pressure on headline inflation (rose +1.9%, m/m vs. +7.3%, m/m). Gas prices also moderated as expected, only increasing by +0.7%, m/m, much weaker than the June gain of +7.9%. Capital market analysts believe that inflation will moderate even further in the months ahead as commodity prices stabilize, consumer spending weakens, and home prices continue to decline, thus eroding further the future purchasing power of the US consumer. Initial jobless claims fell slightly, but, managed to post an unexpected gain of +450k claims (last weeks was also revised higher, +460k). The result managed to push the 4-week average to 6-year highs, which may suggest that the labor markets are softening faster than expected. More importantly, continuing claims edged up to +3.787m, which may suggest that the market can expect an increase in the unemployment rate for Aug (+5.7%). With tighter lending and credit conditions ongoing, coupled with a loss in disposable income for consumers, one can expect job opportunities to continue to decline for the foreseeable future in the US.

The US housing market seems like a bottomless pit after yesterday’s eye popping data. Existing home sales reportedly fell to a 10-year low for the 2nd Q, while median home prices shaved -7.6% off their value, y/y, as the real estate recession deepened. Analysts expect property values to drop even more, as record foreclosures by financial institutions become more prominent. With US economic growth slowing and unemployment rising, deeper price discounts will occur. Bank seizures of properties in default rose 184% in July alone. That is the equivalent of 1 in every 464 US households receiving a default notice. Staggering!! One can only imagine what the Spanish property market is going through.

The US$ currently is higher against the EUR -0.77%, GBP -0.87%, CHF-0.66% and JPY -0.77%. The commodity currencies are weaker this morning, CAD -0.46% and AUD -1.26%. The loonie continues to wilt from a two-prong attack. Firstly, the US$ rallied against all its major trading partners after a stronger than anticipated CPI headline down south and secondly, ‘softer’ commodity prices gaining momentum once again. Traders are reducing their bets that the Fed will be easing any time soon (2.00%) and can only be US$ positive. Since oil peaked at its record highs, the loonie has managed to shave nearly 6% of its value vs. its largest trading partner south of its border (50% of total exports are commodity based). The drop in commodity prices has put Canada’s domestic economic vulnerabilities back onto the radar screen. Last weeks employment report showed that the country lost -55.2k jobs and has heightened speculation that the BOC may cut borrowing costs (3.00%) by year end. After gaining 17% last year vs. the greenback, the loonie has quietly given up nearly 50% of that so far this year. Its proximity and association to the US continues to have a negative impact on its current economic data. Traders are looking for better places to sell the loonie in the short term.

The AUD$ continues to stumble and was one of the largest movers O/N. It has taken its loss from a 25-year high reached only a month ago to 12%. With prices of commodities aggressively sliding and traders betting on lower interest rates (7.25%), will only put the AUD$ under further pressure (0.8625).

Crude is lower O/N ($113.15 down -186c). Newton was correct, what goes up must come down. Crude prices gave back nearly everything they gained this week in yesterday’s session and more this morning. Traders are speculating that fuel consumption declines in the US will spread to other global economies as growth stalls. Data released this week shows that US gas demand was down -2.1% last month, as record prices and slower economic growth cut consumer spending. Euro-land data yesterday indicates that Europe is starting to suffer from the same US symptoms. Despite a bullish EIA report this week black gold has not been able to maintain its gains as growth consumption trumps all other concerns. The strength of the ‘big dollar’ has not helped either. Gas inventories dropped -6.39m barrels to 202.8m, w/w (the biggest decline since Oct. 2002). With refineries not making money on the crack spread, has led to units been shut. Consumer demand is having a negative impact on imports and refinery runs. Despite prices retreating for 22 consecutive days at the US gas pumps, the end user has radically changed their consumption patter which continues to have a negative impact on oil prices. Refineries are operating at +85.9% of capacity, down -1.1% w/w. Petroleum product imports fell -17%, to +2.6m barrels a day (the lowest in three years). Even more interesting, imports of crude oil declined -5.3% to 9.66m barrels a day (the lowest in 6 months). Crude inventories also surprised the markets and fell -316k barrels to 296.5m (anticipated to climb by the same amount). Over the past few months, growth has won the battle, but oil bulls continue to seek some technical temporary support from geo-political upheaval, currently it’s not happening. Higher gold prices remain an optical illusion as the ‘yellow metal’ retreated ($789) on the back of a stronger US$ and lower energy prices which has diminished the appeal of the metal as a hedge against inflation and as an alternative investment.

The Nikkei closed at 13,019 up +61. The DAX index in Europe was at 6,503 up +61; the FTSE (UK) currently is 5,529 up +32. The early call for the open of key US indices is higher. Yields of the US 10-year notes eased 5bp yesterday (3.89%) and are little changed O/N. Investors anticipated a higher than expect inflation number, despite the final print, traders rallied FI on the back of a weaker than an expected number of first-time jobless claims yesterday. Some Fed governors indicated this week that the worst for the US economy may still be ahead as financial losses mount and credit tightens once again.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

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