Whats with the ‘Big dollar’…………….we lost the ‘love’?

Financials cry for capital intensifies, but Trichet believes that European banks are on the road to recovery. Lending rates amongst themselves eased considerably last week (1st time since July). Will investors follow Buffett’s lead and invest at home? The knock on effect is appearing in the Real Economy-expect retailers to by-pass Halloween and head straight for the Xmas stretch!

The US$ is weaker in the O/N trading session. Currently it is lower against 10 of the 16 most actively traded currencies, in another ‘whippy’ trading range.

FX Heatmap October 20th, 2008

US fundamentals continue to weaken, no surprises, but since Friday’s session the ‘big dollar’ has managed to give up some of its recent gains. The US consumer confidence index nose-dived as the global credit crunch intensifies. Despite gaining ground at the beginning of the summer, the financial crisis has led to a ‘huge’ reversal of fortunes on Friday. The UOM confidence index plunged 18% this month (falling from 70.3 to 57.5), and is on the crest of breaking the 18-year lows registered in June this year. The future ‘forecast’ does not look any better as confidence in the economic outlook fell as well. However, on the bright side, the 5-year inflation expectations pushed below 3% for the first time since Mar. 2008 (this will appease the Fed who are expected to ease rates two more times by year end), as inflation fears subside. Other data also showed that we are nowhere close to the bottom in the US housing market debacle. Analysts continue to urge the market to ‘keep digging’ to find a bottom. Total US housing starts hit a 17-year low last month (-6.3% to +817k vs. +870k), and most of the decline was in the single family dwellings, creating a larger hit on real GDP in 3rd Q (single family starts hit a 26-year low). With mortgage rates now going up due to the ‘unintended consequences’ of Treasury’s plans the road to recovery seems far away. Foreclosures continue to mount, pushing inventories higher and prices lower, thus keeping builders on the sidelines and activity moving at a ‘tepid pace’. With the global credit tightening continuing to limit lending, there does not seem to be a bottom in price declines just yet. This of course will keep many homebuyers on the sidelines. Some analysts foresee the bottom could well push to +500k in housing starts. As expected, with builder sentiment in the doldrums, housing permits fell -8.3% in Sep. (+0.79m vs. + 0.86m) to the lowest level in 19-years, especially for multi-family dwellings. Single-family permits fell -3.8% while multi-family fell -16.4% as the housing outlook remains bleak.

The US$ currently is lower against the EUR +0.42%, GBP +0.94% and higher against CHF -0.03% and JPY -0.46%. The commodity currencies are stronger this morning, CAD -0.35% and AUD 0.91%. Last week the CAD$ extended its 3rd-weekly decline, the longest loosing streak in 3-months, on the back of a US economic slowdown reducing commodity prices further. Consumer confidence numbers (the weakest in 25-years) showed that most Canadians believed that the financial crisis will deteriorate further (down -11.9 m/m to +73.9). Other weaker fundamental data, like Canadian manufacturing shipments suggests softer production numbers will be had in the months ahead. Last weeks report fell over 4.5 times more than expected (-3.7% vs. +2.7%), and all of it was on the volume side as prices were unchanged. This will of course cause a large drag on real GDP, as future outlook looks bleak with crude oil prices continuing to fall and the US demand for Canadian goods easing (over 75% of their exports head south of the boarder and 50% of total exports are commodity based). The currency has been trading under pressure as crude prices maintain their downward spiral. As highlighted above, the US recession like data certainly does not help the loonies’ short term outlook. It has now deprecated 14% vs. the greenback since oil registered its record highs at the beginning of the summer. Currently one cannot rule out the market revisiting this months CAD$ lows north of 1.21 again. The plunge is consistent with commodity prices and analysts are aggressively revising medium term price objectives, 6-month levels have been revised up towards the 1.2500 region. With global growth heading for a major downturn, commodities, the backbone of the Canadian economy and exports, are expected again to come under intense pressure and by default should underpin the loonie going forward. Let’s see what OPEC does on Oct. 24th, as the currency will follow the ‘black stuff’. Futures traders continue to price in another 25bp ease by the BOC for tomorrow’s interest rate meeting.

The AUD$ gained ground O/N (0.7020) after the Koreans came up with a rescue plan of their own ($100b) and with NZ promising it may secure wholesale deposits. This encouraged investors to buy higher-yielding assets. Despite equity markets remaining in the black and commodity prices getting a short reprieve, traders continue to be better sellers on rallies for now.

Crude is higher O/N ($73.79 up +194c). Despite Oil penetrating the $70 a barrel level briefly last week, Fridays session remained better bid as traders speculated that OPEC will announce a cut in production at this weeks earlier than originally announced extraordinary meeting. OPEC is panicking as commodity prices have tumbled on growth concerns, retreating more than 50% from the highs archived in early summer ($147.27). OPEC produce 40% of the world’s oil and it’s anticipated that they will cut production by +1m barrel a day to keep in check the price drop according to Qatari Oil Minister Abdullah al-Attiyah. Last weeks bearish DOE report showed that crude and gas stockpiles increased more than twice as much as forecasted. The data showed that crude inventories rose +5.6m barrels to 308.2m w/w. Inventories were expected to rise by +2.6m barrels. Oil over all has remained under pressure on doubts that the bank rescue plan will boost global economic growth and increase fuel usage. It was because of this that convinced OPEC to bring forward the meeting to Oct 24th in Vienna. Sluggish demand continues to be the catalyst for rising inventories. US fuel demand averaged about +18.6m barrels a day over the past month, that is the lowest reported in nearly 10-years. Last week OPEC cut its world demand forecast for 2009, because of ‘dramatically worsening’ conditions in the financial markets, the adjusted levels were cut for next year by -450k barrels or -0.5% to 87.21m barrels a day. The IEA has also indicated that it foresees growth advancing at its slowest pace in 15-years as global economies slip into a recession. OPEC President Chakib Khelil said that the ‘ideal’ price for crude is between $70 and $90 a barrel. Gas stockpiles climbed +6.97m barrels to +193.8m w/w, vs. an estimated rise of +3m barrels. Growth and recession will continue to be apart of the demand equation despite the economic stimulus package. The stimulus packages require time, and time is a variable that’s been in short supply of late. Gold fell last week to its biggest weekly drop in 2-months ($780) and this on the back of weaker fundamental data providing stronger evidence that inflation concerns are easing as the economy cools. Some investors have sold the ‘yellow metal’ to raise cash to cover losses experienced in other asset classes. During the London session this morning, a weakening greenback has increased the ‘yellow metal’s’ appeal as an alternative investment. But, the market remains weary of Cbanks potentially flooding the gold market to raise cash to finance some of the bail-out packages.

The Nikkei closed at 9,000 up +311. The DAX index in Europe was at 4,864 up +84; the FTSE (UK) currently is 4,150 up +84. The early call for the open of key US indices is higher. The 10-year Treasury yields eased 2bp on Friday (3.93%) and backed up 3bp in the O/N session (3.96). Despite weaker fundamental data last week, traders focused on the prospect of greater US borrowing overshadowing recession fears. Record cash infusion by governments and larger future debt issuances being tabled has investors ‘only tentatively’ buying the FI asset class at the moment. Despite the curve flattening 5bp (232), traders are putting on the 2-10’s steepener. Futures contracts continue to show a 96% chance that the Fed will cut its O/N 1.5% target rate by 25bp at the Oct. 29th meeting. The way the markets are reacting to the aid packages, expect 50bp to appear on traders radars.

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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