Black And Blue And Not Green All Over!

The whipping boys have taken the USD for a ride. Technically, there is nothing to suggest that we cannot maintain that said fact. Fundamentals are a non-starter and do not seem to be part of this equation! On the bright side for the sad ‘buck’, the O/N price action may suggest that the initial momentum is waning. Too much of a one-way bet does tend to end in tears. Today, all we have to keep us company will be this afternoon’s Beige book, let’s hope it’s a good read!

The US$ is stronger in the O/N trading session. Currently it is higher against 13 of the 16 most actively traded currencies in a ‘subdued’ trading range.

Forex heatmap

Interesting Fed data yesterday revealed that US consumer credit fell by another record of $21.6b in July! The consumer, the Fed’s go-to sector, continues to show signs that the households remain too weak to drive the US economy out of this recession. Downward revisions of previous month’s NFP certainly does not help. Money is becoming tighter and tighter for the lay person. This was backed by ABC news results indicating that its US weekly consumer confidence stumbled w/w as personal finance ‘woes’ weighed on many American homes, after holding steady for 4-straight weeks. The IMF, and interesting institution, that seems to sometimes put the wrong foot forward at best of times, has now drafted another Economic outlook. Some interesting points, they now expect EUR’s GDP at -4.2% vs. -4.8% this year (less bad is good!) and raises next years outlook to a whopping zero from its -0.3%. It’s nice to be so optimistic! We should be expecting a few more revisions at least as they do provide disclaimers. The global economic recovery remains ‘vulnerable to a series of shocks’ including a more virulent diffusion of the new H1N1 flu virus. They anticipate that the Euro-zone unemployment will print above +10% this year and to ‘nearly +12% in 2011’. This is not the scenario for growth!

The USD$ currently is higher against the EUR -0.10%, GBP -0.09%, CHF -0.11% and JPY -0.31%. The commodity currencies are weaker this morning, CAD -0.18% and AUD -0.48%. Yesterday, the loonie managed to print its strongest level since the 1st week of Aug. vs. its Southern neighbor on speculation that this equity rally continues to have legs. Investors have an appetite for higher-yielding assets. Last week’s Canadian employment report continues to support the loonie and the early-rate hike camp. However, one month’s data does not make a trend. Governor Carney at the BOC knows the domestic economy has been somewhat resilient, but is it sustainable? International trade and its impact on the domestic economy do not seem to be turning around just yet. Despite printing a new month loonie high, the currency does remain range bound and do not be surprised to expect some profit taking. Short term direction depends on commodity prices. If we continue along this vein, parity talk will rear its head again!

The AUD pared gains from this year high after an unexpected decline in Retail sales (-1% vs. +0.5%) damped speculation that policy makers would increase interest rates from their 50-year low. Even Home loans disappointed, the number of loans granted to ‘build or buy houses’ fell -2% vs. +0.4% the previous month. The data will back an RBA pause and encourage further unwinding to positions that have priced in an interest move next month, despite bullish commodity moves. For now look for dealers to sell on upticks (0.8598).

Crude is lower in the O/N session ($17.06 down -4c). Crude is in demand and breached once again the $70 a barrel level as the USD remains under pressure ahead of today’s highly anticipated OPEC meeting in Vienna. The market expects no changes from its members. Yesterday, the Saudi Oil Minister Ali al-Naimi signaled that the group is unlikely to change its production quotas. That certainly takes the fun out of waiting! Members say the group should keep its production target unchanged at +24.845m barrels a day. ‘The price is good for everybody, consumers, producers’, what else can they say? Last week EIA inventory report fell -400k barrels compared with analysts’ projections of a decline of -600k. However, the real eye-catcher of the report was that gas stocks were off -3m barrels, way ahead of analysts’ expectations of a -900k barrel draw down (the bullish element). Distillate stocks rose +1.2m barrels, double the expectation build. Total product demand rose +0.1% over the past month compared with year-ago levels as gas demand increased +0.5% over the same period. Refinery utilization was up +3.1% points to +87.2%. Basically demand destruction remains healthy! Fundamentally, inventories are above the normal level of 61 days’ worth of demand.

We have done it! We broke that $1,000 psychological hurdle, again. The first time in 18-months and officially a 14% gain for this year. Who is buying all that Gold? Anyone and everyone, with the USD under such intense pressure have naturally increased demand for the ‘yellow metal’ as an alternative investment. Even the threat of inflation has speculators wanting the commodity. The Chinese are getting involved, last week China’s Central Television ran news programs letting the public know how easy it is to buy precious metal as an investment ($1007). With 1.3b investors in China who knows where this will end!!

The Nikkei closed at 10,312 down -81. The DAX index in Europe was at 5,469 down -12; the FTSE (UK) currently is 4,941 down -6. The early call for the open of key US indices is lower. The 10-year bonds backed up 2bp yesterday (3.46%) and are little changed in the O/N session. Last week we saw FI prices achieve what we expected and make a break to the top-side, managing to print 2-month lows in the process, and all this despite reasonably positive US data. The US government has more issues this week totaling $32b in 10’s and the long bond. This should be enough of an incentive for dealers to push yields even higher!

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