Forget Bernanke and Geithner, its risk-aversion that supports the USD

We are now paying the US government to look after our short term cash. Is that risk aversion or what? For the first time since the financial collapse, US 3-month T-Bills are trading negative! One gets an uneasy double dip feeling in the market, not a ‘jolly’ Christmas present. Whispers and rumors that more European banks are in trouble, the paranoia of keeping global rates too low too long causing new asset bubbles, especially in China, the ‘chosen savior’ has investors checking the emergency landing gear. The real unemployment rate in the US (supposedly around +17.5%) has consumers backing off, hoarding and not helping this ‘jobless recovery’. Smoke and mirrors syndrome and it’s suppose to be thanksgiving next week!

The US$ is stronger in the O/N trading session. Currently it is higher against 14 of the 16 most actively traded currencies in a ‘whippy’ trading range.

Forex heatmap

Yesterday’s US data received mixed reactions. Initial and continuous claims managed to print close to expectations (+505k and +5.611m respectively). But, the eye popping story was had with the extended and emergency prints. They both aggressively jumped higher even before Obama’s extension of jobless benefits attempts to recapture those who have been unemployed the longest. Extended benefits were up +17.7k (+540k), while emergency benefits skyrocketed by +101k to +3.6m. Disappointingly, the duration of unemployment continues to rise (+26.8 weeks). On the face of it, jobless claims seemed to have temporarily peaked, however, wait until the New Year where they should start rising again once legislation to extend jobless benefits kicks in.

Yesterday’s US Philly Fed was one of those pleasant surprises. The index advanced to 16.7 this month vs. the 11.5 in Oct. (the highest level in 2½-years). Market expectations were around 14.5. Digging deeper, the sub-components were better than the headline (one does not accumulate the components to calculate). New orders advanced for the fifth time in 6-months to +14.8 from +6.2. Shipments rose to +15.7 from +3.3 in Oct. The employment components improved as well and rose to -0.5 this month vs. the Oct. reading of -6.8. A real healthy surprise was the rise in the average workweek, which managed to print +2.0 from -4.7 the previous month. More importantly, it was the 1st positive reading in nearly 2-years. It’s a pity that this is not translated into the weekly jobless claims data! As expected from this week’s data, inflation remains a non-event. The prices paid component slipped to +14.9 from +21.3 in Oct., so, as to be expected, the Fed should remain on hold for an ‘extended’ period of time with firms keeping prices low to retain market share.

As expected Japan kept rates on hold last night and again highlighted their deflationary concerns. But, it was China who made the headlines, albeit, in a ‘smaller’ circulation newspaper, The People’s Daily Overseas. The article rejected the call for a Yuan appreciation and said that ‘the US pressure on China to raise the value of its currency amounts to Washington abdicating responsibility for ballooning deficits that would impede global economic recovery’. The article said it is ‘Washington’s attempt to distract attention and shirk responsibility and make other countries, including China pay the bill’. Now, one can expect open dialogue on the state of China’s artificially hyped-economy as we comment on the various asset classes who seem to be on the verge of collapse. In the end, as per usual, Chinese growth cannot rely solely on domestic demand. It requires the rest of the world to consume!

Food for thought, PIMCO’s Bill Gross brings up a good point, ‘systemic risk’ of new asset bubbles is rising with the Fed keeping interest rates at record lows. He indicated that the Fed is trying to reflate the US economy. What’s that? It’s ‘the process that involves lowering short-term rates to such a painful level that investors are forced or enticed to term out their short-term cash into higher-risk bonds or stocks’. It’s no wonder that 3-month US T-bills are trading negative!

The USD$ is currently higher against the EUR -0.11%, GBP -0.36%, CHF -0.14% and lower against the JPY +0.20%. The commodity currencies are weaker this morning, CAD -0.12% and AUD -0.17%. Growth, lack of growth and questionable growth weighed on higher yielding assets yesterday. As expected the loonie was not spared as the currency declined for a third consecutive day. Investors concerned actions sold global equities and commodities, which inversely supported the greenback and pressurized all growth currencies. Technically, the market is lacking clear direction as we head into next week’s holiday shortened trading week. We remain in a tight 3c trading range. Capital Markets want to test Governor Carney’s intervention and quantitative policies, the policies that the BOC believes need to be implemented to aid the currency from appreciating too fast that it may have longer term effect on Canadian economic growth. Currently, within this tight range, intraday traders are been squeezed daily out of the core positions, whether it’s commodity prices pushing the loonie or risk aversion. Dealers continue to be better buyers of the CAD on USD rallies as the buck’s bear trend becomes well established, for now at least!

It will bee a losing week for the AUD, the first time this month, as reduced risk appetite and uneasiness across global equity markets is limiting gains in growth-sensitive currencies. Over the last 12-months, the AUD has managed to appreciate just above 50% vs. the greenback as the RBA became the first Cbank to hike rates twice this year. This week’s weaker domestic fundamental reports combined with mixed data out of the US has pressurized global equities and promoted risk aversion trading strategies. If you combine that with the RBA minutes implying that three straight lending rate increases may not be on the cards has futures traders unwinding bets that Governor Stevens would tighten monetary policy again in two-weeks. He said that the pace of further rate increases ‘remained an open question’. However, bigger picture, the currency is well supported by commodity prices and expects dealers to remain better buyers on ‘deeper’ pullbacks (0.9133).

Crude is lower in the O/N session ($77.35 down -11c). What ever happened to the bullish fundamental reports for crude prices this week? Yesterday, for the first day in four, the commodity managed to decline as investors questioned global growth prospects and its pace by selling equities. For most of this week crude prices edged higher after the weekly EIA report confirmed the weakness of the previous day’s soft API print (-4.37m) . With US crude stocks falling by more-than-expected last week, and the dollar trading under pressure, had the market temporarily penetrating that psychological $80 a barrel level. Repeatedly over the last few weeks the $80 handle remains a stubborn resistance point, again the market attempted and again it has failed despite US crude inventories falling by -900k barrels last week vs. market expectations of a +300k increase. Confirming their support for bullish prices, both gas and distillate stocks also fell, by -1.7m and -300k barrels respectively. With oil trading inversely with the dollar and positively with equities, buying interest in oil, like other commodities rose this week, but yesterday we witnessed a reversal in all asset classes. Again, justified by the markets reactions, we have come too far to fast. Demand destruction does not warrant elevated prices. OPEC will remain on hold next month because of concerns about tipping global economies back into contraction. To date the market has been wishy-washy within a $7 range with very little follow through. Do not be surprised if we cannot hold current levels again.

After Gold printed new record highs, risk aversion trading strategies has given the USD support. By default, with its inverse relationship to the currency thus far, speculators have pared some of this week’s winnings. The official ‘reserve’ currency managed to gain traction against most of its major trading partners as global equities came under pressure and eroded demand for higher-yielding assets in the O/N session. Expect the Bulls to continue to dominate all of the action and remain strong buyers on ‘any’ pull backs even with the dollar finding support from risk aversion this morning ($1,144).

The Nikkei closed at 9,497 down -52. The DAX index in Europe was at 5,742 down -25; the FTSE (UK) currently is 5,306 up +39. The early call for the open of key US indices is lower. The US 10-year bonds eased 2bp yesterday (3.35%) and are little changed in the O/N session. All the action was on the front-end of the US curve yesterday. 2-year note yields dropped temporarily to their lowest level in over a year on concerns that the rally in higher-yielding assets has outpaced the prospects for economic growth. US refunding numbers for next week (2’s $44b, 5’s $42b and 7’s $32b) will make supply the main for factor a holiday shortened week. Expect the remainder of this week to see some selling of the curve as well as selling outright to make room for purchases. On deeper pull backs, the longer end of the US yield curve remains better bid as the ‘seasonal’s’ are calling for a flattening rally (363 spread 2’s -30’s) ahead of ‘month end index extension’.

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