Dean’s FX May 19th | US confidence falls to 30yr low

The USD$ is weaker in the O/N trading session. Currently it is lower against 13 of the 16 most actively traded currencies in another ‘tight’ trading range.

FX Heatmap May 19th, 2008

On Friday, US consumer confidence took a battering. Confidence fell this month to the lowest level in nearly 30 years as record-high fuel prices, lower home values and fewer jobs continues to undermine the US consumer (59.5 vs. 62.2 m/m). The Fed has relied heavily on the consumer to spend it way out of the ‘slight recession’, but the spending patterns are cooling as surging food and fuel costs erode Americans’ buying power and job losses mount. The sub-prime mortgage debacle has led to declining home prices and stricter lending rules. This has prevented owners from tapping real-estate equity (cause of sub-prime issues) to buy expensive durable items, raising the risk that growth will stall further in the coming months. Other data showed that showed that construction of single-family houses last month dropped to the lowest level in 17-years, despite the building of condos and townhouses rebounding. Lower prices and other incentives have yet to revive demand for houses, indicating builders will need to come up with even more discounts to attract buyers. This is a vicious circle; analysts believe that it will take another year before we see any light at the end of the tunnel. The currency markets continue to repeat the tight trading patterns despite softer data. It fells like a pre-emptive ‘summer trading’. Risk appetite has returned somewhat and the ‘carry trade’ remains in vogue.

The US $ currently is lower against the EUR +0.16%, GBP +0.16%, CHF +0.26% and JPY +0.26%. The commodity currencies are mixed this morning, CAD +0.60%% and AUD -0.17%. The loonie is once again on a tear; it has risen to a two month high as surging commodity prices and equities at new record levels boosted the currency’s appeal for now. Some analysts believe that there is a positive bias for the currency in the medium term and they expect it to hit 0.9700CAD$ over the coming months. Others believe that commodity prices have appreciated far too quickly and the price action is being dictated by speculators rather than fundamentals. With softer data of late emerging in Canada coupled with BOC governor Carney leaning towards lower rates, some investors seek to sell the loonie on rallies. Last week, Canadian data revealed a sharp decline in auto-production and widespread weakness in 18 out 21 manufacturing industries. This has led shipments lower for Mar. as the strong CAD$ and a weak US economy continues to take a bite out of Canada’s trade sector. The loonie has also gained by its proximity and association with its southern neighbor. Corporate USD$ bids continue to queue below parity. Today is a national holiday. Global equities and commodity prices have given the AUD a leg up once again in the O/N trading session. It printed 25 years highs as it races towards parity once again. Investors are content to enter the carry trade as currency volatility declined ($0.9553).

Crude is lower O/N ($125.89 down -40c). Crude advanced to record highs last week after Goldman Sachs raised its forecast, coupled with speculation that Chinese diesel purchases would strain global supplies after the earthquakes in central provinces. Analysts are now looking for $141 a barrel by year end due to supply constraints (it seems that the market does not want to bet against GSNY as they have predicted accurately oil appreciation over the last 18 months). But, the market should expect some short term reprieve after Saudi Arabia’s oil minister; al-Naimi indicated that his country will increase crude oil production by +300k barrels a day to +9.45m a day next month. Last weeks EIA report in the week showed that US supplies of distillate fuels (including diesel) rose more than forecasted. Stocks of distillate fuel gained +1.34m barrels last week vs. the expected +1m barrels. But, total implied US fuel demand fell -2.7% from a year earlier to 20.3m barrels a day. This reduction may be due to overall higher oil prices, the slowing of the US economy and consumer changing their behavior. US crude-oil inventories have now climbed in 15 of the past 18 weeks. Gold has risen the most in 2-months ($910) as energy costs surged to a record and the greenback weakened against most of its major trading partners, thus boosting the appeal of the yellow metal as a hedge against inflation.

The Nikkei closed at 14,269 up +50. The DAX index in Europe was at 7,168 up +12; the FTSE (UK) currently is 6,304 up +1. The early call for the open of key US indices is higher. Yields of the US 10-year bond eased 1bp on Friday (3.85%) and another 3bp O/N (3.82%). The front end of the yield curve (2-year note) posted their biggest loss in a few weeks as Fed officials cited the risk of inflation and a measure of retail sales exceeded economists’ forecasts. For now, the curve continues to flatten. Traders are once again increasing bets that the Fed will raise rates by year-end (2.00%), after cutting borrowing costs 7-times since Sep. ’07.

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