Trichet does not deliver- Is the USD$ wanted?

The USD$ is stronger in the O/N trading session. Currently it is higher against 11 of the 16 most actively traded currencies in a ‘tight’ trading range, as the US celebrate July 4th, Independence Day.

FX Heatmap July 4th, 2008

As the market had anticipated both the ECB and NFP data did not disappoint. Trichet and his policy makers hiked borrowing costs 25bp to 4.25% and then in their following communiqué proceeded to indicate to sit on the ‘picket white fence’. CBankers are hell bent on achieving a ‘stronger USD$’, most likely to curb commodity prices. With Trichet signaling that one interest rate hike is enough to control inflation, traders were quick to buy back their profitable short USD$ position ahead of the long weekend. The ECB has ‘no bias’ on rates and yesterdays hike will go along way in bringing inflation back below their 2% band in their opinion. The typical ‘flip flopping’ of CBankers had Trichet focusing more on growth at the press conference, hence the surprised strong liquidation of EUR’s. He is weighing the risk that higher rates will worsen an economic slowdown against the danger that the fastest inflation in nearly 20-years will feed into wages and prices. The juggling act remains on going.

The NFP headline came in close to market expectations (-62k vs. -60k), but, the net revisions were down another -52k for the previous two months. The unemployment rate remained on hold at 5.5%. These numbers continue to paint a bleak picture, even though it was anticipated, the revisions were deeper and no positive inroads for the unemployment rate. This is the 6th straight month of jobs losses being reported (quarterly average remains at -64k). Digging deeper, losses are reported across all the major categories (manufacturing, construction, retail and finance). Analysts went to great lengths to highlight that professional and business service (which may be considered the engine category through expansion times), was down -51k, so too were temp positions (expect this category to expand). The trend of continued job losses, combined with record commodity prices and falling real estate values, should curb future consumer spending (once the US rebate cheques dry up). One may conclude that the Fed will not be swift in hiking O/N borrowing costs any time soon (2.00%). Also yesterday, US ISM non-manufacturing service industries unexpectedly contracted last month (48.2 vs. 51.1) as prices soared and employment reached an all-time low. Similar theme where rising energy costs and weakening consumers demand are making companies less optimistic and encouraging further tightening of belts.

The US $ currently is higher against the EUR -0.05%, GBP -0.15%, JPY -0.10% and lower against CHF +0.17%. The commodity currencies are stronger this morning, CAD +0.17% and AUD +0.21%. The loonie fell yesterday and is looking to break out of it recent tight trading range after the NFP report showed that the unemployment rate remained unchanged (5.5%) and Trichet signaling that he may not raise O/N borrowing costs again this year (4.25%), thus boosting the greenback across the boards. The CAD$ continues to under-perform on a cross related basis as commodity prices ease. With the US celebrating July the 4th and Canada relying on one piece of economic data today, traders expect it to be an illiquid quiet trading range. On reflection, the NFP data was not a ‘barer of fruit’; deeper revisions highlight a slowing US economy, and that’s not positive for the loonie. 75% of Canadian exports head south and if one took commodities out of the equation Canadian economic data is not that hot. Yesterday there were rumors swirling that the CFTC will be announcing a hike in the margin requirements on oil and potentially other commodities. This would clearly put pressure on oil if the speculators are all long and hence on the CAD$. The market expects the CAD$ will remain guilty by ‘proximity and association’. Earlier this week RBA governor Stevens left borrowing costs on hold at 7.25%. But, the AUD$ remains better bid as traders speculate that the Fed will delay hiking interest rates (2.00%) along with the ECB indicating that they may stand pat (4.25%) thus maintaining the interest rate differential advantage for the AUD$ (0.9624).

Crude is higher O/N ($144.96 down -33c). Yesterday CFTC rumors of changing commodity margin requirements kept crude prices very much in check. Geo-political concerns and this weeks stock inventory data has kept oil prices elevated. The EIA report revealed an unexpected fall in stocks. Inventories fell -1.98m barrels to 299.8m, w/w, vs. an expected up-tick of +500k barrels. But, gas stocks rose +2.1m barrels to 210.9m and supplies of distillate fuel (including heating oil and diesel) increased +1.3m barrels to 120.7m. The report has provided support for crude prices and bearish for refined products. Other variables continue to provide support for the ‘black gold’ prices. The IEA indicated this week that global supplies may not keep up with demand over the next 5-years. They believe that spare OPEC capacity will shrink in this time and keep the market ‘tight’. A Mideast conflict between Iran and Israel will continue to hamper the concerns of spare capacity (Iraq is currently OPEC’s second largest producer). Year to date, crude has climbed nearly 50% aided by a weaker greenback. Trichet comments have given the USD$ a leg up and commodities have been slow to reflect this so far. The worst case scenario was a ‘hawkish’ ECB; this has not materialized, so fundamentals should kick in soon. Gold prices eased as the USD$ gained ground vs. the EUR after the ECB indicated that it may not need to hike rates again this year assuming that inflation targets slip back below their 2% comfort level.

The Nikkei closed at 13,237 down -27. The DAX index in Europe was at 6,326 down -27; the FTSE (UK) currently is 5,427 down -49. The early call for the open of key US indices is higher. Yields of the US 10-year bond eased 1bp yesterday (3.96%) and are little changed O/N. Short end treasury prices gained yesterday steepening the curve (145) after NFP data fell for a 6th consecutive month combined with US services unexpectedly contracting, heightening traders speculation that the Fed will be slow to hike rates (2.00%).

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