‘Slowing down the slow-down’ not helping the US dollar!

The Obama administration is beginning to lose ‘face’ on their ‘stronger dollar policy’. Supposedly, the weak dollar was a Bush hangover, not anymore! The US is losing its reputation as a place where capital is safe. Geithner is now the lone globe trotting PR guru trying to convince China that ‘all is good’ with their investments. The currency has lost 10% over the past few weeks against its G7 counterparties. Expect Capital markets to take ‘any’ USD strength as an opportunity to liquidate further US denominated asset classes.

The US$ is stronger in the O/N trading session. Currently it is higher against 9 of the 16 most actively traded currencies in a ‘subdued’ trading range.

Forex heatmap

Some of yesterday’s data showed that the US consumer is heavily focused on savings. The data reveled that the US income topography is stronger than anticipated (+0.5% vs. -0.1%), but once again heavily aided by US government transfers. This higher income scenario is not leading to increase spending, but to a higher savings ratio (+5.7% vs. +4.5%-the highest in 12-years). Wages and salaries were flat after a long string of monthly declines. Surprisingly disposable income advanced +1.1% in both nominal and real terms. Analysts note that this is a repeat of the Jan. distortion that was caused by transfers. A $46b jump in transfers payments combined with a $64b decline in taxes paid led to the increase in ‘disposable income’. However, what should be more of a concern to us is that the consumer is saving and not spending. This scenario leads us to the question, how much of an effect is the stimulus really having on the economy? The only positive months for consumer spending thus far are Jan and Feb. A pessimist would say that this was only driven by deferred holiday season spending due to potential discounting. An eye popping stat is that US consumer spending has fallen in 8 of the past 10 months-the ‘go-to’ variable that Ben and his policy makers are relying heavily on!

Green shoots are still alive! The US ISM factory index rose to 42.8 vs. 40.1 m/m. It was mostly on the back of new orders increasing for the 1st-time since this recession began. The headline is proof that companies may be growing more confident that the slump will end this year. However, the reading is still consistent with a contraction in manufacturing activity, albeit at a less rapid pace vs. Apr. New orders were the stand-out, up +3.9 points to 51.1 for the 1st- break above 50 in 2-years. Analysts remain cautious about future readings. It will be about the auto manufacturers and possible closings. The trickle down effect is expected to take hold as metal, textile, rubber and plastics producers will be impacted. Some of the sub-categories support this ongoing recession, as expected the employment sub-category remains weak. Lastly, the prices paid index jumped +11.5 points on higher raw material costs but at 43.5 vs. 32 is consistent with falling inflation.

The USD$ currently is higher against the EUR -0.26%, GBP -0.34%, CHF -0.17% and lower against JPY +0.12%. The commodity currencies are weaker this morning, CAD -0.27% and AUD -0.36%. Yesterday, the Canadian economy had better than expected 1st Q GDP numbers (-5.4% vs. -6.5% expected), however some of the details remain very weak and broadly based as the Federal government stimulus continues to play an insignificant role. The economy is officially in recession on a technical basis. Weaker fundamental data of late has done very little to impeded the rapid rise of the loonie. By default, the inherent weakness of the greenback has given commodity and higher yielding currencies a lift. With the USD struggling, parity talk is back on the table. Some are buying into the theory that with Canada being a small, open economy and sensitive to trade flows, if and when the global economy is doing better, then Canada is expected to reap the benefits very quickly. There is no disputing this theory, it’s expected over time that the loonie will trade at a premium to its southern neighbor as the global risk perspective slowly changes. For now, look for opportunities to own the domestic currency on USD rallies.

As expected, RBA Governor Glen Stevens kept O/N borrowing costs on hold last night (3%), but said he had ‘scope to cut’ them from the 49-year low as the Australian economy fell into a recession for the 1st time in 18-years (further data this week is expected to support that). With Stevens tipping his hat to lower rates, has pressurized the AUD to retreat from its 8-month highs (0.8085).

Crude is lower in the O/N session ($67.81 down -77c). Crude oil managed to print a 8-month high yesterday on evidence that China’s manufacturing sector is expanding, which may signal that fuel demand in the world’s 2nd-biggest energy-consuming country may increase. With the USD slipping to a new 6-month low vs. the EUR, has increased the appeal of commodities as an alternative investment for speculators. The perception that some global economies manufacturing sector is expanding are fueling the belief that the worst may be behind us. There are other variable that have aided the black-stuff prices of late. Firstly, OPEC, who are responsible for 40% of the worlds supply agreed last week to keep production quotas at the 24.8b level. To date members have only completed 77% of the previous cut implemented last Sept. Another variable lending support last week was that the market witnessed EIA inventories declining -5.41m barrels to +363.1m. It was an eye popping drop and the biggest in 9-months (hurricane season). Technical analysts say that with oil rising above its 200-day moving average for the 1st- time in 8-months is a signal that prices will rally even further. If OPEC ever fully completes the cut-backs then perhaps the black stuff will manage to achieve their desired target of $75 year end. Some analysts believe that with record 19-year high inventory levels combined with the contraction in activity in advanced economies, the market should expect some sort of pull back from these levels. Of course the ‘dismal dollar’ will not aid their theory. A spluttering USD has given new life to the yellow metal as it marches towards its record highs. One should expect speculators and investors to want to own the commodity on any pull back as a hedge for the greenbacks slide and the prospect of future inflation ($973).

The Nikkei closed 9,704 up +27. The DAX index in Europe was at 5,130 down -13; the FTSE (UK) currently is 4,453 down -53. The early call for the open of key US indices is lower. The 10-year Treasury’s backed up 20bp yesterday (3.65%) and are little changed in the O/N session. The collapse of the long end of the US yield curve was the biggest move recorded in just over 4-months, mostly on the back of the ‘slowing down the slow down’ of US manufacturing headlines yesterday. The 2-10’s spread has widened out to 265bp and is on course to tackle the record of 276 print last week. The change in risk perception combined with a stronger equity and commodity market should continue to pressurize FI prices. Supply and demand will continue to have a volatile impact on treasuries and the USD for that matter over the coming weeks.

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