Is the USD the world’s reserve currency? Nope……Carry? Maybe!

Status Quo is a good rock band! ECB and BOE are not, but, will most likely maintain the status-quo this morning by keeping their respective borrowing rates on hold. The ‘herd’ is long both the underlying currencies and is praying for one final push higher before they clean up their portfolios allowing them more flexibility ahead of tomorrows NFP number. These past few trading session have not been kind to the ‘once mighty greenback’. It’s like the ‘bully in the school yard’ who finally gets his comeuppance! Buy anything against it and you are on to a winner. Everyone and their mother is short USD, in reality it has become a ‘carry currency’ just like the JPY and not what it’s suppose to be, a ‘reserve currency’! It’s very much losing its grip as the world’s reserve currency. Being the world’s dominant military force is the only reason that warrants it being called ‘the’ reserve currency for the time being…. at least.

The US$ is stronger in the O/N trading session. Currently it is higher against 10 of the 16 most actively traded currencies in a ‘subdued’ illiquid O/N session ahead of the ECB and BOE announcements.

Forex heatmap

Yesterday’s ADP report was generally in line with market expectations and consensus. It showed a -371k decline in last month’s private payrolls vs. expectations of -350k decline. However, the report confirms that the pace of decline in private payrolls continues to decelerate, reflecting the slower pace of contraction of economic activity. In reality, the US economy remains in negative territory and analysts do not expect a turnaround in the labor markets until late nest year. It’s worth noting that the ADP figures have had a strong correlation with NFP over the last Q. Analysts warn that any sharp monthly swings have to be interpreted with caution, because the new ADP methodology includes the behavior of initial unemployment claims in its explanatory variables. This means that distortions are likely in months when initial claims had been volatile on the back of one-off factors such as last month’s. There are probably 2-factors that explain only a ‘slight’ improvement in yesterdays headline. The ADP model may have smoothed out the recent volatility in the weekly claims and secondly it might be related to worse than expected sample-based payroll figures that would imply an NFP headline worse than -400k. Digging deeper, there was an improvement in manufacturing payrolls (-99k from -141k in June) whilst the services industry continued to lose jobs at the same pace as the previous month (-202k from -218k).

It’s on again, it’s off again. Green shoots need watering. US ISM non-manufacturing contracted more than expected last month (46.4 vs. 48.0) as ‘concern over rising unemployment (+9.5%) gripped consumers’. This is stronger evidence that the US economy has yet to benefit from any of the government’s incentives programs. With a high unemployment rate (expected to notch a tick higher this Friday-+9.6%) coupled with stagnating wages, falling home values and mounting bankruptcies, do not expect the consumer to rush to the rescue!

The USD$ currently is higher against the EUR -0.07%, GBP -0.04%, CHF -0.08% and JPY -0.24%. The commodity currencies are stronger this morning, CAD +0.7% and AUD +0.42%. The loonie, despite equities and crude falling yesterday, gained momentum again as investors coveted higher-yielding currencies on optimism that the global economy will soon recover. Both investor and dealers have disregarded the Finance Ministers fighting words earlier this week, where he stated that ‘there are some steps that could be taken to dampen the currency’s rise’. Since Mar. the loonie has strengthened 21% vs. its inward-looking southern neighbor. For the loonie per-se, nothing has changed, the currency managed to print its strongest level in 10-months yesterday. This on-again, off-again recession is bringing risk takers back into the market. The strength of the currency continues to get ahead of fundamentals, this morning we get building permit data and tomorrow it’s the biggie of the week, employment. Let’s see if the domestics want to cash in on the recent surge or will they pare some of their profitable trades ahead of the Jobs data tomorrow?

The AUD advanced for the 5th-time in 6-days, making it the 3rd-best performer vs. the greenback in the past 3-months. The currency rose to its highest level in 11-months after the job’s report surprisingly added +32.2k new jobs vs. an expected decline of -18k. The JPY fell as gains in stocks fueled demand for high-yielding currencies (0.8414).

Crude is higher in the O/N session ($72.10 up +13c). Crude managed to extend its losses after yesterday’s weekly EIA figure. The report showed a bigger-than-projected supply increase, add the weaker fundamental data from yesterday and voila we have lower prices. The commodity’s rise of late has been rapid and gut feelings tells us it has been over extended on the top side. The crude oil builds across the States and at Cushing (where West Texas is stored-+1.2m to +33.3m w/w), are weighing on the market. Demand destruction remains healthy as noted by industries reports contracting last month. This certainly does not bode well for any strong rebound in the coming months. Crude stocks increased +1.67m barrels, w/w, vs. an expected rise of +0.6m. Gas stocks declined -212k to 212.9m. The market was expecting a decline of -800k. Supplies of distillate fuel (including heating oil and diesel), fell -1.14m barrels to +161.5m, an increase of +1.23m was projected. On the face of it, it’s a bearish report. However, we continue to range trade. Technically the market needs to break below $69 to gain any true momentum. Reality tells us that inventories are high, demand is still really weak and the risk is increasing that we will see a bigger correction towards $60. We are not seeing growth, but indicators are showing us a ‘less bad is good’ scenario. It’s worth noting that OPEC increased their output levels for a 4th-consecutive month in July (agreed compliance is slipping as some members states take advantage of the stronger prices).Their output averaged +28.39m barrels a day (up +45k, m/m). The market seems to want to take its cue from this Friday’s NFP report! Technical selling had us witnessing weaker Gold prices yesterday. After breaking through the $970 print, many investors have been willing to lock in some of their rapid gains of late. Dealers are happy to pare positions ahead of the employment reports ($965).

The Nikkei closed at 10,388 up +135. The DAX index in Europe was at 5,380 up +28; the FTSE (UK) currently is 4,695 up +48. The early call for the open of key US indices is lower. The 10-year Treasury’s eased 3bp yesterday (3.65%) and backed up 9bp in the O/N session (3.74%). Treasuries at the end of the day managed to snap a 3-day losing streak after the non-manufacturing ISM surprisingly contracted yesterday suggesting that the recovery from this on-going recession will be slow. During the morning session, the US yield curve shifted higher after the record quarter funding announcement for next week ($75b in total-$37b 3’s, $23b 10’s and $15b 30’s). Also applying pressure was the announcement that they would increase TIPS issuance. This Friday’s North American employment report may give bonds an even bigger lift!

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