Bernanke’s ‘USD’ Is Entering the Abyss!

Globally no one wants to own, invest or have anything to do with the once ‘mighty greenback’. Yesterday’s US TIC data revealed more Capital outflow from the country (15.5b vs. 69.5b, m/m). Those numbers are for Aug. Looking at June and July a mighty $150b skipped town! It’s obvious that the constant Capital outflow is pressurizing the dollar, month end pricing in particular. There seems to be a domestic appetite only for the currency, everyone else and their mother want to sell the ‘greenback’ during North America time slots. The confusing part to this whole scenario is, if there is such a migration out of the currency then why are US Bonds and Equities so bid? Inherently, the USD is weak and will get much weaker, it’s the delusions of other asset class bubble not happening is the concern!

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

Forex heatmap

Yesterday’s US CPI print was larger than expected (+0.4% vs. +0.0%), and followed a no change in July. However, if we looked at ex-food and energy, the core-print increased +0.1%, which was bang on expectations. These numbers highlight the phenomena of gradual disinflation. In reality, the lack of inflation will give the Fed and its policy maker’s latitude to keep O/N borrowing costs near to zero in the foreseeable future, until we at least see sustainable signs of recovery. The Treasury department’s announcement yesterday will surely pressurize the ‘lack of inflation’ theory. They are to wind down most of its supplementary financing program, from approx $200b to only $15b. The general consensus is that it will be done in a matter of weeks. What exactly does this mean? The supplementary program consists of product that is 3-months and less in maturity. Technically, the maturing debt will not be rolled over. The Fed will surely raise the level of excess reserves in the banking system by ‘printing’ up to $185b of ‘new money’ to offset the Treasury’s action. This should put upward pressure on inflation expectations and further downward pressure on the once ‘mighty buck’!

US Industrial Production managed to surge last month (+0.8% vs. +0.7%), exceeding market expectations. Both autos and utilities continue to lead the pack. Digging deeper, the big-ticket durables production was up +0.5%, but, ex-autos, durables production fell -0.1% after a +3.3% rise the previous month. Analysts commented that inventory positions outside of autos remain high and a sustained material ex-autos production rise is difficult to sustain until further inventory shedding occurs. Inventories have been the scourge of this recession. Non-durables production was up +0.7%, led by higher food and drink output. The meat of the data shows that motor vehicle and parts led the charge, rising +5.5%, m/m, in Aug. This is once again a solid gain after the ‘miraculous’ gain of +20.1% in July. Obviously, a disproportionate share of the rebound over the past two months can be attributed to autos. However, it’s worth remembering that production of motor vehicles and parts remains -20% below its year-ago level! This would suggest that current levels are not inflated.

Other data showed that US Capacity utilization posted its 2nd-consecutive gain last month. The 69.6% beat all expectations, especially after posting a record low of 68.3%. Let’s not kid ourselves we have a long way to go before we can once again post the pre-recession rate levels. Digging deeper, one notices that manufacturing, mining and utilities all posted an increase and the largest jump was in the motor vehicles sector. That was not much of a surprise!

The USD$ is currently lower against the EUR +0.08%, GBP +0.30%, CHF +0.00% and JPY +0.25%. The commodity currencies are stronger this morning, CAD +0.31% and AUD +0.10%. The loonie managed to print new 6-week highs in the O/N session as both global equities and commodities pushed the currency to dominate its southern neighbor. When the USD is on the edge of a cliff looking into ‘chasm of nothingness’ it brings forth an appetite for risk which the loonie benefits from. Canadian data showed yesterday that July’s factory sales advanced +5.5% vs. +2.4% (fastest gain in 12-years), fuelled by auto’s output jumping +48%! Any sustainable signs of Canadian growth and no BOC interference will have the loonie trading at a premium vs. the buck sooner than we think. Dealers continue to play the range and will take their cue from commodities and equities.

The AUD has once again surged to New Year highs on the back of US reports showing that they fundamentals are stronger, thus boosting the demand for higher-yielding assets. With commodity prices moving upwards hand-in-hand with Asian bourses has encouraged ‘new’ risk appetite, which should provide further support for the AUD. Commodity’s account for +50% of the country’s exports. Dealers are looking to buy the currency on pullbacks (0.8743).

Crude is lower in the O/N session ($72.50 down -1c). Yesterday’s weekly EIA report favored higher crude prices. Mind you the weak dollar continues to provide never ending support. US oil stockpiles fell much more than expected last week as imports continued to decrease while inventories of refined fuels increased. Crude inventories fell by -4.7m barrels w/w to +332.8m, beating analysts’ forecasts of a drop of -2.4m. Imports fell -192k barrels per day. It’s worth noting that refiners cut crude runs by -56k bpd as refinery utilization was off -0.3% to 86.9% of capacity. The market was anticipating a -0.5% fall. Inventories of distillates fuels (heating oil and diesel) were up +2.2m barrels at +167.8m, vs. forecasts for a rise of only +1.3m. On the flip side, gas supplies increased +500k barrels to +207.7m, w/w. The data would have included the Labor Day holiday, which historically marks the end of the US summer driving season. Earlier this week, the API report painted a slightly different picture. Crude stocks gained +631k barrels last week as refiners slowed run rates by -146k bpd. Inventories of distillates rose +5.2m barrels and gas inventories were up by +1.3m barrels. Stronger US fundamental and Governor Bernanke’s belief that worst of the recession is over will provide further support on pull backs in the short term. Last week, we were subjected to the ‘weak’ dollar boosting the appeal of commodities to investors as an inflation hedge, this week we continue to witness a ‘sickly’ greenback. Currently there is nothing to dissuade investors from this conviction. Least we forget, demand destruction remains healthy no matter what the USD is doing!

Last week the ‘yellow metal’ surged to its highest close in 18-months on the back of a weak dollar scenario. This week the picture remains the same with the ‘yellow metal’ O/N well sought after, as investors buy the commodity as a hedge against inflation ($1,022).

The Nikkei closed at 10,443 up +173. The DAX index in Europe was at 5,723 up +23; the FTSE (UK) currently is 5,161 up +38. The early call for the open of key US indices is higher. The 10-year bonds backed up 2bp yesterday (3.46%) and are little changed in the O/N session. Yesterday, Treasures managed to stay close to home and were little changed by day’s end. A stronger than expected industrial production report coupled with a CPI print showing that inflation remains well contained managed to pare the early advances for Treasuries to basically unchanged. The less bad scenario means it’s good! PIMCO let it be known that they hold a considerable amount of Government debt and continue to add to it. Basically Bill Gross is talking his portfolio. It will be interesting to see if the lemmings will follow!

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