Cash-cow Bernanke is the dollar’s nemesis

Its no big surprise, all traders know it and are milking it. The IMF have stated the obvious, record low US interest rates are funding global ‘carry trades’, however, stating that the USD is still overvalued is just ‘poking a sleeping bear’. It will end in tears with ‘newer’ financial imbalances. If US long bond yields ever back up, we will be witnessing a tsunami carry trade unwind! For now no-wants to own or know about the greenbacks health and that includes the G20 calculated actions on the weekend.

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

Forex heatmap

Yesterday was an intraday snooze for the North American trading session. All the damage to the greenback occurred in the O/N session. True too form, the day after NFP is historically the quietest trading session of the month. This week is also a shortened holiday week, with less staff creating liquidity concerns. In fact, this week marks the beginning of the holiday ‘volatile liquidity premium scenario’. It does not matter that US employment is at 10.2% or higher. The markets psyche wants to push the current risk-rally, equity rally and the ‘mother of all carry-trades’ (USD), into the year end. After G20, investors, speculators and dealers are convinced that cash-cow-Ben and his foreign counterparts will provide the necessary liquidity at low cost well into 2010 or beyond!

After posting strong gains that could be related to various M&A flows GBP plummeted this morning after the rating agency Fitch warned over the UK’s AAA status. In its review on major economies it said ‘the U.K. was most at risk of losing this status’. The comments have triggered broad based sterling selling in thin conditions. Illiquid markets will be the order of the day in this holiday shortened week.

The USD$ is currently lower against the EUR +0.01%, CHF +0.02%, JPY +0.27% and higher against GBP -0.58%. The commodity currencies are weaker this morning, CAD -0.09% and AUD -0.23%. At 96c or 1.0417 expect the BOC to be drawing ‘their’ line in the sand. Governor Carney has insisted that they will use a combination of currency intervention, credit and quantitative easing options to influence the loonies’ value. The BOC believes that a strong currency is detrimental to economic growth. Yesterday, the loonie appreciated just under +2% (the largest one day gain in 4-months), to its strongest level in 2-weeks vs. its southern trading partner on the back of the G20 maintaining their economic stimulus measures. Keeping the status quo is boosting speculators risk appetite for the higher yielding asset classes and commodity based currencies. Last week the Canadian economy managed to pare -43k jobs in Oct. (the market was expecting a gain of +10k) and push the unemployment rate up 2-ticks to an unexpected +8.6%. The data provides much stronger evidence that Canada has some ways to go to exit this recession, but, the data will make it easier for Governor Carney to follow through on his pledge to keep borrowing costs at record lows until June of next year to promote growth unless of course the inflation outlook changes materially. For now the loonie remains in a tight 3cent trading range with dealers continuing to play the support and resistance levels until fundamentally or technically told otherwise.

The AUD has managed to take the foot temporarily of the gas pedal last night, on speculation that the pace of the rally to its yearly highs may have been somewhat overdone. After commodities rabid rally of late, especially gold, investors are comfortable to withdraw some of their well eared profits. The currency has also climbed on speculation that the Fed will now have to keep its O/N borrowing costs low for a considerable period of time after Friday’s disappointing headlines, thus boosting demand for higher-yielding assets. It’s the same story, but at a different pace! Last week, Governor Stevens indicated that the Aussi economy will expand at more than three times the pace forecasted in Aug., and signaled he and his policy makers will continue to lead the world in raising borrowing costs. The currency is well supported by commodity prices and expects dealers to remain better buyers on pullbacks (0.9290).

Crude is higher in the O/N session ($79.09 up +34c). Good old Ida! Hurricane Ida dragged crude prices from the one week lows as she entered the Gulf of Mexico and forced both BP and Chevron to cut production and evacuate some staff for safety reasons. With the G20 ignoring the USD weakness has also pushed the greenback to new 15-month lows vs. its largest trading partners and promoting commodities as another alternative for investment. It’s worth noting that the Gulf of Mexico produces 27% of the domestic US Oil production and 15% of its gas output! Last week the black-stuff prices plummeted after the 26-year high US unemployment rate conjured up fears that future fuel demand will once again weaken. To date, it has not been able to retrace all of its 3% losses from Friday. The commodity is contained within this $7 trading range for the time being, however, support levels are questionable as demand destruction remains strong and healthy in the US. Even last weeks bullish inventory report provided little support. The EIA showed a surprise decline in US crude stocks. Crude inventories fell -4m barrels last week vs. expectations that stocks were to rise by +1.4m barrels. Imports of crude fell -764k barrels, or -8.6%, to +8.13m barrels a day (the lowest level in 3-months). Refineries surprisingly are operating at +80.6% of capacity, down -1.2% from the previous week and the lowest rate in 6-months. A similar story for gas, where gas inventories fell -287k barrels to +208.3m, w/w, vs. an expected increase of +400k barrels. A tad better news from distillates (includes heating oil and diesel), stocks fell -378k barrels to +167.4m. The market had been expecting a decline of around -1m barrels. Bear in mind one week does not make a trend! Inventory reports appear this Thursday due to the Memorial Day holiday tomorrow. Speculators have had their ‘fun in the sun’, let fundamentals drive the market short term.

Gold remains better bid this morning and on course to leave the $1,100 an ounce resistance level in its wake, as a questionable greenback continues to support the ‘yellow metals’ appeal as a hedge against currency depreciation. Disappointing US employment numbers along with the RBI purchase of 200 metric tons or $6.7b of the yellow metal from the IMF has speculators wanting to push this commodity higher. Year-to-date, gold has climbed +25% ($1,109).

The Nikkei closed at 9,870up +62. The DAX index in Europe was at 5,621 up +2; the FTSE (UK) currently is 5,244 up +10. The early call for the open of key US indices is higher. The US 10-year bonds eased 2bp yesterday (3.49%) and are little changed in the O/N session. Treasuries prices were little changed yesterday despite the market setting itself up to absorb another $81b’s worth of US debt this week. Yesterday, dealers took down $40b 3-year product with a record of indirect bids (68.5% vs. a prior record of 62.5%, bid/cover was 3.33%). Now that the G20 has held the status quo last weekend, has given consumer confidence a boost, pushing them to embrace riskier trading strategies. Money is being taken off the side-lines and been put to work in both equities and FI asset classes. The US treasury will issue $25b 10’s later day and resume after the memorial holiday to sell $16b 30-year bonds on Thursday. One would have expected dealers to cheapen the curve a wee bit more, however, demand is there!

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