Dollar Bears Beware!

Buy dollars wear diamonds! It seems to be that easy, the contrarian view for the remainder of this calendar year at least. The sustainability of questionable global growth is forcing the USD bears hands as G20 currencies challenge old support levels. The Greece debacle will be Euro-land’s first true litmus test. The country is exposed to the challenges of all Euro-zone members to get their budget under control and return to fiscal solidity. Would they be forced to leave the Union? Why stop at Greece, include Ireland, Italy, Spain and Portugal. Ireland on the verge of bankruptcy, a Government been dictated to by Union actions and a police force balloting to go on strike is not a recipe for getting your house in order under the Euro rules. Bond vigilantes are watching. Short term give me my diamonds!

The US$ is weaker in the O/N trading session. Currently it is lower against 10 of the 16 most actively traded currencies in a ‘subdued, yet illiquid’ trading range.

Forex heatmap

Dubai World’s Nakheel lost $3.65b, Fitch Ratings downgraded Greece’s credit and German industrial production unexpectedly dropped has pushed investors to seek sanctuary in the USD. Excluding all the ‘noise’, the holiday season brings illiquid, unexplained currency movements that sometimes defy total logic. Historically, December is one of those months. However, this time the noise is providing total logic. With no influential US data out again today, once again the greenback will be taking it lead from commodities. For now the trend remains your friend. Over the last little while the greatest currency movements have occurred in Asia and European shifts while North American is left ‘jobbing’ a tight trading range. We are subject to the ‘after the fact’ information. Buyers and sellers beware as liquidity dry’s and spreads widen!

The USD$ is currently lower against the EUR +0.28%, CHF +0.24%, JPY +0.93% and higher against GBP -0.03%. The commodity currencies are slightly stronger this morning, CAD +0.15% and AUD +0.33%. The BOC‘s Governor Carney did what was expected of him and keeps O/N rates on hold at +0.25% yesterday. Policy maker’ reiterates their ‘conditional commitment to hold the current policy rate until the end of the 2nd Q of next year’. In the following communiqué they shifted tone on both the loonie and inflation. Firstly, they dropped the remark that ‘the current strength in the loonie is expected, over time, to more than fully offset the favorable developments……’ and instead said that ‘a strong currency was more of a downside risk for weaker growth and inflation’, which is a softening of language for the currency. Secondly, the BOC changed its wording on its inflation forecast. Two months ago they indicated that inflation was expected to return to the +2% target in the 3rd Q of 2011. Yesterday however, they changed that timing to the 2nd half of that same year. The report was definitely more dovish than expected and the market expects Carney to clarify the Cbanks stance more clearly next week. Plummeting commodity prices and risk aversion trading strategies has aggressively pared growth currencies recent rise. With the USD finding surety favor with investors has the loonie testing medium term support levels. Canadian bulls have been caught offside, short term look for USD buying on pull backs.

The AUD similar to other growth currencies touched its lowest levels in more than a week yesterday after a downgrade of Greece’s debt and the Dubai World’s damped demand for higher-yielding assets. Not helping the currencies situation were economic reports showing that consumer confidence fell in Dec. (-3.8%) for a 2nd month and home lone approvals also declined (-1.4%). Currently, commodity values are the problem to the AUD advancement (0.9092).

Crude is higher in the O/N session ($73.42 up +80c). Five day’s and counting! This is the longest losing streak in 5-months. Flight to safety has boosted the greenback as investors question the sustainability of the ‘smidgen’ of global growth we have experienced thus far. If economic recovery is weaker than expected, then people will naturally start thinking about how that affects oil demand. Fundamentals continue to promote demand destruction. This morning we get the US weekly inventory report and consensus expects another stock gain. An increase will only put further pressure on current support levels and limit any price gains ahead of the OPEC meeting at the end of the month. Already this week, the Saudi oil minister, al-Naimi said that prices are in ‘the right range and there is no need to reduce inventories’. Last week’s EIA report continues to support the bear trade. Oil inventories rose +2.09m barrels to +339.9m, w/w (highest level in 3-months). Also surprising was gas supplies surged +4m barrels to +214.1m. Technically, the markets have been paring their open positions ahead of OPEC’s gathering. Secondly, a report last week on Russian output (the world’s largest producer) showed that it remains at a record high for a second consecutive month. Expect the USD’s direction to dictate price action medium term. Support levels continue to look vulnerable!

Gold continues to track the USD’s movement. For a third consecutive day the yellow metal declined, plummeting another -3%, and encroaching on a $100 drop from last weeks highs. The recent record rally required a healthy ‘lemming purge’ which we are witnessing this week. The commodity’s prices have experienced wild gyrations of $20-$40 price swings over the past few trading sessions and remains exposed to further selling pressure if the USD continues to find traction. Sellers beware, despite the ‘mother in-law’ and anyone who can, does own this ‘hot’ commodity, these pull backs remain strong buying opportunities as it’s ‘the international currency’ ($1,136).

The Nikkei closed at 10,004 down -135. The DAX index in Europe was at 5,650 -39; the FTSE (UK) currently is 5,205 down -18. The early call for the open of key US indices is higher. The US 10-year bond eased 3bp yesterday (3.39%) and are little changed in the O/N session. Flight to quality continues to drive FI prices higher. Sovereign downgrades and future potential downgrades have investors seeking surety. Bernanke, prudently, continues to tout the same vein of caution about the speed of the US recovery, despite the strong data of late. This week in total, $74b of new product needs to get absorbed. Yesterday, $40b worth of 3’s was again well received, drawing the lowest yield in 11-months (1.223%). Today we entertain $21b of 10’s and tomorrow $13b long-bonds. Cbank rhetoric continues to remind us that the credit crisis is not over and the safety of the FI asset class is an attraction to investors.

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
Dean Popplewell

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