The market is irrational and illogical this time of year when interested parties pare positions in their portfolios for the yearly Ã¢â‚¬ËœturnÃ¢â‚¬â„¢. A holiday shortened week is always difficult to trade. The dollar has struggled somewhat in the O/N session with the Ã¢â‚¬ËœbullsÃ¢â‚¬â„¢ booking well earned profits before closing up shop. What will be the dollars New YearÃ¢â‚¬â„¢s resolution? Ceasing to be the Ã¢â‚¬ËœfundingÃ¢â‚¬â„¢ currency of choice as it was this year?
The US$ is weaker in the O/N trading session. Currently it is lower against 13 of the 16 most actively traded currencies in a Ã¢â‚¬Ëœsubdued, yet illiquidÃ¢â‚¬â„¢ trading range.
We finally get some US data this morning, so far in this holiday shortened week we are Ã¢â‚¬Ëœdriving the FX market on fumesÃ¢â‚¬â„¢, looking at screens, twiddling ones thumbs, wondering why with so little noise, why the movement? That is the holiday season for you, movements makes Ã¢â‚¬Ëœno senseÃ¢â‚¬â„¢. The Fixed income asset class at least has reasons for movement. Yesterday, Charles Evans, Chicago Fed President and a non-voter, stated in an interview that the Fed’s commitment to maintaining loose monetary conditions Ã¢â‚¬Ëœfor an extended periodÃ¢â‚¬â„¢ may only apply to the next 3-4 meetings. His train of thought does not seem to align with BernankeÃ¢â‚¬â„¢s. Helicopter Ben is more concerned about the downside rather than upside risk to inflation. Next weekÃ¢â‚¬â„¢s US Treasury funding requirements will be very interesting. Is there an immediate chance of failed auction?
The USD$ is currently lower against the EUR +0.26%, GBP +0.13%, CHF +0.10% and higher against JPY -0.16%. The commodity currencies are mixed this morning, CAD +0.24% and AUD -0.05%. Yesterdays Canadian sales numbers favored the bulls with the headline print coming in as expected (+0.8%) and the core underscoring slightly (+0.2% vs. +0.3%). Digging deeper one noticeÃ¢â‚¬â„¢s that despite a strong rise in the dollar value of sales, the volume of sales climbed +0.6%, m/m, bringing us back to year ago levels. This is strong evidence that we should be expecting a healthy GDP number tomorrow. Some of the details showed that building and outdoor home supply store sales rose +1.2%, while food sales fell -1.2% and there was a +0.9% decline at the pharmacy. As indicated over the last few trading sessions, the loonie has performed surprisingly well in this dollar Ã¢â‚¬Ëœbull runÃ¢â‚¬â„¢. Stronger domestic fundamentals and commodity prices have managed to lend an undercurrent bid tone to the currency. The loonie has lagged most growth currencies, but now it seems to be given its head. Currently, the market is still looking at dollar rallies as a sell opportunity. If one prefers being long the greenback, crossing it with Ã¢â‚¬ËœthisÃ¢â‚¬â„¢ commodity sensitive currency is not the ideal answer as analysts continue to favor buying the loonie longer term. EUR/CAD books are starting to see more sell orders building above.
Again under pressure, the AUD fell to its lowest level in 2-month this morning as traders pared position in high yielding assets just before year end. Investors continue to speculate that stronger US economic data will warrant the Fed to hike rates soon that what is being indicated. Last week, the RBAÃ¢â‚¬â„¢s deputy governor Battellino said that AustraliaÃ¢â‚¬â„¢s monetary policy is Ã¢â‚¬Ëœnow back in the normal rangeÃ¢â‚¬â„¢ after lenders raised business and home-loan rates by more than the RBA themselves have increased (+3.75%) the overnight cash rate target. Interest rates being paid by borrowers are now Ã¢â‚¬Ëœabove their previous cyclical lowsÃ¢â‚¬â„¢, making it Ã¢â‚¬Ëœreasonable to conclude that the overall stance of monetary policy is now back in the normal rangeÃ¢â‚¬â„¢. Traders have aggressively pared bets that the Cbank was in a position to hike rates for a fourth consecutive time in Feb. (+40% chance). The currency remains under pressure despite stronger fundamentals. Investors are looking for better levels to sell it (0.8799).
Crude is higher in the O/N session ($73.76 up +4c). Yesterday, Crude stayed close to home, even in the presence of a stronger O/N dollar, as heightened geo-political fears threatened to escalate. Nigeria with MEND and Iraq with Turkey continue to have internal quibbles. OPEC meet today and itÃ¢â‚¬â„¢s expected that there will be no change to production quotas. With demand destruction remaining healthy, OPEC, who supplies 40% of the worldÃ¢â‚¬â„¢s oil, are comfortable with the current price range. They do not want to give the impression that the world is oversupplied, so status quo is what it will be. Crude earlier fell as the dollar strengthened against the euro, printing 3-month highs and limiting the appeal of most commodities as a currency hedge. Last weekÃ¢â‚¬â„¢s EIA reported that inventories declined -3.69m barrels to +332.4m vs. expectations of a decline of only -2m barrels. Lending initial support, imports of crude declined -4.5% to +7.77m barrels a day (the lowest print in 14-months). Refineries are operating at +80% of capacity, down -1.1%. On the flip side, US gas consumption rose +1.5% last month, y/y, as the economy recovers from the recession. Gas inventories gained +879k barrels, or +0.4%, to +217.2m barrels last week. The market was anticipating a rise of +1.25m barrels. In contrast, distillate stocks dropped -2.95m barrels to +164.4m, compared with a forecast of a -500k decline. In total, US daily fuel demand averaged +18.8m barrels over the last month, down -1.8% from a year earlier. Demand destruction is healthy and the commodity prices remains range bound. The Ã¢â‚¬ËœreserveÃ¢â‚¬â„¢ currency will dictate the direction of commodities.
Gold price movements are firmly entrenched in a tight seasonal trading range. Some holiday profit taking took place yesterday which has temporarily pressurized the yellow metal ascent. Gold year-to-date has climbed 25%, reaching a new record of $1,227.50 earlier this month. Even with all the noise and volatile movements in other asset classes, the commodities pull backs continue to remain a strong buying opportunity ($1,096).
The Nikkei closed at 10,378 up +194. The DAX index in Europe was at 5,955 up +24; the FTSE (UK) currently is 5,344 up +50. The early call for the open of key US indices is higher. The US 10-year bond backed up 10bp yesterday (3.71%) and are little changed in the O/N session. The fear that an accelerating US economic recovery will fuel inflation has dampened the demand for government debt. With more supply coming down the pipeline, tomorrow Treasury announces 2Ã¢â‚¬â„¢s, 5Ã¢â‚¬â„¢s and 7Ã¢â‚¬â„¢s allotted issues for next week, should pressurizes prices even further. The 2Ã¢â‚¬â„¢/10Ã¢â‚¬â„¢s spread has widened out to 280bp, the largest gap in 7-months. Many analysts are now throwing their weight behind the idea that 10-years will yield 4% by end of next year.
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