The dollar maintains its holiday edge

Despite all the fundamental data to be reported over the next 2-days, most traders’ have closed their books. Price action is expected to be choppy and erratic with poor liquidity for the remainder of the year. This month has rejuvenated the dollar ‘bull’ as capital markets price out its ‘funding’ currency theme. Next week’s US treasury refunding requirement ($118b 2’s, 5’s and 7’s) will probably be the highlight of the week. It will be interesting to see what foreign demand is like and how messy a holiday auction can become. Will we have a failed US auction by Mar?

The US$ is weaker in the O/N trading session. Currently it is lower against 11 of the 16 most actively traded currencies in a ‘subdued, yet illiquid’ trading range.

Forex heatmap

Yesterday’s US data was a mixed bag of results. GDP was revised lower yet again. The final pass (GDP is reported in advance, preliminary and final reports) for 3rd Q real-GDP growth unexpectedly fell from +3.5% (advance) all the way down to +2.2%. The downward revisions did little damage to consumption, however all other sub-categories took it on the chin. These deep downward revisions leave the market susceptible to ‘upside’ surprises for the 4th Q. Digging deeper, in the final report, consumer spending only missed its expectation target by a tick (+2.8% vs. +2.9%). Investments were revised much weaker, tumbling from an original estimate of +11.5% to +5%, this covered the whole spectrum of investments, even residential investment were revised lower again. The initial growth of +23.4% in the advance report was lowered to +19.5% in the second take, and now sits at +18.9%, q/q, growth. Net exports were slightly worse than previously estimated (deficit of -$357b vs. -$348b), as export growth was revised a bit lower and imports higher. On the optimistic side of the equation, US sales of existing homes last month jumped to its highest level in 3-years as first-time buyers continued to take advantage of a government tax credit and lower prices. Purchases increased +7.4% to a +6.54m annual rate vs. an expectation of +6.29m. It’s all about the health of the US housing market. It’s probably the strongest variable that will convince the masses that the worst is truly over.

The USD$ is currently lower against the EUR +0.03%, CHF +0.00%, JPY +0.03% and higher against GBP -0.15%. The commodity currencies are mixed this morning, CAD +0.22% and AUD -0.10%. The loonie again yesterday, for a second consecutive day, was the strongest of the G7 currencies. It rallied higher on speculation that stronger domestic fundamentals warrant the BOC will have to hike rates sooner than anticipated. It’s not surprising that Governor Carneys policy of timing may be going step ‘n step with the Fed’s. Year-to-date the currency is up 16% and the Canadian futures market is starting to price in rate hikes sooner. Up until this week the loonie had 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 ‘this’ 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.

The AUD is little changed this morning despite traders want to pare their position in high yielding assets just before year end. Some investors are speculating that stronger US economic data will warrant the Fed to hike rates ‘sooner that later’. The RBA believes its monetary policy is ‘now back in the normal range’ after lenders raised business and home-loan rates by more than the RBA themselves have increased (+3.75%) the overnight cash rate target. Traders have aggressively pared bets that the Cbank was in a position to hike rates for a fourth consecutive time in Feb. The currency remains under pressure despite stronger fundamentals with investors continuing to look for better levels to sell it (0.8747).

Crude is higher in the O/N session ($74.69 up +45c). Yesterday, oil managed to crawl its way higher as the greenback pared some of its earlier trading session gains vs. G7 currencies and on signs that global economic strength is gathering momentum. Initially the black stuff fell on the ‘expected’ announcement from OPEC that they agreed to hold quotas at 24.845m barrels a day. However, all we have truly seen is technical buying on the dollar movements. Volume remains light because of the holidays, which makes it easier to move the market. This morning we get this week’s inventory report. Last week’s EIA release showed that inventories declined -3.69m barrels to +332.4m vs. expectations of a decline of only -2m barrels. 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. Demand destruction is healthy and the commodity prices remains range bound. For the moment the ‘reserve’ currency will dictate the direction of commodity prices.

Gold managed to print a 2-month low yesterday on speculation that this months dollar rally may reduce the demand for the ‘yellow metal’ as an alternative investment. Month-to-date, the commodity has depreciated just over 11% after printing a record high of $1,227.50 earlier in Dec. Strong US fundamentals has propelled the dollar 4% higher this month. Is this a seasonal or year-end move? Is the dollar ‘bullness’ sustainable? Temporarily the weak trend remains intact as speculators, friends and everyone’s mother are long the ‘yellow metal’ ($1,084).

The Nikkei closed at 10,378 up +194 (holiday). The DAX index in Europe was at 5,979 up +33; the FTSE (UK) currently is 5,367 up +39. The early call for the open of key US indices is higher. The US 10-year bond backed up 3bp yesterday (3.74%) and are little changed in the O/N session. The US curve remains under pressure with 10-yrs printing a 4-month high yield on the back of US Home sales beating expectations. 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, today Treasury announces 2’s, 5’s and 7’s (expected $118b) allotted issues for next week, should pressurizes prices even further. The 2’/10’s spread has widened out to 288bp, 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. However, short term technically we are approaching some attractive yields.

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