The dollar is stuck in ‘no-mans land’

‘Between the years’ is how some analysts describe this week of trading. This tends to be another shortened holiday week where some of the currency movements make little sense. Seasoned traders are happy to make the ‘turn’ with minimum fuss. Liquidity issues will remain. This month has seen only ‘one way traffic’ and that’s been in favor of the dollar. Technically, the directional move has been over done, on a macro-perspective, little has changed, be weary of dollar bears wanting to have a ‘punt’.

The US$ is stronger in the O/N trading session. Currently it is higher against 12 of the 16 most actively traded currencies in a ‘subdued, yet illiquid’ trading range.

Forex heatmap

With the UK and Canada on extended holidays today and North American travel tailgated, this session with lack participation, even despite the week that’s in it. There is no data to chew on today, however, expect the US 2-year auction to be the highlight of the day. There are +$44b notes on offer and with the curve shifting aggressively this month it will be interesting to see what the demand is like. Technically, the shorter end of the curve should be absorbed easier than the 7’s on Wednesday. This week is a good time to get caught up on year-end reading.

The USD$ is currently higher against the EUR -0.02%, CHF -0.02%, JPY -0.12% and lower against GBP +0.04%. The commodity currencies are stronger this morning, CAD +0.07% and AUD +0.29%. The loonie managed to strengthen during last week’s Christmas shortened week pushing the currency to it highest print vs. its southern neighbor in 3-weeks. In fact, the loonies strengthened against all 16 of its largest trading partners as Canadian GDP gained for a second straight quarter. Elevated commodity prices and robust equity indices have kept the loonie in ‘demanded’ territory. It has rallied higher on speculation that stronger domestic fundamentals warrant the BOC 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 than next May. 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 higher in the O/N session on the back of stronger commodity prices. However, some investors are speculating that stronger US economic data will warrant the Fed to hike rates ‘sooner that later’ and interest differentials will pressurize the AUD. 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 temporarily remains under pressure despite stronger fundamentals and commodity prices with investors continuing to look for better levels to sell it (0.8882).

Crude is higher in the O/N session ($78.27 up +22c). By the end of last week, crude managed to roar higher on the back of stronger fundamentals, a weaker weekly inventory report and an illiquid market that influences price gyrations. Will the bullish move be sustainable as we head into another holiday shortened week? Various surveys again expect inventories to be lower this week and this scenario should only support prices. Crude inventories fell -4.84m barrels to +327.5m last week. This month alone we have witnessed inventories plummet -3.6%. Digging deeper, last weeks report was even more bullish for prices. Distillate fuel (heating oil and diesel) slipped -3.03m barrels to +161.3m, the biggest decline in 8-months. Gas stockpiles fell -883m barrels to +216.3m. It’s worth noting that this was the first drop in a month and a half. Imports of the black stuff fell -0.8% to +7.71m barrels a day and the lowest level in 15-months. The trend of demand and consumption continues to climb. Gas demand averaged +9.05m barrels a day, w/w, that’s +2% higher than a year ago, while consumption of distillate fuel averaged +3.99m barrels a day, +5.2% higher w/w. Volume remains light because of the holidays, which makes it easier to move the market. For the moment the ‘reserve’ currency will dictate the direction of commodity prices, however, fundamentally we cannot ignore last week’s weaker inventory report. One should expect the black stuff to be better bid on pull backs until the New Year.

Gold rose the most in a week on Thursday when the dollar started to wilt and boosted the demand for the ‘yellow metal’ as an alternative investment. In this morning’s session, the commodity again has started with a bid. The greenback managed to pare just under a ½% vs. its G7’s member currencies last week and is treading water this morning. Month-to-date, the commodity has depreciated just under 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? For now, the metal seems to have found some support. Not unlike other asset classes, this month’s holiday swings have been somewhat overly exaggerated ($1,111).

The Nikkei closed at 10,634 up +139. The DAX index in Europe was at 6,002 up +45; the FTSE (UK) currently is 5,402 up +30. The early call for the open of key US indices is higher. The US 10-year bond backed up another 6bp since Thursday (3.80%) and another 4bp in the O/N session. The US curve remains under pressure with 10-yrs printing a 4-month high yield on the back of strong US home data last week. The fear that an accelerating US economic recovery will fuel inflation has dampened the demand for government debt and pushed the 2’s/10’s spread out to 286bp. With more supply coming down the pipeline this week, 2’s (today-$44b), 5’s (tomorrow-$48b) and 7’s (Wednesday-$32b) should pressurizes prices even further. Many analysts are now throwing their weight behind the idea that 10-years will yield 4% by end of next year and that the curve will continue to steepen. 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