In December the dollar’s King

Currently there is little to write about as we approach the final two days in 2009. Traders and investors are happy to keep their powder dry until the ‘turn’. Last year on this day I penned this:

2008 is the Year never to be forgotten. It’s the year that brought global financial markets almost to its knees, the year that punished greed, leverage and irresponsible risk. A year that has managed to make some oligarchs much poorer and perhaps made us sit up and think about future society values a wee bit more. Brace yourselves for a historic 2009.

Again all we may have to do is change the dates!

The next 36-hours will be about year end requirements. This ‘flow’ driven trading is what most traders try to avoid. One should expect erratic, illiquid price movements that make very little sense. Fundamental and technical trading, as we know it, will begin again in the New Year.

The US$ is stronger in the O/N trading session. Currently it is higher against 14 of the 16 most actively traded currencies in a ‘subdued, yet illiquid’ trading range.

Forex heatmap

Finally, yesterday we got some US data to chew on. US Home Prices rose in Oct. for a fifth consecutive month, again adding support to the idea that at long last the housing market and economy are moving along the ‘path to economic’ recovery. The S&P/Case-Shiller HP index increased +0.4% (seasonally adjusted) vs. the previous +0.2% rise in Sept. Putting it another way, year-over-year, the index was down -7.3%, the smallest drop since Oct. 2007. This turnaround and somewhat stabilizing prices could be attributed to the tax credits for first-time buyers and mortgage rates close to record lows may inhibit the market from falling any further. With yearly prices been so low, we have witnessed sales jump +35% in the first 11-months. However, starting at such a low watermark, any strength can easily be impressive and distorting. On the flip side, shadow inventory, mounting foreclosures and a higher unemployment level could still very much impede future gains.

US consumer confidence advanced for a second straight month yesterday (52.9 vs. 49.5), as the pessimistic outlook about job losses seems to have waned slightly. Digging deeper, the consumer 6-month expectation actually increased to 75.6, the highest recorded level in two years. The ‘future’ gain outweighed the decline in the Present Situation Index, which happened to retreat from 21.2 to 18.8 this month (on top of its 26-year low). Somewhat disheartening, consumer expectations over wages declined. This may result in the further slowing to the spending pattern, even with government incentives. Remember, the consumer is the Fed’s go to variable. Uncertainty and pessimism about the US jobless rate exceeding +10% in the 1st H 2010 may force policy makers and retailers to maintain tax breaks and incentives to lure ‘constant’ buyers. The sub-category of ‘jobs are plentiful’ declined to +2.9% from +3.1%. While the individuals who said ‘jobs are hard to get’ actually fell +48.6% from +49.2%.

The USD$ is currently higher against the EUR -0.03%, GBP -0.12%, CHF -0.10% and JPY -0.09%. The commodity currencies are weaker this morning, CAD -0.39% and AUD -0.16%. The loonie ended yesterday little changed, despite appreciating temporarily to a new month’s high on the back of stronger commodity prices and some traders returning after the festive season. The currency continues to outperform 16 of its largest trading partners this month. Elevated commodity prices and robust equity indices have kept the loonie in ‘demand’ territory. Over the last two week’s especially, 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. Historically, the CAD performs well during the month of Dec. In the short term, be wary of speculators wanting to short the loonie after the fortnights tentatively over exaggerated gains. Better buying on pullbacks.

The AUD softened in the O/N session, trimming the biggest annual advance vs. the greenback in 6-years, as falling Asian equities has persuaded investors to shy away from higher yielding assets. Speculators have managed to snap a 5-day winning streak. Similar to most currency pairings, the markets lack direction because of liquidity constraints and low volume. 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 RBA was in a position to hike rates for a fourth consecutive time in Feb. Investors continue to look for better levels to sell despite elevated equity and commodity prices (0.8924).

Crude is higher in the O/N session ($79.01 up +14c). What has happened to crude over the past month? Prices have been rising even as the dollar climbs, they are rising even as interest rates are rising. There is no correlation and it can only suggest that the market is beginning to believe that global demand is rising. Forget the dollar. The demand ‘variable’ seems to be back on the table again. Crude remains better bid after Weather Derivates predicted that US demand will increase +6.7% this week due to the North American cold snap. The black stuff managed to rise for a fifth consecutive day yesterday, supported by last week’s surprisingly weak inventory report. Now that most Capital Markets are tentatively open, albeit with liquidity remaining an issue, the commodity will probably find stronger support on any pull backs until year end. Various surveys again expect inventories to be lower today. 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. Year-to-date, oil has climbed +76%, the largest increase in a decade.

Gold retreated for the first time in three days yesterday on the back of a strengthening greenback persuading investors to shy away from investing in the commodity as a hedging alternative to a weakening USD. The buck has managed to appreciate +3.4% this month, of course the million dollar question remains, is this month’s dollar strength sustainable and will it be repeated at the beginning of the New Year? As per usual, investors will be guided by the inverse relationship of the ‘yellow metal’ to the reserve currencies price movements. Month-to-date, the commodity had depreciated just under 12% after printing a record high of $1,227.50 early in Dec. Year-to-date, it has appreciated +25%, the ninth consecutive yearly gain. Not unlike other asset classes, this month’s holiday swings have been somewhat overly exaggerated on liquidity constraints ($1,093).

The Nikkei closed at 10,546 down -91. The DAX index in Europe was at 5,970 down -41; the FTSE (UK) currently is 5,417 down -21. The early call for the open of key US indices is lower. The US 10-year bond eased 5bp yesterday (3.80%) and are little changed in the O/N session. The US 5-year auction came in at 2.665% vs. the pre-auction levels of 2.655%. The bid-to-cover ratio was weaker than expected at 2.59 vs. Nov.’s print of 2.81 and Oct.’s 3.63%. However, it did match the average of the previous four auctions. Indirect bids (Primary dealers, Cbanks etc.) accounted for 44% vs. the 60.5% print in Nov and the 54.8% demand in Oct. Disappointingly it was well below the four auction average of 54.2%. Softening the blow was direct bids climbing to 13% vs. Nov.’s handle of 2.9%. Overall it was a so-so auction as the market had feared the worst. Today we get to see the final of the $118b worth of product to be issued this week. We should expect 7-years ($32b) to provide further concessions. Technically, these yields do look attractive.

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