Dollar Supported by Double-Dip Threat

Even the strongest IFO reading in Germany in two years (95.8 vs. 94.6) has done little do dissuade dumping the EUR this morning. Economic proof that Britain has emerged from its longest recession on record has not stopped traders from selling the pound (GDP +0.1% vs. -2%). With Japan’s sovereign rating outlook cut to ‘negative’ by S&P’s, citing diminishing policy flexibility, has empowered the dollar, as investors seek sanctuary. With Greece placing 8b EUR 5-year paper up for auction (4-times oversubscribed), at a whopping +30bsp premium, will only increase the country’s funding costs. Again, this will not be good for the EUR. Is this the second coming of a double-dip? The dollar has momentum and it not for its ‘strong economics’, flight to surety is dominating trading.

The US$ is stronger in the O/N trading session. Currently it is higher against 14 of the 16 most actively traded currencies in another ‘whippy’ trading range.

Yesterday’s US existing home sales print was certainly a large pill to swallow. Analysts are advising us to look beyond the Dec. re-sales numbers. But, sales plummeting -16.7% in the month is too big a number to ignore (+5.45m vs. 6.54m). Digging deeper, one notices that both single and family-unit sales were down by double-digits. On the bright side, analysts expect this print to be only temporary and expect a rebound in the Jan. numbers. There are a couple of reasons to support this theory. Firstly, there was uncertainty last month over whether the first-time homebuyers’ incentive program would be extended past the Nov. deadline. That month’s uptick was due to many wanting to take advantage of the program. However, in the end, the program was both extended and expanded to Apr. this year. The market should anticipate future demand to be brought forward once again, leading to both an improvement in Jan. and an upsurge in spring. Secondly, and probably providing the biggest impact, long term yields. Now that yields have fallen again this month, this should pressurize 30-year mortgage rates and by default should lead to another uptick in MBA mortgage applications. Month-to-date and w/w, application numbers have been positive. The re-sales print had a major impact on months’ supply, pushing it up from 6.5 to 7.2, despite a further decline in inventories. More importantly, shadow inventories are not included. They would have pushed the month’s supply much higher. Looking at some of the sub-categories, single-family starts plunged -16.8%, while condos dropped -15.4%, m/m. Both the median and average prices advanced after declining slightly in Nov. Finally and on a more positive note, the report annualized released results led to a +4.9% gain in re-sales (first positive print in 5-years). A strong fiscal stimulus program coupled with low rates and weaker foreclosure-induced prices contributed to the turnaround in the re-sale annualized print.

The USD$ is currently higher against the EUR -0.47%, GBP -0.02%, CHF -0.44% and lower against JPY +0.25%. The commodity currencies are weaker this morning, CAD -0.34% and AUD -0.92%. With global equity indices and commodity prices fluctuating yesterday happened to push the loonie to print a new monthly low. After experience a -3% drop last week vs. its largest trading partner, all on the back of a vocalized Governor Carney expressing his concerns of a strong domestic currency’s role on future growth, had futures traders paring their bets on when interest rates hikes would occur. Similar to the Fed’s policy, rates will remain low for an extended period of time. Technically, the currency is underperforming in the crosses and this is directly pressurizing the loonie. The market seems to be caught long the CAD and is eager to pare some of these positions. Depending on equities and commodities, any CAD rally will have investors looking to sell some of their long positions. In the short term, analysts believe the CAD is still overvalued and are targeting 1.0750 as achievable.

The AUD fell in the O/N session and is threatening to break through its three-week low on speculation China will tighten monetary policy. It was reported that the PBOC again will ask domestic lenders to raise their reserve ratios. With regional bourses accelerating their losses, has reduced the demand for higher-yielding assets. Any hint of Chinese tightening will always be a negative on the Australian economy and commodities. Earlier in the session and similar for all riskier assets, the belief that Bernanke would get a second term was initially positive for growth currencies. Stronger Australian fundamentals have traders increasing their bets that the RBA will keep raising interest rates. They next meet on Feb 2. With the Australian economy well into a recovery phase, there is added pressure on Governor Stevens to increase the O/N borrowing cost to 4% for a fourth straight meeting (0.8974). Despite this expect commodities to continue to trade under pressure dragging the AUD with it.

Crude is lower in the O/N session ($74.49 down -79c). A number of factors continue to keep oil prices well contained. The commodity has clawed its way back from a four-week low despite last week’s EIA report revealing that refineries have slashed their operating rates as fuel demand declines. A declining dollar has ‘tempered the commodity selling for now’ driven by concerns that China will raise interest rates to mop up some of their excess liquidity. With North American bourses finding traction yesterday, the possibility of a stronger greenback temporarily heightened the appeal of commodities for hedging inflation. Last week, plants were running at +78.4% of capacity w/w, the lowest run rate in 16-months. Also negative for the commodity was the market having to deal with another weekly build up of gas supplies (the highest level in 22-months). Fuel use over the past month fell -1.8% from a year ago. Gas stocks rose +3.95m barrels to +227.4m last week vs. an expected climb of +1.75m barrels. Inventories of crude fell -471k barrels to +330.6m vs. a forecasted rise of +2.45m barrels. The EIA report was another consecutive bearish report highlighting the strength of ‘demand destruction’. Even China’s stellar growth numbers have had a minor positive impact on the commodity class. There are concerns amongst analysts that the ‘increasing demand in China and emerging markets will not be strong enough to offset declines in the other countries’ and technically may push the commodity down to the $70 level as the continual build up of stocks will give further support to the ‘bears’. Let’s see what tomorrow’s inventory reports have in store for us and in the meantime follow the dollar.

From last week’s lows, the metal has rebounded as traders speculate that a weaker dollar will boost the appeal of the precious metal as an alternative investment. The market is expected to remain contained until we get more clarity on interest rates (FOMC today and tomorrow) and the direction of the dollar. To date, the commodity has been top heavy with ‘one direction lemming buying’ after last years 24% rally. During the same period, the dollar has only fallen -8.5%. After last week’s -3.5% trading loss, any liquidation of the metal with momentum will have nervous investors seeking an early exit. With the EUR remaining vulnerable and the dollar the ‘go-to’ currency, expect to see selling on upticks for the time being ($1,092)

The Nikkei closed at 10,325 down -187. The DAX index in Europe was at 5,606 down -25; the FTSE (UK) currently is 5,238 down -22. The early call for the open of key US indices is lower. The US 10-year note backed up 2bp yesterday (3.62%) and have eased 5bp in the O/N session (3.57%). Treasuries initially came under pressure after temporarily printing medium term lows when investors speculated that US government reports this week will reveal that the economy grew at a faster pace in the fourth quarter. However, despite a plethora of product coming to the market, yields have fallen to a one-month low, as Asian stocks declined, Japan’s credit outlook was cut by S & P’s and concern deepened that China will step up measures to cool economic growth. Treasury will auction off a record tying $118b notes and bonds this week ($44b 2’s today, $42b 5’s on tomorrow and $32b 7’s on Thursday). The pessimistic view that the rate of recovery may be losing momentum continues to find buyers on deeper pull backs.

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