Yield for a Stronger Dollar

How do US 10-year notes back up to 3.27% after last weeks NFP number? Even Moody’s comments on the US Tax cuts and their concerns on the long term US rating outlook not being addressed seems to have been ignored in the wave of optimism this week. The markets focus again today will be dominated by yields, the reopening of the 30-year bond and initial jobless claims. Dealers and investors are searching for reasons to reverse the selloff in US treasuries triggered by Obama’s new proposed stimulus measures. If jobless claims come in close to market expectation of +410k, the data should offer limited opportunities for any pull-back in yields, keeping the dollar well supported.

The US$ is stronger in the O/N trading session. Currently, it is higher against 13 of the 16 most actively traded currencies in a ‘whippy’ trading range.

Forex heatmap

The market anticipates the BOE to remain on hold at +0.5% at today’s MPC meeting. The unchanged voting pattern in the latest minutes suggests a very low likelihood of a change in their policy stance. Finally we get some data to chew on in the US, moves have been volatile this week, dominated by the FI asset. As we approach the weekend, attention will shift towards China and the possibility of the PBOC tightening monetary policy after they brought forward their inflation releases to Sat. We may be facing a ‘new ball game’ come Monday morning.

The USD$ is higher against the EUR -0.39%, GBP -0.27%, CHF -0.15% and lower against JPY +0.09%. The commodity currencies are mixed this morning, CAD -0.07% and AUD +0.39%. Despite Canadian Housing starts surprising the market yesterday, the loonie has managed to give up some of its recent gains, as commodities underperformed and the dollar index surges. Housing starts rose this month for the first time in four months (+11.6%) in Canada, to a seasonally adjusted annual pace of +187.2k from a revised +167.8k rate in October. The loonie is again within striking distance of parity as the currency slowly gains traction on the crosses on global optimism in response to Obama’s tax-cut continuation. The market also expects further support from the Russian Cbank converting approximately 1-2% of total reserves into loonies. The currency outright wilted slightly from Governor Carney’s comments after the BOC sat on the fence and kept rates on hold earlier this week. They have been careful not to say too much until it has updated its economic outlook. Carney acknowledged that economic growth in the second half of this year has been weaker than previously anticipated and expressed concern about the expected recovery in net exports (that’s a strong loonie problem). The market has taken this as a dovish sign. Futures traders are pricing out the possibility of any monetary stimulus in the first two quarters of 2011. The market is also focusing on what China may do after the release of its inflation numbers this Saturday.

Much stronger than expected Aussie employment data blew all analysts expectations out of the water, pushing the currency higher in the O/N session. Total employment rose another +54.6k last month vs. market expectations of +20K. Year-to-date, the Australian economy has added just over +425k new jobs. Digging deeper, all the new jobs came from the full employment category, providing further strength for the report and dragging down the unemployment rate to +5.2% from +5.4% month-over-month. Analysts are beginning to agree that with the tight labor market it will bring the RBA back into the picture. They will need to tighten rates in the first half of next year to contain inflation, but agree that Governor Stevens is not behind the curve just yet and will not be required to hike rates in February. With consumers boosting their savings significantly in an environment of rising job and wage growth, suggests that the RBA is still ahead of the curve. Governor Stevens has also mentioned that rates are ‘appropriate’ for the economic outlook. Investors remain better buyers on dips, planning an assault on parity again (0.9839).

Crude is higher in the O/N session ($88.32 +4c). Crude prices continue to fall, retreating from a two-year high, as the ‘buck’ increases against its major trading partners, curbing the investment appeal of commodities as an alternative investment. Not aiding the commodity was this weeks EIA inventory report showing an unexpected increases in gas and distillate fuels stocks. Gas inventories rose +3.81m barrels to +214m last week vs. a forecasted fall of-300k barrels. Supplies of distillates (heating oil and diesel) climbed +2.15m barrels vs. an expected decline of-900k barrels. The increase in these categories confirms there is nothing wrong with supply, but the demand picture is not that strong. The headline inventory crude print fell -3.82m barrels to +355.9m. Supplies were forecasted to drop by -1.4m barrels. The market seems to be also pricing in the possibility of a tighter Chinese monetary policy. If the PBOC raise rates too much it could have a big affect on oil demand and a strong reason for OPEC to put off making any changes at its upcoming meeting.

The strong dollar and the outlook for a more robust economy as well as better yielding treasuries have hurt gold. It has fallen $60 from its highs this week and continues to search for a place to attract buyers. It was only natural to see some profit taking after gold surged to a new record on Monday ($1,432.50). With another year end upon us, the one-directional trade will continue to see paring of positions before we make the turn. Even with the dollar strengthening, the commodity remains supported by the persistent concern over Euro debt levels. To date, debt contagion has driven investors into the third ‘reservable’ currency as they seek a store of value. Despite the fear that China will tighten their monetary policy next year, a move to curb speculation and dampen inflation, global demand remains robust. Even though the one direction lemming trade seems to be overdone, investors continue to hold gold as a hedge against currency debasement and long-term inflation. The Euro-zone backdrop will put a floor on gold prices on demand for a haven. Year-to-date, the metal is up + 26% and is poised to record its 10th consecutive annual gain ($1,383 +70c).

The Nikkei closed at 10,285 up+54. The DAX index in Europe was at 6,964 down-11; the FTSE (UK) currently is 5,802 up+8. The early call for the open of key US indices is higher. The US 10-year backed up 9bp yesterday (3.27%) and has eased 3bp in the O/N session. The US yield curve has shifted aggressively higher this week, recording the highest yields in eight months after the Obama administration decide to extend the Bush-era tax cuts for another two years and as dealers took down the second to last of this weeks $66b of new product. The US government is to help boost economic growth but expand the deficit, both of which are negative for rates. These higher yields point to higher costs and certainly defeats Bernanke’s objective at the moment. The tax-cuts suggest that helicopter Ben’s stimulus package will probably ‘not’ require any increases in nominal note and bond sizes in the near term, but there is always that fear. Yesterday’s $21b 10-year auction was sold at a yield of 3.34%. The bid-to-cover ratio is 2.92, compared with the average of 3.13 from the past eight auctions.

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