Dollar loses its Swagger

What a little love between friends can achieve, a EUR that’s a damn sight stronger this morning. Euro leaders have decided to amend the Euro Treaty to make possible the creation of a permanent mechanism to aid troubled Euro-zone countries. The details are iffy, but translating political jargon, they will work on them as it’s in their common interest to have a strong stable currency. With Congress approving an extension of the Bush-era tax cuts, coupled with this morning’s stronger than expected German business Ifo survey has led to a cautious recovery in risk loving currencies. The dollar is loosing its swagger, these thin markets will have dealers hunting for short EUR stops just above this weeks highs.

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 ‘whippy’ O/N session.

Forex heatmap

Yesterday, we were fed some mildly better than expected US release followed by a Philly Fed headline that hit it out of the park. The jobless claims data continues its downward trend (+420k vs. +421k). Month-to-date, the monthly average is down -17.5k compared to the November release and has the market believing that the December NFP should be much healthier than last months. Initial jobless claims have retreated for ten of the past fifteen weeks. The less volatile four-week moving average has been moving lower since August (+422.8k) and currently sits at its lowest level in two years. The trend sits in prime position to want to breach that +400k psychological barrier sooner rather than later. The details of the report were not as strong. All the subcategories posted gains, reversing nearly all the previous month’s improvement. It worth noting that continuing claims data (+4.135m vs. +4.113m) lags behind initial claims by one week, and the extended (+0.977k) and emergency programs (+3.85m) another week behind that. Certain unemployment benefits for the long-term unemployed expired at the end of last month, and Obama’s Tax-cut proposal will include a thirteen-month extension.

The US housing sector will be a drag on fourth quarter GDP. We witnessed mixed reports for housing starts (+555k vs. +534k) and permits (+530k vs. 552k) yesterday. The details for starts were better than the headline gain as the data focused on single family homes (+6.9%). Housing starts averaged +588k in 3rd Q, and if we assumed a flat December print, then we should expect approximately a +544k print or a decline of -7.5%.  Analyst’s note that the rise in singles will mitigate some of the decline because of the higher value added involved in single home. With permits falling it would suggest further softness in the New-Year.

The Philly Fed headline print (24.3 vs. 22.5) comes with a warning, despite the headline being somewhat encouraging and confounding consensus expectations for a drop, it is the strongest reading on manufacturing conditions in five years. However, the details burst the bubble. The increase was due to a faster acceleration in prices paid and received. Digging deeper, seven of the nine subcomponents posted improvements, of which one experienced a decline (inventories) and one reentered growth territory (prices received).The hiring activity and shipments registered slower growth which was offset by the six-month index posting its fourth consecutive monthly improvement.

The USD$ is lower against the EUR +0.80%, GBP +0.01%, JPY +0.11% and CHF +0.68%. The commodity currencies are mixed this morning, CAD -0.06% and AUD +0.00%. The loonie continues to modestly underperform against its major trading partners despite the stronger fundamentals out of North America. Yesterday it happened to be commodity prices weighing on the range bounded currency. Stellar Canadian manufacturing data this week coupled with Cbanks interest to convert a portion of their reserves into CAD is supporting the loonie on dollar rallies. Manufacturing data posted a solid gain in both the headline (+1.7%) and details midweek, supporting last week’s strong export numbers. Analysts note that most of the subcategory gains flow directly into GDP. Do not expect Governor Carney to be swayed by the release when it comes to tightening monetary policy. The sustainability of the gains will always be questioned as the appreciation of the currency tends to have a lagging effect. The Governor has already indicated, in the October MPR, that net trade is expected to be a mild positive contributor to growth next year. Canadian policy makers will remain weary of Europe’s funding challenges, US growth risks and with benign domestic inflation worries, Carney will not be pressurized any time soon. This month the loonie has gained +1.8% outright vs. its largest trading partner. Gains in commodities, stocks and Euro contagion fears have made the loonie more attractive. The currency has only witnessed modest strength compared to other growth sensitive currencies as Governor Carney highlights the dangers of a persistently strong domestic currency. The loonie continues to struggle within striking distance of parity because of the strong corporate interest to own dollars there. Better dollar buying remains on dips.

It’s hardly believable, but the AUD is poised for another weekly gain outright as global equities advance and EU leaders agree to create a permanent crisis management system, boosting demand for higher-yielding assets. With risk back on, the currency can make another assault on parity. The currency had been trading under pressure outright as US Treasury yields climb, narrowing the yield advantage of assets down-under and on fear that China will act in answer to slow inflation, reducing the demand for growth sensitive and higher-yielding assets. Year-to-date, the currency has climbed +9.1% (second biggest winner after JPY), on prospects for commodity-driven economic growth and the yield advantage of the nation’s debt compared with other developed markets. Domestic data remains strong, this months employment data blew all analysts expectations out of the water and supports the currency on pullbacks. Not aiding the currency is the concerns for long dated interest rates in the US. Analysts are beginning to agree that the tight labor market will bring the RBA back into the picture, but believe 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 that 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 (0.9876). There has been interest to short AUD/CAD as a hedge vs. long gold trades.

Crude is higher in the O/N session ($88.05 +35c). Crude prices softened yesterday, as seasonal factors pointed to warmer weather over the holiday period. This week’s EIA report showed that the category of distillate fuel (includes heating oil and diesel) increased +1.09m barrels to +161.3m. This supply print will provide some bearish proof for the report, unlike the weekly headline print showing supplies plunging the most in eight years as imports tumbled and refineries bolstered fuel output. Stocks plunged -9.85m barrels to +346m last week vs. an expected decrease of -2.5m barrels. Also aiding prices midweek was imports falling-15% to +7.69m barrels, the lowest level in two years, and refineries operating at +88% of capacity, the most in three months. It’s worth noting that inventories along the Gulf Coast (where 50% of US refiners are located) fell -9.02m to +173.4m as the region levies taxes on year end supplies. The large draw down is mostly due to end of year inventory management at refineries or in other words cooking someone’s books. The black-stuff had previously garnered support from reports revealing that China’s refiners increased their processing rate last month. The world’s biggest energy consumer boosted their net imports of the black stuff by +26%, m/m, and increased their processing rates to ease a diesel shortage. Coupled with OPEC announcement to maintain their production quotas and the PBOC refraining from tightening monetary policy is supporting the market, probably to the year end at least. OPEC believes that supply and demand are ‘in balance,’ and expect demand growth will slow as the global economy struggles to recover, amid ample supplies. Technically, expect the market to meet resistance again at the $90 high printed earlier this month.

Being long the lemming gold trade has the weaker bulls tentatively worried after this week’s price action. Gold fell yesterday, the most in a week, on speculation that the dollar will extend its rally, eroding demand for the precious metal as an alternative asset. Investors are booking year end profits following a +26% rally this year. This weeks declines have taken the market somewhat off guard. It’s speculated that the selling has been caused by ‘year-end posturing, or even movements of large funds out of the market’. The stronger US data of late points to a recovering economy with a low inflation rate. However, thus far, the commodity remains supported on deeper pull backs by the persistent concern over Euro debt levels. For most of this year, debt contagion has driven investors into the third ‘reservable’ currency as they seek a store of value. Even though the one direction trade feels overdone, investors continue to hold gold as a hedge against currency debasement and long-term inflation. The Euro-zone backdrop is trying to put a floor on metal prices on demand for a haven. The commodity is poised to record its 10th consecutive annual gain ($1,376 +$5.40c). Technical analysts believe that gold will outshine other precious metal in 2011 and peak somewhere above $1,600 in 2012.

The Nikkei closed at 10,303 down-7. The DAX index in Europe was at 7,031 up+8; the FTSE (UK) currently is 5,901 up+21. The early call for the open of key US indices is higher. The US 10-year eased 3bp yesterday (3.42%) and is little changed in the O/N session. Treasury prices remain soft, pushing debt yields to a seven-month high, on stronger US fundamentals reducing the demand for safety. With the Senate passing the tax-bill and foreign investors beginning to cut their holdings of US debt as risk appetite improves has speculators seeking better returns elsewhere. Liquidity remains a premium as we enter the holiday stretch.

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