Reasons or Excuses to Own Some Dollars

The reasons to own the dollar continues to pile like dirty laundry. Eventually you will have to deal with it. The buck, this morning, is broadly stronger against the rest of the world, as popular carry trades continue to correct lower.There is no obvious macro driver for that move, though mixed Australia jobs numbers, a weaker Swedish IP number and softer Norwegian CPI have contributed to the carry corrective tone. Thrown in the concerns about Egypt, the PBOC’s decision to fix USDCNY higher, cautious comments from RBA’s Stevens and a BOK leaving rates on hold are seemingly weighing on global sentiment. Let’s not forget the Euro-peripheries, Portugal is back on the radar, and leads in the insurance stakes, the cost of insuring European government debt against default. This morning’s US Consumer confidence is expected to strengthen further and potentially reach an eight-month high. There is the US yield curve, that looks attractive. Finally, add a ‘little’ weekend insurance premium and you have a dollar recipe.

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

Finally, weekly claims fell south of +400k. It managed to print a 30-month low yesterday (+383k vs. +419k) and extended its declines for a second consecutive week. Over the recent months initial jobless claims have been volatile, alternating between flirting with the +400k mark and adding +40-50k to those levels. The less volatile 4-week moving average corrected back to its mid-January level of +415.5k. It’s worth noting that the US east coast count did not seem to be distorted by the heavy snowfall. Digging deeper, continuing claims (+3.88m down-47k) and the extended benefits (+879k down-16k) subcategories experienced declines. It was the +100k gain in the emergency benefits category (+3.57m) that provided a strong offset. This would suggest that more individuals, Americans who are struggling to find a job, are entering the final stage of unemployment benefits. It’s worth noting that both the extended and emergency series are not seasonally adjusted and lag a week behind continuing claims.

The USD$ is higher against the EUR -0.58%, GBP -0.33%, CHF -0.21% and JPY -0.29%. The commodity currencies are weaker this morning, CAD -0.22% and AUD -0.65%. The loonie has advanced for the first time in four-days vs. EUR as Canada’s new home price index rose for a fifth consecutive month (+0.1%) and US weekly claims fell to the lowest level in 30-months yesterday. It has been a different story vs. its largest trading partner. At one point yesterday, the loonie dropped to a new weekly low against the dollar as the extra yield investors received to hold 10-year product instead of Canadian debt was within three basis points of the highest this year (+22bp). Governor Carney expects the Canadian housing sector to eventually become a drag on economic growth this year. Housing investment has slowed after the government ended temporary stimulus measures. This weeks CAD buying interest, influenced by the strong jobs report last Friday, have moved up their selling interest levels as the currency underperforms against the dollar. With the Euro-peripheries back in the picture we may be back to less risk more safe heaven, until then, expect CAD to outperform on the non-U.S. dollar crosses. Against the dollar, better sellers have appeared above parity (0.9975).

The AUD is trading below parity for the first time this month, mostly on the back of RBA Governor Stevens stating in his testimony to parliament O/N that market pricing of no rate hikes until late this year was reasonable and that the RBA is ahead of ‘the game’ and can afford to stay on hold for the time being. Market pricing for rate hikes over the next 12-months fell 4bp to +34bp. Analysts note that with futures dealers interpretation, combined with such a clear message from Stevens, still leaves the rates market vulnerable to the weaker data on lending and consumption over the next few months. The market does not expect the RBA to turn outright dovish as the market continues to price in rate hikes later this year. Already this week the AUD has reacted negatively to a mixed employment report, a Chinese rate hike, Mubarak refusing to step down, all reasons that have forced the liquidation of the weak long carry trades who had been influenced by the market pricing for RBA rate hikes. Dealers remain better sellers on upticks as we head into the weekend (0.9978).

Crude is higher in the O/N session ($87.14 +0.41c). Oil remains better bid on continued uncertainty about Egypt and fear that crude supplies from the Middle East may be disrupted. Analysts note that approximately +3.5% of global oil output moves through Egypt by way of the Suez Canal and the Suez-Mediterranean Pipeline. The value of the Yuan is also aiding commodity prices. After reaching a 17-year high vs. the dollar it is making it much cheaper for them to acquire ‘their’ coveted commodities. This weeks EIA report revealed no surprises. Both crude and gas stocks happened to edge higher last week. Oil inventories increased by +1.9m barrels to +345.1m and analysts note that stocks remain above the upper limit of the average range for this time of year. It was a similar story with gas. Inventories moved up by +4.7m barrels after increasing by +6.2m in the prior week, and are above the upper limit of the average range. Crude imports averaged +8.9m bpd last week, down by-105k per day. Over the last four weeks imports have averaged +9.1m bpd, which were +783k barrels above the same four-week period last year. Distillate stocks rose +288k barrels to +164.3m, compared with projections for a +1.2m draw. Refinery utilization rose +0.2% to 84.7%. Fundamentally there is far more oil in storage, more fuel capacity and more idle oil wells to limit a much stronger market rally. However, the market now expects Egypt to keep upward pressure on the commodity. The fear of a reduction of supply will always overextend the commodity’s price.

Uneasiness in the Middle-East continues to provide support for gold, the commodity that every investor hated last month has found strong support on this weeks pull back. Prices have climbed to a three-week high on demand for a hedge against rising consumer prices after China increased borrowing costs earlier this week on expectations that their inflation has expanded at the fastest pace in two and half years. The commodity is being used as a store of value. Last year the commodity appreciated +30%. So far this year, natural physical buying has been less than modest with the commodity off to its worst start in 14-years. Has the commodity peaked or is it simply a short-term correction? The commodity is attracting technical buyers after rallying above its 20-day moving average. On deeper pullbacks, the metal should remain better bid on speculation that currency volatility will boost demand for a safe heaven investment once the Euro contagion fears raise its ugly head again over the coming weeks during the Euro-periphery refunding season ($1,361 -60c)

The Nikkei closed at 10,605 down-12 (holiday). The DAX index in Europe was at 7,318 down-20; the FTSE (UK) currently is 6,000 down-21. The early call for the open of key US indices is lower. The US 10-year backed 3bp yesterday (3.68%) and eased 2bp in the O/N session (3.66%). Treasuries have been trading soft as US weekly claims fell to their lowest level in 30-months and on the back of dealers taking down the last of this week’s $72b auctions, the $16b 30-year bonds. The issue was soft with a 1bp tail. Non-dealers took just over half the issue and the auction had a 2.51 bid-to-cover ratio compared to an average of 2.62 seen in the previous month. The duration and risk of the security made dealers more defensive, hence the concession unlike the strong 10-year issue. These higher yields continue to support the dollar and are pressurizing mortgage rates, pushing them to a 10-month high, reducing affordability for homebuyers as the housing market struggles to recover from depressed levels. Now we are back to pricing in weekend premiums.

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