US Dollar Bear Cycle Has A Ways To Go

The pace of USD weakening has quickened in this holiday shortened trading week. With the Fed expected to be on hold for the remainder of the year, despite ECB hikes and the US budget again being a market concern, this dollar bear market potentially still has someways to go.

Analysts note that the last dollar bear market between 1985 and 95 implies that the buck has ‘approximately-2% further to fall to match its depreciation at the same point in the bear cycle’ and ‘-14.9% further to fall to ‘match the maximum depreciation from the peak’.

Some of this weeks market moves have been somewhat exaggerated because of the lack of liquidity, but, the dollars intention remains the same, and that is to underperform against nearly everyone except Yen.

The US$ is weaker in the O/N trading session. Currently, it is lower against 15 of the 16 most actively traded currencies in a ‘volatile’ session.

Forex heatmap

More mixed signals from the US housing sector was to be had yesterday. Sales of existing homes rose slightly last month (+3.7% to a seasonally adjusted +5.10m), but prices remain weak. The median sales price for an existing home was $159k, down -5.9% from the revised year-ago median. The inventory of previously owned homes climbed last month to +3.55m, a +8.4-month supply at the current sales price. Earlier this week the NAHB said its housing index dropped this month, a sign of slipping confidence in the industry and other revealed that US home construction remains relatively weak. The big issue is that builders and sellers are competing with a large inventory of foreclosures.

The USD is lower against the EUR +1.06%, GBP +0.22%, CHF +0.75% and higher against JPY -0.20%. The commodity currencies are stronger this morning, CAD +0.40% and AUD +1.19%.

The greenback is being dumped, and in favor of higher yielding growth assets, pushing the loonie to print a fresh three-year high as investor’s embraced risk and covet commodities. Domestic numbers so far this week have also aided the CAD.

Inflation data beat all analysts expectations, even the BoC’s target set out just last week in its monetary policy report, marking the biggest monthly headline gain in 20-years (+1.1%) and the largest annual advance in nearly three-years (+3.3%). Last week Governor Carney dampened expectations of a rate hike with a dovish slant on the currency’s value (+4% outright gain this year) creating ‘headwinds’. The market does not seem to heed his warning, pricing a tightening bias for the July BoC meeting.

After the reports the loonie has advanced to its 2007 year highs outright, and has technically run into resistance profit around 0.9450-00 option protected level.

Expect investors to covet the loonie as an alternative to the EUR and the dollar on pull backs, assuming their risk appetite remains the same. This morning we get Canadian Retail Sales, the last piece of data before the long weekend (0.9475).

The AUD has rallied to a post-1983 float high this morning after their PPI rose more than analysts expected for the first quarter (+1.2% vs. +0.1%), further proof that growth is quickening. Outright, the currency has appreciated +16% over the last year. Earlier this week, the antipodeans witnessed a stronger terms of trade, where export prices rose +5.2%, q/q, in the first quarter, while import prices rose +1.4%, q/q. Analysts note that these gains largely reversed falls in fourth quarter and pushed up Australia’s terms of trade to close to their 2008 and 2010 highs. The data will give the RBA more reason to raise interest rates (+4.75%).

The RBA seem comfortable with interest rates at the moment, as highlighted in the released minutes this week. The Governor viewed his policy setting as appropriate, saying they will ‘look through’ higher inflation and slower growth stemming from natural disasters. ‘Headline inflation was likely to be quite high in the March quarter, while GDP would be held down, to a greater extent than earlier assumed’. It’s expected that the RBA will want to see more data that’s not so distorted by weather, which may take some time to come through, before moving on rates again.

Australian yields are still the highest in the G10 and do look attractive. The expected mix of trade surpluses and rising capital inflows should provide support for the currency on any pullbacks (1.0765).

Crude is higher in the O/N session ($111.80 +35c). Oil prices continues to be well supported as the dollar underperforms and on optimism that the global economic recovery is accelerating. The weekly EIA report is also supporting higher prices.

Supplies of crude fell -2.32m barrels to +357m last week (the first drop in three months). The market had forecasted a stock increase of +1.3m barrels. Gas inventories fared no better, falling -1.58m barrels to +208.1m (the lowest level in five-months). Stocks were expected to decline by -1.75m barrels. Year-to-date, crude has rallied +20%.

Last week the IEA said it maintains its 2011 global oil demand growth forecast but noted that the high oil prices are beginning to dent demand growth based on its preliminary data for January and February. Both the IEA and IMF have said that prices above the $100 watermark are beginning to hurt the global economy.

Saudi Arabia stated that because of weak demand had forced it to reduce its crude output. Saudi’s Oil Minister al-Naimi said that the global ‘market is oversupplied’ with crude, forcing them to cut output last month by more than +800k barrels a day. OPEC said the group is unlikely to alter output targets when it meets in June as there is ‘no shortage of oil anywhere in the world’ even after supply curtailments in Libya.

Gold has raced to another record, breaking the psychological $1,500 mark, as investors sought to guard against inflation. The day before’s reason was on speculation that the sovereign-debt crisis in Europe will worsen. Investors have a multitude of excuses to choose from to want to own commodities. Even the dollars demise could be included.

Fundamentally, prices are supported on speculation that record-low interest rates will encourage demand for an inflation hedge amid expectations that the Fed will maintain its accommodative monetary policy in the medium term. Gold, as a non-yielding asset, has a higher opportunity cost when interest rates rise.

The precious metal has become the currency of choice despite Goldman recommending last week that if one owned commodities, the risks outweigh any further potential gain. The metal has jumped +30.5% in the past year.

The metals bull-run is far from over with investors continuing to look to buy the commodity on dips. Any price pullbacks are viewed as favorable opportunities for investors to continue to diversify into safe-haven assets, especially metal being used as a store-of-value ($1,508 +$9.30c).

The Nikkei closed at 9,685 up +79. The DAX index in Europe was at 7,286 up+38; the FTSE (UK) currently is 6,026 up+4. The early call for the open of key US indices is higher. The US 10-year backed up 3bp yesterday (3.41%) and is little changed in the O/N session.

FI prices declined for the first time in four days as investors sought higher-yielding assets, sending global equities higher, and a measure of trader inflation expectations approached the highest level in three years.

It’s interesting that yields have not aggressively risen despite the general appetite for risk. It seems that European periphery debt issues continue to trump a cut in the US credit rating earlier this week.

With a holiday shortened trading week, the market can expect 10’s to trade in a tight range (3.48-3.33%) until liquidity picks up again.

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