Dollar Negativity Remains Contagious

The mighty dollar selloff continued in Asia, throughout Europe and is now back to the Americas, with a number of crosses recording new record highs. Why? Because Ben has told us so, by the Fed confirming that their monetary policy is to remain ‘very expansionary’ for at least the next couple of quarters, allowing investors to focus on ‘carry and momentum’.

Technically, the dollar has further downside to go, except perhaps against the JPY. It seems that its only immediate savior is a renewed Euro-zone crisis. The technicals are again showing that most currency’s are in overbought territory now that many of the short term targets have been printed. The risk of a correction is rising in the dollars favor, however, there is no compelling reason to want to own the mighty buck. Maybe it will be left up to Central Banks to protest, just like the RBNZ did last night by stating that their currency strength was ‘unfavorable’.

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

Bernanke gave capital markets very little new information during the Q&A. He focused on defending the Central Banks policy. His comments are not going to change the perception of a dovish Fed or dent the positive global risk appetite view any time soon.

The FOMC statement indicated that the Fed will end its QE2 program as scheduled in June. Policy makes will closely watch inflation, thought the Fed believes the effects from rising oil prices are temporary.

In his press conference, Bernanke indicated that they plan to reinvest treasuries, even after they end the QE2 program, they view this as another form o policy easing (ending reinvestments can be considered the first steps of the a tightening cycle). They do not seem to be worried about the weakening in the dollar. They argue that by fulfilling its dual mandate, the Fed can cause a stronger recovery which will lead to a stronger dollar.

Ben indicated that the top priority is the debt situation and the Fed is encouraged by recent efforts on both sides, but it’s not a problem that can be solved in the short term. In the end, its more of the same with the same conclusion, few people want to hold the greenback.

Yesterday’s US durable goods report was solid on its details. New orders surprised to the upside in March (+2.5%) while February’s report was revised up substantially (+0.7% vs. -0.9%), leading to a positive gain in the first quarter (+2.1%).

Digging deeper, the heavy lifting was provided by business investment (non-defense capital goods ex-aircrafts) surging ahead in March (+3.7%), along with a further increase in vehicles and parts orders (+3.7%). However, business investment contracted for the first quarter as a whole, highlighting some resistance from US businesses to make large ticket investments.

Other categories showed that shipments advanced +1.8%, m/m (fifth consecutive increase) and inventories, but to a lesser degree than shipments, resulting in a decline in the inventory to shipments ratio (1.61). It’s worth noting that unfilled orders continue to advance, suggesting we should expect further increase in shipments down the road.

The USD is lower against the EUR +0.28%, GBP +0.17%, CHF +0.19% and JPY +0.63%. The commodity currencies are stronger this morning, CAD +0.22% and AUD +0.42%.

A surprisingly bearish EIA report released just before the FOMC announcement was able to pressurize crude pieces temporarily and by association push the loonie to test its weekly lows. The CAD negativity was also influenced by a recent poll that the Liberal party was being pushed into third place ahead of next week’s general election by the left wing NDP. An NDP-led minority government is a likely negative for the loonie, as their political mandate and agenda tends to be ‘a little less business friendly, a little less fiscal austere than under a Conservative majority’.

However, big picture, the currency is being supported by a broadly softer greenback, with an accommodating Fed policy. The market can expect the currency to underperform outright and on the crosses as we head closer to the May 2nd general election on event risk.

Fundamental reason have aided the CAD rise of late, but the speed of its rise has been somewhat over zealous, requiring a pull back from its four-year high print. Because of the stronger than expected domestic inflation data, the market has been pricing in a a rate hike for the July BoC meeting.

Expect investors to covet the loonie as an alternative to the EUR and the dollar, assuming risk appetite remains the same now that Bernanke has show his hand (0.9473).

The AUD has rallied to a post-1983 float high above 1.09 overnight after higher-than-expected Australian CPI-inflation in the first quarter has increassed expectations of the RBA hiking rates to contain inflation earlier than any hikes by the Fed. Earlier this week, data showed that Aussie inflation rose +1.6%, q/q, far higher than the consensus forecast of +1.2%, pushing the year-on-year rate to +3.3% from +2.7% in the fourth quarter. It seems that flood related food price spikes and higher oil prices drove the headline. However, the underlying inflation was also high, rising +0.9%, q/q to +2.3% from +2.2%, y/y in the fourth-quarter.

Currently, the RBA seem comfortable with interest rates as highlighted in the released minutes earlier this month. The Governor viewed his policy setting as appropriate, saying they will ‘look through’ higher inflation and slower growth stemming from natural disasters. It’s expected that Governor Stevens 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 as the currency marches towards 1.10 outright (1.0919).

Crude is little changed in the O/N session ($113.36 +36c). Recent Saudi, IEA and IMF comments have finally found some support after yesterdays surprisingly crude bearish report, showing weekly inventories gains exceeding even the most optimistic of forecasts. Inventories surged by the most in nine-months as imports increased. This week, the world seems awash with the black stuff despite the MENA supply constraints.

Weekly crude stocks rose +6.16m barrels to +363.1m last week. It was the biggest one-week advance since July 2010. The market was expecting a build of only +1.7m barrels. Crude imports rose +1.21m barrels to +9.23m. In contrast, gas inventories fell for the tenth consecutive week, -2.51m barrels to +205.59m, compared with expectations for a -1.1m drawdown. It’s worth noting that gas inventors fell in spite of domestic demand falling by -1.6% last month on a year over year basis. Finally, distillates (heating oil and diesel) dropped -1.81m barrels to +146.53m. Refinery utilization rose +0.2% to 82.7%. In reality, it looks like refiners have got to convert more of the oil into gas in the coming weeks.

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. OPEC said that they are 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 MENA.

Gold has resumed its upward trajectory and recorded new record highs on speculation that US policy makers will be slow to tighten their monetary policy, weakening the greenback and boosting the appeal of metals as an alternative asset class. Gold, as a non-yielding asset, has a higher opportunity cost when interest rates rise. The precious metal has become the currency of choice as the dollar continues to underperform against its G10 trading partners.

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 ($1,532 +$15.80c).

The Nikkei closed at 9,849 up+158. The DAX index in Europe was at 7,455 up+40; the FTSE (UK) currently is 6,071 up+3. The early call for the open of key US indices is higher. The US 10-year backed up 2bp yesterday (3.36%) and is little changed in the O/N session.

Treasuries prices fell, ending its three-day rally yesterday, as the US treasury came to the market with the second of this weeks weekly auctions just after the release of the FOMC statement, where the Fed left rates on hold for an ‘extended period-of-time’. US policy makers believe the economy is in a moderate recovery, however, they have increased their forecast for inflation.

With the new format of the Fed’s announcement and Bernanke’s post Q&A made it difficult for the market to set up to take down product. Yesterday’s $35b 5-year auction went well, despite concerns of who would take the product now that the Fed’s QE2 buying would end soon. The notes drew a yield of 2.124%, with a bid-to-cover ratio of 2.77, compared with an average of 2.8 for the previous 10-sales. Indirect bidders took 40%, while direct bidders took down 11.2% of the notes, compared with an average of 10.2% at the last 10-auctions. Today we get the last of this week’s auctions, $29b 7-year notes.

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