Deja vu for Dismal Dollar

Price action has been subdued in both Asia and Europe with the Royal wedding dominating market coverage, at least until US data releases. This morning, Euro-zone inflation rose to a 30-month high for April (2.8% vs. 2.7%), further strengthening the case for Trichet and Co. to tighten monetary policy, despite the peripheries tackling severe debt problems.

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 ‘subdued’ session.

Forex heatmap

The dollar did not need any more bad news, but it got it. Yesterday’s economic indicators point to a dismal employment and slowing economic growth. GDP showed growth at only +1.8% in the first quarter, however, it’s backward looking data and right on market expectations. The weekly jobless claims (+429k) is more important and suggests further sluggishness in the jobs market.

Initial jobless claims increased by +25k, w/w, beating analysts expectations of a sub +400k psychological print. The four-week moving average, capable of smoothing out volatility, rose by +9.2k to +408.5k. It’s worth noting that this is the the first print above +400k since the beginning of February. A weaker jobs number tends to undermine consumer confidence and directly affect consumer spending. Digging deeper, continuing claims (reported on a week’s lag) fell by-68k to +3.64m. The net-effect seems to agree with Bernanke’s comment that ‘we are moving in the right direction even though that’s encouraging does not mean the labor market is in good shape’.

Fundamentally, the US economy hit the breaks in the first quarter as higher prices, especially gas and food, curtailed consumer spending, limiting seasonally adjusted GDP to print +1.8%. The modest increase marked a significant slowdown from the fourth quarter (+3.1%). Bernanke indicated this week that the first quarter slowdown would most likely be temporary. Digging deeper, consumer spending for the quarter rose at a +2.7% clip, down from the +4% print last quarter, with spending accounting for +70% of GDP. It seems that the Fed is relying on, to a certain extent, the equity wealth effect to encourage people to open their coffers. Various tax cuts are also allowing consumers to keep more of their pay packets. For the Fed’s sake, consumers need to save less and spend more. That’s difficult in this high energy and food price environment.

Finally, US pending home re-sales climbed +5.1% after a revised +0.7% increase the previous month. An improving job market, falling home prices and lower borrowing costs may help to attract more buyers over the coming months.

The USD is lower against the EUR +0.25%, GBP +0.32%, CHF +0.61% and JPY +0.10%. The commodity currencies are weaker this morning, CAD -0.10% and AUD -0.05%.

The loonie is little changed, trading close to its three-year high after Ben and Co. decided to keep its interest-rate target at record low levels and finish QE2 on schedule in June. From a commodity sensitive and higher yielding currency, the loonie looks attractive as a carry play versus its largest trading partner. In just under a year the currency has appreciated +12% against the dollar. The Canadian dollar, like most G20 currencies 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. However, this morning Canadian GDP number may provide further support for a currency that investors continue to covet on dollar rallies (0.9513).

The AUD is heading for its biggest monthly gain this year, further supported by comments from their Treasurer Wayne Swan this morning, stating that the currency’s strength reflect the improving economy and higher commodity prices.

It will be currency’s sixth consecutive weekly advance outright as lower-than-estimated US growth increases speculation that the RBA will be raising interest rates before the Fed. Traders have added to their bets that policy makers will be hiking rates +25bps points over the next year.

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 ($112.60 -26c). The black-stuff briefly touched its 31-month high as the dollar weakened to its lowest level in three-years against its major trading partners yesterday and this despite a bearish weekly EIA report for the crude prices.

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. OPEC have already stated earlier this month 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. It’s all about the dollar’s inverse relationship with commodities.

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 7,472 down-3; the FTSE (UK) currently is 6,069 up+2. The early call for the open of key US indices is lower. The US 10-year eased 4bp yesterday (3.31%) and is little changed in the O/N session.

Treasury prices rallied after weaker US growth and employment data yesterday. Now that the Fed has unanimously clarified extending its easing monetary policy stance is giving the FI support on pull backs.

The Treasury issued the last of this week auctions yesterday, $29b 7-years. It was a very weak auction with a whopping +3.5bp tail. The notes drew a yield of 2.712%, with a bid-to-cover ratio of 2.63, compared with an average of 2.84 for the previous 6-sales. Indirect bidders took 39.1%, while direct bidders took down 7.9% of the 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