Dollar movement contained, markets digest Obama’s proposal

It’s Déjà vu. Concerns and apprehensions about ‘the’ market remain the same. Obama’s new proposals for the banking sector, Bernanke’s second term re-election, the situation in Greece and China’s FX policies seem to have currency markets well contained. One gets the feeling that forex is preparing itself for a significant move, dollar positive or not, this week’s highly anticipated FOMC meeting, starting tomorrow, may hold the key.

The US$ is weaker in the O/N trading session. Currently it is lower against 14 of the 16 most actively traded currencies in another ‘whippy’ trading range.

Global bourses only know one color this year and it seems to be the color ‘red’. Traders are trying to figure out what currency is affected most by the above negative news. Is the dollar a sell because of Obama’s banking proposals or Bernanke’s reappointment? Perhaps shorting the EUR is a stronger trade idea as Greece and other PIIGS deficits remain a mess. Again, the Yen looks vulnerable, as Japan is most likely to be the last one to start raising rates. Cable, the market wants to sell it because it’s cable! Finally, heightened risk aversion does not bode well for emerging currencies. Technically, it’s a toss up on currency positions at the moment, hence the contained trading ranges. The dollar needs more proof for support and the FOMC may be in a position to give us just that.

The USD$ is currently lower against the EUR +0.12%, GBP +0.32%, CHF +0.07% and higher against JPY -0.51%. The commodity currencies are stronger this morning, CAD +0.11% and AUD +0.62%. The loonie weakened the most in 4-months on Friday, mostly on the back of Capital Markets uncertainty over the Obama’s proposed new banking regulations that will restrict excessive risk taking, China’s monetary policy (pushing short term Bill yields higher to warn off potential asset bubbles) and Greece’s finances. Collectively they have curtailed investors’ appetite for higher-yielding assets. Global bourses and oil prices have plummeted ever since Obama’s went public with his intended Bank proposals. Even the BOC has weighed in on its own currency. After keeping the O/N lending rates on hold last Tuesday (+0.25%), Governor Carney managed to give the loonie an ‘off side nudge’ by stating that growth will peak in the 2nd Q, hindered by a strong currency, weak US demand and the end of Canadian government stimulus. In the BOC’s MPR, they stated that it expects growth will quicken to +4.3% annualized rate next quarter before gradually slowing to a +2.2% rate at the end of 2011. Policy makers expect annual growth will be +2.9% this year and +3.5% in 2011. Other data released on Friday revealed that Nov. retail sales fell -0.3% while the Dec. CPI rose +1.3%, less than forecasted. This will keep the BOC rate on hold for a considerable period of time. Technically, the market has been caught long the CAD and any rally of the loonie in the short term will be seen as an opportunity to sell the currency.

The AUD gained the most in three weeks in the O/N session, especially vs. the JPY, on speculation that ‘helicopter’ Ben will be reappointed for a second term. Appetite for risk has returned on the news. It is believed that Australian inflation data, this week, will again show that annual inflation quickened in the fourth quarter. Stronger Australian fundamentals have traders increasing their bets that the RBA will keep raising interest rates. With the Australian economy well into a recovery phase, there is added pressure on Governor Stevens to increase the O/N borrowing cost to 4% for a fourth straight meeting (0.9051). Futures traders are betting on a 62% chance that the RBA will increase on Feb. 2. Again, expect commodities to influence the currency this week!

Crude is lower in the O/N session ($74.46 down -84c). A number of factors have harried oil prices last week. The commodity fell to a four-week low after the weekly EIA report revealed that refineries have slashed their operating rates as fuel demand declines. Plants were running at +78.4% of capacity w/w, the lowest run rate in 16-months. Also providing no help was the market having to deal with another weekly build up of gas supplies (the highest level in 22-months). Fuel use over the past month fell -1.8% from a year ago. The value of the dollar and global bourses seeing red continues to pressurize the commodity. Gas stocks rose +3.95m barrels to +227.4m last week vs. an expected climb of +1.75m barrels. While inventories of crude fell -471k barrels to +330.6m vs. a forecasted rise of +2.45m barrels. It was another consecutive bearish report highlighting the strength of ‘demand destruction’. Even China’s stellar growth numbers had a minor positive impact on the commodity class. The market will continue to anticipate that global supply remains sufficient and with the strong ‘buck’ it would continue to discourage investors using the commodity as a hedging conduit. The belief of analysts that the ‘increasing demand in China and emerging markets will not be strong enough to offset declines in the other countries’ may push the commodity down to the $70 level as the continual build up of stocks will give further support to the ‘bears’.

The gold story remains the same. Again on Friday the commodity fell, printing a one-month low, on speculation that Obama’s plan to restrict US bank’s trading abilities will reduce global total investment demand for the metal. Currently, with the dollar holding its own emphasizes that risk aversion trading strategies remain a priority. Up until now the commodity has been top heavy with ‘one direction lemming buying’ after last years 24% rally. Any liquidation with momentum has nervous investors seeking an early exit. With the EUR remaining vulnerable and the dollar the ‘go-to’ currency under times of duress, the markets should expect to see continued selling on upticks for the time being ($1,100)

The Nikkei closed at 10,512 down -77. The DAX index in Europe was at 5,664 down -31; the FTSE (UK) currently is 5,301 up +8. The early call for the open of key US indices is higher. The US 10-year note eased 1bp on Friday (3.62%) and are little changed in the O/N session. Risk aversion trading strategies continue to push global yields lower. For a third consecutive week last week, FI prices roses on speculation that the Obama administration proposal to curtail risk taking by Financial Institutions would heighten investor demand for notes and bonds. The 2/10’s (281bp) spread narrowed as global bourses remain under pressure. It’s interesting to note that a week ago the curve was at +290bp. This week the Treasury will auction off a record tying $118b notes and bonds ($44b 2’s tomorrow, $42b 5’s on the 27th and $32b 7’s on Jan. 28). The pessimistic view that the rate of global recovery may be losing momentum continues to find FI buyers on pull backs. Expect dealers to make the Treasury to pay up for this week’s product. Conspirarists will tell you that the chance of a failed auction on the horizon probably has increased!

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