Bin Laden Dollar Premium Short Lived

The death of Bin Laden will affect all asset classes, however, the true effect is yet to be felt because of semi-holiday trading conditions. The May Day has had most centers closed, adding to liquidity constraints. Already the dollar seems to have lost most of the bin Laden advantage after a healthy Euro-zone PMI release (58) this morning.

In the broadest sense, the dollars decline continues and the rally in other asset classes remains strong and getting stronger. The end of QE2 does not seem to be dampening the enthusiasm for the liquidation of the dollar in the FX market. Investors continue to look for better levels to unload the currency and this is the major reason why the bin Laden positive dollar effect has been short lived.

Over the weekend, China’s April PMI fell -0.5 points to 52.9, defying the seasonal tendency for the measure to rise in April. New orders fell -1.4 points to 53.8, and forcing commodity block currencies to under-perform.

The US$ is mixed in the O/N trading session. Currently, it is lower against 9 of the 16 most actively traded currencies in a ‘whippy’ session.

Forex heatmap

The USD is lower against the EUR +0.23% and higher against GBP -0.18%, CHF -0.19% and JPY -0.35%. The commodity currencies are weaker this morning, CAD -0.47% and AUD -0.15%.

The loonie has taken a beating in the O/N session after commodities took a giant step lower on the news of Bin Laden’s death. His demise has only added fuel to the fire as the CAD underperforms against most of its major trading partners for a fourth straight week after GDP unexpectedly contracted in February (-0.2%) on Friday. However, outright against the dollar, similar to most other major currencies, the loonie managed to print a new three-year high last week, on speculation that the Fed will trail the BoC in raising interest rates. In just under a year the currency has appreciated +12% against the dollar.

Today the country goes to the polls to elect a new parliament. To date, politics has played a minor role in the currency’s value. The market should expect some event risk calculation to pressurize the currency in the medium term (0.9510).

The AUD fell outright against the greenback after Obama declared that Bin Laden had been killed. The initial market reaction was to push up US equity stock futures, and to boost the allure of assets in the world’s largest economy. The Aussie’s pullback has been somewhat limited despite the market expecting the RBA to keep benchmark interest rates on hold tomorrow.

Last week was the 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.

Currently, the RBA seem comfortable with interest rates as highlighted in the released minutes last 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 wants to march above 1.10 outright (1.0949).

Crude is much weaker in the O/N session ($111.36 -$2.57c). Crude prices settled at their highest level in two-and a half-years on Friday as a weaker dollar and geopolitical concerns in MENA overshadowed demand worries in the face of slower US economic growth. April was the eight consecutive month of monthly gains. However, in the O/N session, crude has plummeted -2.4% on the news of Bin Laden’s death.

Last weeks crude inventories rising +6.16m barrels to +363.1m. 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 beat equities, bonds and the dollar for a fifth consecutive month in April, the longest stretch in 14-years, as demand for raw materials increases with expanding economies and 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 ($1,556 -40c).

The Nikkei closed at 10,004 up+154. The DAX index in Europe was at 7,581 up+67; the FTSE (UK) currently is 6,069 up+2. The early call for the open of key US indices is higher. The US 10-year eased 2bp on Friday (3.29%) and is little changed in the O/N session.

Treasuries prices have rallied for a third-consecutive week, generating the biggest monthly return in eight-months, as weaker US economic growth indicators coupled with the Fed’s commitment to maintain stimulus encouraged demand for the safety of government debt.

The lack of growth continues to haunt investors. Last week, the Fed expressed very cautious sentiment toward growth and made it clear they aren’t going to do anything until sustainable growth has picked up. Various CBanks rate announcements and NFP is expected to keep all asset classes on their toes in this shortened holiday week.

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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