Dean’s FX 11th June|Stagflation dominates?

The USD$ is stronger in the O/N trading session. Currently it is higher against 12 of the 16 most actively traded currencies in a ‘whippy’ trading range that has been dominated by CBankers pledging their fight against inflation.

FX Heatmap June 11th, 2008

Yesterday the US trade data widened in April (+7.8% to -60.9b-largest in a year) as the surge in oil prices pushed imports to a record, which over shadowed the US’s biggest gain in exports in almost 4-years. Despite this, some analysts estimated that 1st Q growth was greater than previously estimated by the government, even as fuel prices pushed imports higher. Exports had climbed +3.3%, to a record $155.5b, led by sales of commercial aircraft, autos and agricultural machinery. If one adjusted for inflation, the trade deficit shrank to -$46.9b, which technically looks bullish for economic growth. This combined with Bernankes belief that economic risks have faded has pushed the greenback to loftier heights against most of its major trading partners. Cbanks around the world continue to remain worried about inflation, with China hiking reserve ratio yesterday and tough talk from the Fed, ECB and BOC as well. This coupled with signs of weak growth seems to have reignited stagflation fears, with the major stock indices seem to be topping out.

The US $ currently is higher against the EUR -0.10%, GBP -0.06%, CHF -0.00% and JPY -0.13%. The commodity currencies are stronger this morning, CAD +0.21% and AUD +0.16%. BOC governor Carney is certainly leaving a lasting impression on the market after leaving O/N borrowing costs on hold at 3.00% while the market had anticipated a 25bp ease due to softening Canadian data of late and benign inflation numbers. The surprise announcement provided much needed support for the loonie who earlier had printed quarterly lows. Carney has fallen in step with other Cbank leaders whose priority is to combat future inflation at all costs while inhibiting growth. It seemed that he had little choice, as the FED continues to make noises about tightening, and the BOE saying it’s done with easing would in time have put more pressure on the Canadian economy. Now, with food and energy prices surging he seems to have systematically halted his easing cycle to ensure inflation remains contained. ‘The BOC now judges that the current stance of monetary policy is appropriately accommodative to bring aggregate demand and supply into balance and to achieve their 2% inflation target. One can expect the loonie to gravitate back towards the parity level once again. The AUD$ remains on the back foot after US Treasury Paulson comments that he would ‘never’ rule out currency intervention. This is a USD$ story and all currencies are being clipped for now (0.9473).

Crude is higher O/N ($133.03 up +172c). Relentless, ‘black gold’ continues to be powered by technical data. More analysts have jumped on the bandwagon and increased their price forecasts amid concern that supply from outside OPEC will not climb as fast as expected. The IEA lowered its estimate for non-OPEC output this year by -300k barrels a day to +50.04m. It seems that supply trends are growing slower than demand, which of course will push prices higher until ‘the market becomes convinced that supply and demand will be in better balance, supposedly in 2010’. Saudi Oil Minister al-Naimi said earlier this week that producing and consuming nations should meet ‘soon’ to discuss how to deal with the record cost of crude, which ‘is not justified in terms of market fundamentals’ (they are the top oil exporter). Subsidizes, supply issues and geo-political concerns have all been blamed in the not to distant past. But, it’s the greed factor by investors that may push the world economy into a global recession. Traders will be betting that tomorrows EIA data will remain consistent with the m/m trend. Bernanke and co. have worked hard of late to keep the buck elevated, which will provide extra pressure on commodity prices in the short term. Gold has pared some of it losses this morning but remains under pressure ($877) as the USD$ strengthens, thus diminishing the yellow metal’s appeal as an alternative investment.

The Nikkei closed at 14,183 up +162. The DAX index in Europe was at 6,787 up +17; the FTSE (UK) currently is 5,833 up +6. The early call for the open of key US indices is higher. Yields of the US 10-year bond backed up 9bp yesterday (4.09%) and are little changed O/N. Treasuries remain under pressure especially in the short end (flattening the yield curve) after increased hawkish rhetoric by Bernanke and Co. He said yesterday that the risk of a ‘substantial downturn’ in US economic growth has diminished. By default, traders have increased their bets that policy makers will raise interest rates by Sep. according to futures prices.

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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