Forex declares ‘dollar’ King!

The Global credit market meltdown remains undeterred despite CBankers efforts to instill consumer confidence. Intended ‘fire-sales’ continue to dominate financial headlines. Like plunging house prices in the US, buyers are scarce and buyers beware. There is only so much of a depreciating asset one is able to absorb!

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

FX Heatmap September 11th, 2008

Yesterday, with no US data to chew on ahead of this morning’s US Trade balance, traders were focused on deciphering Lehman Brothers largest loss in its 158-year history. The company indicated that they intend to spin off some of their units and reduce dividends to shore up their capital base. Their announcement has met with approval from capital markets, and temporarily curtailing the slide in equities. Technically they have bought themselves time to restructure. Initially, the market feared that they would become another victim to the global credit-market meltdown. They still may, as competition for holding a fire sale of investment units and assets intensifies. Of course there will be concerns about their ability to raise ‘new capital’, once the market smells blood, they rarely let up as they go for the kill. The greenback continues to dominate all the major trading currencies despite Paulson nerves being tested by Lehman after their seizing of Freddie and Fannie over the weekend. Euro-land policy makers at last recognize that the Euro zone may technically be heading for a recession. Yesterday, the European Commission cut its growth outlook for the area for the rest of this year and predicted a recession for Germany (the region’s largest economy and backbone). They lowered its full-year growth forecast to +1.3%, from +1.7% reported earlier, and signaled that their 2009 projections may also be cut. Technically the value of the EUR over the past year and the surge in energy prices is starting to take its toll on a number of member countries. In hindsight it’s playing a negative catch up with the US economy and solidifying greenback strength even more.

The US$ currently is higher against the EUR -0.70%, GBP -0.18%, CHF -0.35% and lower against JPY +0.56%. The commodity currencies are weaker this morning, CAD -0.50% and AUD -1.16%. Yesterday, Canadian labor productivity fell for a 3rd consecutive quarter. This is on the back of falling exports curbing production. Productivity which measures what an employee produces per hour, declined -0.2% between April and June. The data had very little influence on the value of the loonie. Traders continue to rely on the currency correlation with commodities. Despite oil prices receiving a boost from OPEC’s decision to cut excess quota production, the loonie is trading independently from commodities. There seems to be a temporary disconnect for the commodity currencies. Like most of the major currency pairs, the broad based USD strength is weighing on the loonie at the moment. The link between increasing risk appetite and the Canadian dollar is through commodities and presently the market does not want to bite. It is only a matter of time for a stronger correlation to reappear. The currency has lost 5% of its value since oil’s registered its highs 2-months ago. The loonie is trading within a very tight range despite the greenback outperforming against most of its major trading partners. Canada continues to be guilty by ‘association and proximity’ to its largest trading partner south of the border. Fundamentally and technically there is no reason to own the currency at these levels. Expect traders to continue to be better buyers of the greenback on pull backs. Politically and economically Canada will be pre-occupied with its general election slated for Oct 14th over the next few weeks.

NZD fell to its lowest level in two years during the O/N session after governor Bollard from RBNZ slashed borrowing costs more than expected (50bp to 7.50%) and signaled further cuts to combat their 1st recession in a decade. The Kiwi has lost more than 19% vs. the greenback in the past 6-months, the Cbank indicated that they ‘have room to move’ and that they are in a ‘loosening mood’. This has also put pressure on the AUD (0.7919), despite strong stronger than anticipated employment numbers O/N (+14.6k vs. +5.5k), softer commodity prices continue to weigh on the currency value for now.

Crude is lower O/N ($102.23 down -23c). No surprise that OPEC is trying to manage oil prices in their favor despite the lack of global growth affecting demand. According to Saudi Oil Minister Ali Al-Naimi speaking in Vienna, the oil market is ‘well- balanced’ and that inventories remain ‘healthy’, concluding that supplies were sufficient to meet global demand. On the other hand, OPEC President Khelil called on members to stop producing more than the group’s set quota, a move that would reduce supplies by +520k barrels a day. They are not cutting ‘production’; they are cutting ‘over-production’. They intend to reduce a ‘huge oversupply’ of oil on the market, and at the same time psychologically provide an artificial floor for the black stuffs price ($80-$100). The Saudis are not planning to reduce its own oil production, they intend to supply whatever customers demand. However, if their policy changes then oil prices will become more bullish. Perhaps OPEC’s intended action may end up being counter productive. Higher oil prices continue to hurt the global economy, despite oil prices retreating 30% from their highs printed 2-months ago. Yesterday’s EIA report showed that fuel demand declined w/w and refinery production dropped after Hurricane Gustav shut plants along the Gulf Coast. These plants remain closed as Hurricane Ike moves into the Gulf of Mexico. Operating rates fell to 78.3% last week, the lowest levels in three years. Whilst crude stocks declined -5.8m barrels to 298m, it’s the crude production levels that will continue to weigh on prices. Hurricane Ike presently has weakened to a Category 1, but is expected to strengthen as it heads west into the Gulf of Mexico on a course that is expected to miss most of the oil installations. So weather watching will remain the order of the day in case the storm shifts direction. Gold is finding it difficult to find any traction and dropped to a 10-month low ($749) as falling energy costs and a strengthening greenback has reduced the demand for the ‘yellow metal’ as a hedge against inflation.

The Nikkei closed at 12,102 down -244. The DAX index in Europe was at 6,182 down -27; the FTSE (UK) currently is 5,343 down -23. The early call for the open of key US indices is higher. 10-year Treasury yields backed up 3bp yesterday (3.62%) and are little changed O/N. Treasury prices declined after Lehman Brothers announced their intention to restructure and sell specific assets to survive the fallout of investor confidence yesterday. This gave a temporary lift to equities and reduced the demand for government debt. Traders are weary of owning long term product at these lofty levels ahead of today’s 10-year auction. Lets see what the US trade balance brings us this morning.

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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