Month-end dollar love-fest is on

Deciphering and understanding the reasons for the dollar’s move is worth its weight in gold. There are so many plots and subplots to consider. Yesterday, we had helicopter Ben’s credibility being called into question. Supposedly, policy makers sent out a survey asking primary treasury dealers of their expectations of the size and affect of further asset purchases. Ben, do you not know how much, or how, to apply additional quantitative easing into the market? Remind me not to follow you into battle. Now, with the market failing to show lasting concerns to yesterday’s ‘survey’, the excuse is month-end dollar requirement related and pre-FOMC book squaring. After this morning data, anticipate liquidity to dry up very quickly.

The US$ is stronger in the O/N trading session. Currently it is higher against 13 of the 16 most actively traded currencies in a ‘whippy’ trading range.

Forex heatmap

It’s worth noting that initial jobless claims have been volatile over the past three weeks and yesterdays unexpected decline does not make a trend (+434k vs. +455k). Some of the volatility analyst’s note can be attributed to the Columbus Day holiday. Historically, headline prints tend to be more wayward around public holidays, as on average it takes a few weeks for applications to be processed and holidays tend to slow the process. Despite the headline print gravitating towards that psychological +400k magical print, in reality the US economy is still a long way off from supporting a more sustainable expansion in their labor market. Digging deeper, revisions remain a curse, with last weeks initial claims revised ‘modestly’ higher by +10k to a +455k print. Not to be left behind, continuing claims was also revised higher to +4.47m vs. +4.44m. The four-week moving average (less volatile) fell to +453k, the lowest print in three-months. The continuing claims print, ex-extended and emergency claims, decreased by -414k to +4.66m. Is it a sign that the US labor markets are on the ‘up’? Next week’s NFP report will probably indicate otherwise.

The USD$ is higher against the EUR -0.68%, GBP -0.26%, CHF -0.51% and lower against the JPY +0.36%. The commodity currencies are weaker this morning, CAD -0.05% and AUD -0.66%. The loonie timidly advanced for the first time in three-days yesterday and is certainly outperforming this morning despite the dollar making a come back on the back of month-end dollar adjustments. The market is hedging their bets that speculation about another round of monetary stimulus in the US may not boost their economy. The market is applying some event risk premium ahead of the FOMC decisions next Wed. Over the past month, the CAD has been one of the worst performers vs. the buck, despite all the negativity surrounding the greenback. Last week Governor Carney stood down on hiking rates as expected, citing a softer outlook for the Canadian economy. Futures prices have priced in a ‘no-hike’ for the next six-months despite policy makers continuing to see the risk to the inflation outlook as being balanced. The BOC said that the ‘more modest growth profile reflects a more gradual global recovery and a more subdued profile for household spending’. They did not go all out neutral on future rate hikes, but noted that certain factors stand in the way. It’s all about next week’s pending announcement from the Fed that will again give the market nonevent risk direction.

The AUD is heading for its second successful weekly decline on speculation that the RBA will leave interest rates on hold next week. Not helping the currency cause was regional bourses slipping in the O/N session and the ongoing debate of what the Fed is aiming or willing to do next week. Data this week has been somewhat on the tame side. Last night, credit to businesses and consumers rose +0.1% in Sept. vs. an expected increase of +0.3%. Inflation this week also disappointed hawkish speculators. Australian CPI rose +2.8% in the third quarter from a year earlier, after increasing at a +3.1% pace in the previous three month. The market was expecting a rate of around +2.9%. Futures traders have pared their bets from a +47% chance that the RBA would hike next week to a +16% chance. It’s now expected that any rate increase down-under ‘will be only gradual, even if the RBA were to resume the monetary tightening cycle next week’. With such a benign rate outlook, the market is betting that the currency will ‘struggle in extending its gains far above parity’ in the medium term. The currency had been getting a lift from the price of commodities and the dollar of late. Now that that relationship has somewhat gone ‘walkabout’, expect investors to be better sellers on rallies in the short term (0.9703).

Crude is lower in the O/N session ($81.49 -69c). Oil rose yesterday after US initial jobless claims declined to a three-month low, signaling increased fuel demand, and the dollar dropped vs. the EUR. This morning, with the dollars’s gain, the commodity has given up some of that appreciation. Even with supplies growing it’s the dollars direction that dominates the black-stuffs prices. This week’s EIA report again blindsided the market to a certain extent, although the direction was not surprising the volume headline print was. The release was greater than five times analyst’s expectations. Crude climbed +5.01m barrels to +366.2m last week, the biggest increase in four-months. The market had only priced in a +1m barrel gain. Offsetting the reported surplus was the plunge in gas stocks, falling -4.39m barrels to +214.9m. Analysts were estimating an increase of +625k barrels. The net effect was a zero-sum report. Crude analysts note ‘this is currently a shoulder season for product demand ahead of the winter heating season’. Technically, we should see inventories gravitate towards their highs. The market remains wary that the underlying fundamentals have not changed. The ‘big’ dollars value continues to push prices about.

Gold prices recovered some of this weeks losses after the dollar turned on uncertainty about the impact of further quantitative easing. There are two trains of thought dominating the market at the moment, some argue that a measured move next week may have a more muted affect on the dollar, while others suggest that further easing would weaken the dollar irrespective of the size as investors chase higher yielding assets in other countries. The dollars negative correlation relationship remains intact with commodity prices. For most of this year investors have sought an alternative investment strategy to the historical reserve currency. Investors have been using the commodity as a proxy for a ‘third reservable currency’, pushing the metal to record new record highs. To date, gold has outperformed global equities and treasuries (+21.9%), prompting record investment in gold-backed exchange-traded products. The debasing issues of the dollar, coupled with the sustainable growth issues of the US economy have investors generally seeking protection in an asset with a ‘store of value’. Everything now hinges on next weeks Fed announcement ($1,338 -$4.20).

The Nikkei closed at 9,202 down -164. The DAX index in Europe was at 6,574 down -21; the FTSE (UK) currently is 5,649 -28. The early call for the open of key US indices is lower. The US 10-eased 4bp yesterday (2.66%) and another 2bp in the O/N market. 10-year prices have ended their longest losing streak in 2-years with dealers making the government pay up for buyback product on Thursday and this despite the last auction of the week pushing $29b of seven-year product into the market. The auction drew a yield of 1.97%, compared with the average forecast of 2.002%. The bid-to-cover ratio was 3.06, vs. 3.04 at the last sale and an average at the past 10 auctions of 2.87. Now its onto GDP and then the Fed.

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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