For now dollar agenda remains the same

By default, the dollar’s rise is not fundamental in nature. The currency’s strength is been driven by the relative ‘weakness’ of the EUR. Investors are losing faith in the European plan and with risk aversion topping their agenda’s, they are pulling cash out of Europe at a record pace. Even with Cbanks slowing their EUR purchases, optically they are endangering the currency status as a substitute to the dollar as the world’s reserve currency. Agh, but won’t the ECB be happy with a weaker currency?

The US$ is mixed in the O/N trading session. Currently it is higher against 11of the 16 most actively traded currencies in another ‘volatile’ trading range.

Already after a whippy night the dollar is getting the backing in some corners of the market. This week, data should support the greenback, finishing with a stronger NFP number on Friday. Markets are witnessing growth, but it’s the pace and sustainability that is going to drive all asset classes. Last month, no one would have favored owing the greenback, this month after one big ‘stop-loss’, effectively that’s what has happened, the market continues to question itself. Will budget deficit woes spread in Europe? Will the ECB step in for Greece? China, what’s their agenda? They are never transparent and always surprising. Do they intend to cool things even further? Commodities and the FI asset class look vulnerable. There is nothing fundamentally thus far to convince the masses of anything different.

The USD$ is currently lower against the EUR +0.13%, CHF +0.16% and higher against GBP -0.17% and JPY -0.47%. The commodity currencies are stronger this morning, CAD +0.22% and AUD +0.42%. With global equity indices and commodity prices plummeting has managed to push the loonie to its biggest monthly drop in 7-months. Already the currency year-to-date has lost just under -5% vs. its largest trading partner south of the boarder. It is the fourth-worst performing amongst the 16 most-traded USD counterparts. In Canada and similar to the Fed’s policy, rates will remain low for an extended period of time. The market seems to be caught long the CAD and continues to pare these positions. Depending on equities and commodities, any CAD rally will have investors looking to sell some of their long positions. Currently, analysts believe the CAD is still overvalued and are targeting 1.0750-75 near term. Over the past two weeks, capital markets have taken it on the chin from various sources, which in turn will affect growth currencies and commodities. Firstly, there is a strong belief that Greece may not be able to contain its fiscal deficits. What is the knock on effect? Will Spain be next? Secondly, Obama’s proposals to reduce financial firms’ risk taking has managed to give the greenback a boost and finally, how much further will China go to divert an asset bubble? For now, the dollar remains King.

The AUD is trading close to its month lows as traders ease off pricing in an ‘automatic’ rate hike this evening using the slowness of global economic growth as the reason. Technically, markets remain nervous about the growth recovery story with the problems associated with Greece’s fiscal issues remain ongoing. The percentages of the problem not being contained are getting higher. On the opposing side, analysts believe with Australia having such a robust and stellar economy there is no reason to keep rates as low as they are. Stronger fundamentals has AUD traders betting a +63% chance that the RBA will hike another +25bp to +4% this evening. However, the currency like all the majors is dollar driven at the moment (0.8790).

Crude is little changed in the O/N session ($72.22 up +33c). Crude oil trades little changed after another week of declines on concerns that fuel demand will be slow to recover amongst ‘the bigger energy consuming nations’. Mind you with the dollar advancing to a six-month high vs. the EUR certainly has limited the need for commodities to hedge against inflation. Analysts and traders expect another bearish weekly report for the black-stuff this week. Penetrating that psychological mark of $70 a barrel is doable with another build up of inventories. Last week’s EIA report showed that gas inventories rose to a 22-month high proving that demand destruction remains healthy. Gas inventories climbed +1.99m barrels to +229.4m vs. an expected increase of +900k, another consecutive bearish print. In contrast, crude supplies dropped -3.89m to +326.7m vs. an expected rise of only +1.5m barrels. Technically, the crude print was the only bullish component of the report and that was mostly due to the closure of the Houston Ship Channel because of foggy conditions. Refineries ran at 78.5%of capacity, little changed from the previous reading of 78.4%. Market sentiment remains negative with trading momentum pointing to lower levels. Year-to-date, the black-stuff has managed to drop -14% from its 15-month high of just under $84 recorded in the first few days of the New Year. With China taking dead aim in trying to ‘cool its economy’ by hiking bill rates and increasing reserve requirements for banks coupled with a bullish greenback has dissuade investors seeking the commodity as an alternative investment. These reasons are only adding fuel to the ‘bear strategy’ for commodities. The market continues to see sellers on upticks in the short term.

Gold again ended a second consecutive month on a losing streak. The ‘yellow metal’ remains under pressure as a stronger dollar continues to curb the commodities appeal as an alternative investment. As expected, margin calls in the equity markets has required investors to lighten their commodity load to cover losses. This is likely to increase over the coming weeks as global bourses are finding it difficult to maintain any significant gains. The market is expected to remain contained until we make a bona-fide attempt at penetrating resistance levels ($1,075-80). There is no doubt about it, the commodity trades ‘heavy’ as ‘one direction lemming buying’ has the market caught long product after last years 24% rally. Any liquidation of the metal with momentum will have nervous investors seeking an early exit. With the EUR remaining vulnerable and the dollar the ‘go-to’ currency, expect to see selling on upticks for the time being ($1,082).

The Nikkei closed at 10,205 up +7. The DAX index in Europe was at 5,611 up +3; the FTSE (UK) currently is 5,202 up +14. The early call for the open of key US indices is higher. The US 10-year note backed up 3bp on Friday (3.60%) and are little changed in the O/N session. Speculation of US data this week has weakened treasuries for the first time in three trading sessions. Investors are betting that reports will finally show that the US economy’s recovery from recession is gaining momentum. Analysts belie that we will witness strength in both the manufacturing sector and also on the jobs front by week end. Once investor psyche get its head around temporary ‘risk aversion’, the market should expect higher yields. Expect any upticks in bonds to be sold short term.

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