Dollar gets a get out of jail card, temporarily at least

Holidays are supposed to be boring for markets. However, last night was a different matter. It seems that the forex markets execution of an extraordinary large stop-loss provided the traders with the jitters. The EUR and CHF cross related currencies saw the SNB intervening and buying USD’s. Their actions in the short term could be rather productive. Technically they have caught the market exposed as its less liquid during Thanksgiving. Most of these currency moves that will take place over the holiday season will seem irrational. Liquidity and lack of it, will create a difficult volatile trading environment where both the technical’s and fundamental’s take a back seat!

The US$ is stronger in the O/N trading session. Currently it is higher against 15 of the 16 most actively traded currencies in another ‘whippy and illiquid’ trading range.

Yesterday’s US unemployment claims is on an ‘improving trend’. The number of claimants filing last week fell to its’ lowest level in over a year (+466k vs. +501k) as the US economy tentatively improves and persuades or encourages companies to lay off fewer workers. A tourniquet has been applied to the bleeding so it seems! Let next weeks NFP be the judge of that. Digging deeper, one notices that the number of people receiving unemployment insurance dropped, a similar scenario with those receiving extended payments. Looking at the less volatile component, the 4-week moving average of initial claims happened to also soften from the previous week to +496.5k from +513k. Another sub-component continuing claims declined by -190k to 5.423m vs. market expectations of 5.57m. However, it’s worth noting that continuing claims does not include the number of individuals receiving extended benefits. The number of individuals who have used up their traditional benefits and moved along to extended benefits actually fell by -18.2k to +4.18m, w/w.

It was a surprise, but not that surprising to see that the sales data for US new homes beat market expectations yesterday (+430k vs. +408k, w/w). Buyers continued to take advantage of Obama’s tax credit before it expires next year. With sales advancing +6.2%, it managed to print the highest level in over a year. Technically, rising demand shows that Obama’s incentive for first-time buyers (expanded to include current owners) maybe helping to drag housing out of its worst slump in 50-years. On the flip side, house prices should remain depressed as the constructive industry’s inventory levels continue to compete with record foreclosure numbers that is being fuelled by unemployment. Foreclosure filings surpassed the +300k mark for the eighth straight month in Oct.!

Other early morning data yesterday revealed that personal spending actually increased last month (+0.7%), more than forecasted, however Sept. was revised down a tick to -0.6%. Orders for durable goods unexpectedly declined -0.6% on lower demand for defense equipment, interestingly the previous months was also revised higher to +0.2%. Finally, the US Michigan Consumer sentiment index fell to 67.4 vs. 70.6 last month (second consecutive monthly fall) as the fear of further job losses encourages less consumer spending as we head into this ‘extraordinarily’ long holiday period, which seems to be getting longer as retailers try to squeeze ever last ‘hoarding dollar’. With the unemployment rate having broke that psychological +10% barrier in the US, the consumer who account for 70% of the economy, will limit their contribution to growth in the short term.

The USD$ is currently higher against the EUR -0.46%, GBP -1.08%, CHF -0.52% and JPY +0.50%. The commodity currencies are weaker this morning, CAD -0.79% and AUD -1.46%. The loonie remains in a tight trading range despite touching new weekly highs yesterday after the CBR (Russia) indicated that they would be adding the CAD to their required reserves and by default liquidating some of the USD exposure. The Russian Cbank wants to increase its ‘gold holdings and promote regional currencies in trade and finance to reduce risks posed by the US dollar’s dominance’. Rumors of other Cbanks like India again expressing their willingness to add more gold will only provide a stronger bid to growth currencies on any dollar rallies in the medium term. Technically, the loonie is lacking clear direction in amongst the tight 3c trading range. Currently, within this range, intraday traders are been squeezed daily out of the core positions, whether it’s commodity prices pushing the loonie or risk aversion. Dealers continue to be better buyers of the CAD on USD rallies as the buck’s bear trend remains well established. Governor Carney at the BOC has got to be worried. If the loonie appreciates too strong, too quickly, one should expect policy makers to make a concerted effort to at least slow the process down.

The AUD had its largest loss in over a month in last night’s session, as investors gravitated towards the JPY on speculation that global policy makers will allow further USD weakness. Risk aversion trading strategies are dominating the currency market at the moment. The AUD also came under pressure after a report showed that business investment unexpectedly declined last quarter (-3.9% vs. +1.1%). Earlier this month, the RBA minutes implied that three straight lending rate increases may not be on the cards had futures traders unwinding some of their bets that Governor Stevens would tighten monetary policy again in two-weeks. He said that the pace of further rate increases ‘remained an open question’. That question now seems to have been answered by his deputy, as once again futures traders lay their bets. The currency remains well supported by commodity prices and expects dealers to be strong buyers on much ‘deeper’ pullbacks (0.9177).

Crude is lower in the O/N session ($76.92 down -104c). Crude oil advanced yesterday as the greenback once again weakened against most of its major trading partners on signs of a global economic recovery. Stronger US fundamentals yesterday boosted the investment appeal of commodities. Last week’s EIA report was close to being bang-on. Crude stocks rose less than expected as imports gained. Inventories advanced by +1m barrels to +337.8m vs. market expectation of a +1.2m gain. On the face of it, the build up was consistent with Tuesday’s API report, where inventories advanced +3.3m barrels as imports also rose. Analysts said that daily imports added +371k barrels a day as imports and the Gulf of Mexico output rebounded from the disruptions caused by ‘Ida’. Gas inventories advanced +1m barrels to +210.1m, w/w, vs. market expectations of only +300k. Distillates stocks (those that include heating oil and diesel) declined by -500k vs. expectations of -100k. Refinery utilization managed to advance +0.9% to 80.3% of capacity, vs. analyst forecasts of only +0.3%. Repeatedly over the last few weeks the $80 handle remains a stubborn resistance point, again the market attempted and again it has failed. However, demand destruction does not warrant elevated prices, perhaps the $80 a barrels will be the top for the remainder of this year. OPEC is expected to remain on hold in a couple of weeks because of their concerns about tipping global economies back into contraction. Another tight range to endure so it seems!

There is nothing like a bullish rumor to add spice to the record price saga that the ‘yellow metal’ has been experiencing. It’s no surprise to witness gold jump to another record high in the O/N session as the greenback once again faltered on the rumor that India may want to add once again bullion to their reserves. Year-to-data, the yellow metal has gained +36% as investors and central banks increased their holdings of the commodity to preserve wealth. Expect the bulls to continue to dominate all of the action and remain strong buyers on ‘any’ pull backs even if the USD finds support from risk aversion trading strategies ($1,184).

The Nikkei closed at 9,383 down -59. The DAX index in Europe was at 5,691 down -111; the FTSE (UK) currently is 5,267 down -97. The early call for the open of key US indices is lower. The US 10-year bond eased 5bp yesterday (3.27%) and are little changed in the O/N session. Yesterday’s $32b 7-year auction (the last of this week’s issues totally $118b) was once again well received. The bid-to-cover ratio was to 2.76 vs. the average of 2.53. Despite record low yields, all three auctions surpassed market expectation of demand as indirect bidders, usually Cbanks, took close to 60% of the entire product. Overall the market remains better bid, despite more positive fundamental data out of the US as the ‘seasonal’s’ are calling for a flattening rally ahead of ‘month end index extension’ next week. It’s too painful to be the contrarian in this environment!

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