Dollar on the Defense After More Bad News

Tuesday August 16: Five things the markets are talking about

The ‘big dollar’s demise over the past few trading sessions is being driven by mixed U.S data and fixed incomes’ repricing of the U.S yield curve.

The first regional Fed factory report for the month yesterday did not bode well for U.S manufacturing (dropped sharply to -4.2 from +0.55). Despite conditions stateside having improved in recent months, U.S producers continue to battle with softer overseas demand, worsened by the strong dollar’s effect on pricing, and with a sharp drop off in business investment.

Investors continue to look for direction in thin holiday trading conditions and the reason why some of the current price moves remain so highly exaggerated – overnight yen action is a good example.

Today promises to be a tad busier with the U.S releasing Building Permits and consumer inflation reports at 08:30 EDT.

1. Oil prices see profit taking, gold looks for direction

It’s not a surprise to see crude prices temporarily back away from their five-week highs overnight, especially in thin trading conditions. This month’s +16% rally seems to be a strong enough incentive to book some profit (yesterday oil rallied +3.2% intraday).

International Brent crude oil futures were trading at $48.14, down -21 cents from their previous close. U.S. West Texas Intermediate crude was trading at $45.56 a barrel, down -18 cents from its previous close.

This August rally is been driven by producer talk of reining in the global oversupply as investors speculate that OPEC will discuss a potential cap on production at an upcoming meeting next month. With the Saudi’s leading the drive and the fact that even Russia has voiced their willing to discuss continues to provide crude support, and this despite questionable global fundamentals.

Also, news of an imminent collapse in oil output from Venezuela is also supporting prices – they hold the world’s largest crude oil reserves and are on track to suffer its steepest annual oil output drop in over a dozen years.

Gold rose for a second day overnight ($1,348.31 or +0.3%) as the dollar slipped on lower expectations of Fed rate hike this year. From a technical perspective, the gold market remains in the ‘balance’ as investors wait for more economic data to determine the “next” trend. Perhaps tomorrow’s FOMC minutes will be the instigator.

2. Global stocks retreat

Global indices see red after yesterday’s record closing high on Wall Street, pressured as the dollar slides against the Yen and EUR.

In Asia, shares in Japan were down -1.4%, aided by the ‘big’ dollars decline against yen of over -1%. The Shanghai Composite Index fell -0.5% as investors sold shares of banks and insurance companies.

In early trading in Europe, falling auto shares has sent the Stoxx Europe 600 down -0.6%. Commodity and mining stocks, as well as oil stocks in the FTSE 100 are trading higher ahead of the open stateside.

Currently, futures prices point to a -0.2% opening loss for the S&P 500, after the S&P, Dow, and Nasdaq all closed at record-highs for the second time in a week.

3. Sterling bearish bets increase

Recent data indicate that bearish bets against the sterling have now reached the highest level on record.

Week ending August 9, CFTC data show that ‘short’ pound bets held +90k contracts versus the +52k contract ‘short’ bet ahead of the June 23 Brexit vote. In January the bears only held +30k contracts.

Aiding these ‘short’ positions has been the aggressive stance of the BoE to the EU referendum outcome. Earlier this month, the “old Lady” cut interest rate to record lows and increased their QE program, which has helped the pound to depreciate even more sharply (£1.2875), declining -13% outright since the Brexit vote.

These “bears” are now expecting the pound to breach its 31-year low (£1.2797) and head toward the £1.2350 over the next three-months, pressured by the U.K.’s large current-account deficit and the forthcoming major political and economic changes.

Despite being out numbered, the pound “bulls” would argue that there is still a possibility that the U.K. isn’t going to leave the single market. As the economy struggles, they are betting that the public’s attitude will likely change, giving the negotiators some flexibility. Only time will tell.

4. Yen prints one-month highs on thin trading

The yen is sharply higher against other currencies overnight; hitting a one-month high against the dollar (¥100.24), with thin trading volumes (Japan’s traditional summer vacation season) and stop-loss orders exaggerating the steep gain in the currency.

Investors’ appetite for dollar buying remains low this week. Aside from the pound, the ‘buck’ has retreated against all G10 pairs after some mixed U.S data.

Last Friday’s July U.S retail sales data was not inspiring, with both the headline and core readings flat on a m/m basis, a big deceleration from the decent growth seen in the revised June report. This has investors lengthening the odds on any Fed hike this year (September fed funds are at +6% and December at +38%).

Investors will look to this mornings U.S. inflation data and housing starts for another chance to gauge the health of the economy. For now, the only danger to the Yen ‘bull’ is more aggressive easing by the Bank of Japan (BoJ) when they next meet (September 21).

5. RBA minutes had little impact; Fed Williams white paper does dollar damage

Australia RBA August meeting minutes showed that subdued outlook for underlying inflation was little changed from their May forecasts, and is expected to remain low for the time being before picking up as spare capacity in the labor and other markets diminished. Governor Stevens’ remains concerned about two things, the domestic labor market and a slowing China, its largest trade partner.

The report itself has had little direct impact on the AUD. The Aussie’s overnight bid (A$0.7720) has come from Fed President William’s (San Francisco) white paper, published yesterday, that suggests that the Fed should raise their inflation target from the current +2% or move to a new target based on price levels – a higher inflation target could give the Fed more room to keep rates at current levels, which favours commodity and interest rate sensitive currencies (NOK, CAD, NZD etc.).

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