Failing Banks Support Dollar Appetite

Just when you thought it was safe to get back into the water, along comes another bailout to test your risk appetite! European banks (RBS, Lloyds, and UBS etc) continue to provide evidence that the financial industry is far from recovery. Look on the bright-side both RBS and Lloyd’s will get $31b if they put a cap on bonuses! You require $31b from the tax payer for a second time and you expect to get a bonus! That’s a good arrangement now that RBS are government employees. The market continues to wait for the Fed, ECB and BOE. Are they going to give us any indication of taking back some of the liquidity that they have provided the markets? The RBA did, but are shifting to a ‘prudent to lessen gradually’ mode. Expect risk-appetite strategies to take it on the chin today!

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

Watching US data of late is like playing Russian roulette! Someone is always surprised with the outcome. The US manufacturing sector expanded last month at the fastest pace in over 3-years (55.7 vs. 52.6). Digging deeper, one notices that that the sub-category production sector accounted for a largest share of the growth (63.3), probably supported by another increase in auto production after the cash for clunkers program reduced inventories to exceptionally low levels. About time, we witnessed employment moving into expansionary territory for the 1st-time in 3-years (50.0)! New orders reversed direction last month, but, still continued to expand (55.5), strong proof that foreign demand remains their biggest supporter! On the prices front, it managed to surge last month to 65.0.

The USD$ is currently higher against the EUR -0.19%, GBP -0.50%, CHF -0.29% and lower against JPY +0.34%. The commodity currencies are weaker this morning, CAD -0.25% and AUD -0.25%. After stumbling last week, the loonie managed to advance from it lowest level in over a month as stocks and commodities reversed their earlier declines yesterday, and making higher yielding commodity currencies more attractive. In the O/N session they are attempting to revisit these lower levels again as the dollar takes command. Last week’s Canadian GDP disappointed and blindsided both the currency and Capital Markets. Augusts’ headline print actually fell -0.1% as oil and gas extraction dropped -2.3% and manufacturing fell -0.7%. Weaker Canadian data of late may be stronger evidence that the Canadian economy is not following its southern neighbor directly out of this recession. Perhaps Governor Carney may have spoken too soon when he declared that the recession ended sometime between July and Sept! Do not be surprised to see Canadian policy makers once again revising domestic expectations. Both Governor Carney and Finance Minister Flaherty have worked tirelessly to keep lending rates at a record low well into next year, maybe even into the 3rd Q! They are both insistent that a strong domestic currency will damper longer term Canadian growth. To date, the BOC has declared that they would use a combination of currency intervention, credit and quantitative easing options to influence the loonie and meet their 2% inflation target. Will they get to use any of these methods? Yes, over time, but not just yet. Dealers want to see better levels to own their own currency. But, let’s see what the other Cbanks policy makers want to do first!

The RBA raised rates 25bp to 3.50% as expected, but the currency managed to sell off as policy makers indicated that it was ‘prudent to lessen gradually’ the economic stimulus provided by lower-than-average borrowing costs. The wording ‘gradually’ has prompted traders to pare bets that there will be a rate increase in Dec. The futures market is now only pricing in a 50% chance of a hike! Expect dealers to sell on upticks, however, higher interest rates will support the currency on deeper pull backs (0.8936).

Crude is lower in the O/N session ($77.28 down -85c). There is life in the black stuff yet! After plummeting nearly 4% on Friday on the back of US consumer spending dropping for the first time in 4-months, crude prices managed to find some traction yesterday because of the Chinese manufacturing data over the weekend (PMI advanced to an 18-month high of 55.4 in Oct.). It’s always a good bet to assume that stronger economic data will promote fuel demand. Other variables have also contributed to yesterday’s price support, firstly, a weaker USD index and secondly, recent surveys revealing that OPEC’s output has declined slightly, while at the same time production from non-OPEC Russia reached a new post-Soviet record! Earlier last week, stronger US GDP data boosted the appeal of the commodity as speculators gambled that fuel demand would increase. That piece of data alone had market participants believing that the recession has ended! However, we came back to earth on Friday after a mixed bag of data had the market questioning if the pace of growth was sustainable? All last week, the black stuff has had issues sustaining a break of the $80 a barrel level. Should crude prices not be following oil fundamentals? Last weeks EIA report revealed an unexpected increase in US gas stocks, with supplies jumping to a new 2-month high. Gas inventories climbed +1.62m barrels, w/w vs. an expected decline of -1m barrels. The import number for crude also advanced for the 1st- time in 5-weeks. Its worth noting that OPEC believes that both the ‘producer and consumer are comfortable with prices between $75 and $80 per barrel and that higher price’s would only put the brakes on the pace of global economic recovery’. Ideally, they want to ‘maintain balance’ and will act accordingly at the Dec. meeting. Over the week, refineries operated at +81.8% of capacity, up +0.7% from the previous week. On the other hand, crude stocks rose +778k barrels vs. expectations of +1.9m to +339.9m barrels last week. This has left supplies +9.1% higher than the 5-year average. Supplies of distillate fuel (includes heating oil and diesel), declined -2.13m barrels to +167.8m. Surprisingly, inventories were +29% higher than the 5-year average for the week. If the USD finds any momentum ahead of NFP this Friday expect speculators to sell the commodity on upticks!

Gold rallied to a one week high yesterday on the back of the USD index slipping after stronger than anticipated US manufacturing and housing data convinced speculators to own the alternative asset class as an investment strategy ($1,052). Year-to-date, the yellow metal has climbed +19% this year. With UK financial companies needing another bailout has the yellow metal well supported!

The Nikkei closed at 9.802 down -231 (holiday). The DAX index in Europe was at 5,328 down -102; the FTSE (UK) currently is 5,002 down -102. The early call for the open of key US indices is lower. The US 10-year bonds eased 2bp yesterday (3.40%) and are little changed in the O/N session. With the Fed starting its 2-day policy meeting this morning, combined with stronger US manufacturing and housing data yesterday, managed to weigh on FI prices and the US yield curve. Capital Markets is betting that the Fed may begin to signal an increase in interest rates from their 50-year lows as the US economy is starting to show signs of stability and growth. Along with the Fed, ECB and BOE interest rate announcement occur later this week. Currently, the market does not expect any surprises. The ending of the Fed’s $300b buy-back program after 7-months is expected to pressurize treasury prices. The program was initiated to help stabilize the housing market and limit an increase in borrowing costs by keeping rates low. If equity prices continue to find resistance, then expect FI prices to look attractive at these levels!

Content is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Business Information & Services, Inc. or any of its affiliates, subsidiaries, officers or directors. If you would like to reproduce or redistribute any of the content found on MarketPulse, an award winning forex, commodities and global indices analysis and news site service produced by OANDA Business Information & Services, Inc., please access the RSS feed or contact us at info@marketpulse.com. Visit https://www.marketpulse.com/ to find out more about the beat of the global markets. © 2023 OANDA Business Information & Services Inc.