FX Market is not Boring just Exhausting

All the fun was in the Aussie last night, with the doves being trounced by the hawks as inflation numbers pushed the currency to post a new float high. Why can it not be this easy to trade the dollar? There is no fundamental trading at the moment, rather the market moves on the bickering qualities of Washington politicians.

With the debt status quo on hold, how much of a US credit downgrade has the market priced in so far? With next Tuesday even closer the average pundit expects ‘the’ sovereign downgrade to be worth another 4-5% loss to the dollar. A contrarian would probably argue that with so many foreign holders of US securities, they likely do not have sufficient dollars on hand to fund positions. Rather than liquidate in the hole, they could prefer to finance “margin calls” requiring them to buy dollars. These markets are not boring, just exhausting!

The US$ is mixed in the O/N trading session. Currently, it is higher against 10 of the 16 most actively traded currencies in a somewhat ‘subdued’ session.

A mixed bag of US data yesterday did little for the dollar as the market brushed aside all fundamentals to continue to pressurize the buck because of uncertainty over the US debt debate stalemate.

US home prices -4.5% decline in the 20-City May S&P’s Case-Shiller house price index was in line with market expectations, but lower than the adjusted April reading of -4.2%. This is the twelfth consecutive deterioration in the y/y pace. It’s worth noting that on a monthly non-seasonally adjusted terms, the survey managed to print a +1% increase, while the seasonally adjusted data was unchanged on the month. Analysts note that the seasonally adjusted print is consistent with other house price surveys. Big picture, with weaker house sales the market should not expect the improved scenario to turn into a succession of positive monthly changes. Digging deeper, eleven cities saw price advances while nine saw declines.

US new home sales fell unexpectedly last month, decreasing-1% to a seasonally adjusted print of +312k vs. +315k, further proof of continued softness in this sector of the US economy. Despite last week’s NAR report of sales of previously occupied homes falling to a seven month low the market had been expecting a seasonally adjusted y/y rise of +1.2%. Surprisingly, with soft demand prices increased, up +7.2% y/y and +5.8% month-over-month. Analysts noted that the ‘glut’ of new homes on the market has been depleted to a record low (-1.8%, m/m to +164k), because of builders cutting deep their inventories. Supplies would take 6.3 months to exhaust, down from +6.4 months in May. The builders arch enemy has been the deeply discounted foreclosure supply and the shadow inventories estimated at 2.2m units.

A pleasant surprise was US consumer confidence levels unexpectedly rising this month (59.5 vs. 57.6), despite the stuttering labor market conditions. Digging deeper, the index of present conditions advanced to 35.7 from 36.6, while the expectations index touched 75.4 vs. 71.6. Of late, household moods have come under pressure from weak US growth concerns, high unemployment, rising food and energy prices and the governments borrowing concerns. These variable are bound to affect consumer spending patterns with households remaining ‘apprehensive about the future’ according to the conference board.

Finally, in contrast to the Dallas Fed survey on Monday, economic activity in the Fed’s Richmond index was mixed in July, with the manufacturing index easing to-1 this month from three months ago, shipments held steady at -1 and the service sector revenues advanced to 7 from-4.

The dollar is higher against the EUR -0.11% and lower against GBP +0.10%, CHF +0.10% and JPY +0.27%. The commodity currencies are stronger this morning, CAD +0.21% and AUD +0.99%.

The loonie is wearing the ‘safer heaven’ hat as investors push the currency towards its four-year high. It’s a currency on steroids, performing well on the crosses especially CAD/JPY and EUR/CAD. The currency is still riding Carney’s hawkish coat tail comment last week that has futures traders pricing in at least one more hike by year-end despite a subdued CPI print. Month-to-date, it’s the fourth best trading currency among its 16 most-traded counterparts. It seems that the markets are now realizing that a reduction in the US credit status is going to have to be priced in overtime.

The currency continues to benefit from expectations of continued reserve manager demand and widening rate differentials. The futures market is moving to fully price in an October hike from Carney, while reserve managers continue to diversify newly accumulated reserves away from the USD and EUR. Technically, the loonie will be expected to underperform against MXN, SEK and AUD in the short term as they too offer even better value at current levels in a pro-risk environment.

The Canadian dollar is guilt free from association to its largest trading partner on many fundamental fronts. Investors are looking forward to this Friday’s GDP print for further currency bullish confirmation. Currently, the market is in dollar sell uptick mode (0.9417).

The AUD vaulted to a post float high this morning after the market digested a higher than expected second quarter inflation print. With Australia inflation surprised higher, it points to rate hike rather than a cut. Core-CPI rose by +0.9% on the quarter and +3.6% on the year against forecasts of +0.7% and +3.4%. The print is a blow for the doves who expect Governor Stevens to perform a rate cut before the year is out, beginning with a 25bp cut in December.

Coupled with ongoing dollar negativity, around US politicians inability to strike a deal before next Tuesday and the stronger than expected inflation figures means Aussie buying dip theory remains in vogue, with strong support ahead of 1.10 and option resistance at 1.11 and 1.1150 this morning.

Crude is lower in the O/N session ($99.21 -$0.38c). Oil prices received a boost from two quarters yesterday, first, US consumer confidence climbed from an eight-month low and second, on concern that the country will default on its debts sending the dollar lower. The market will now shift its attention towards fundamentals with this mornings weekly inventory report expected to reveal another drawdown on stocks.

The bull’s believe the debt issue will weaken the dollar and in turn provide support for commodities. The bear’s believe that a failure to raise the debt ceiling will be bad for commodity demand. Until the market can expect some sort of US debt resolution, the oil market should look forward to remaining volatile. Big picture, failing to raise the debt ceiling would mean the US could either default or have to cut spending on a variety of social services, which would have a negative affect on domestic oil demand, translating into lower prices.

Gold prices rose for the third consecutive session as the “prolonged” US debt stalemate boosts demand for the yellow metal as a haven. There was another record print this morning after US lawmakers failed to agree on hiking the federal debt limit again, raising fears over a possible default and boosting the appeal of bullion versus alternative asset classes.

Year-to-date, the yellow metal has advanced +15.3% and +7.8% this month alone, heading for its eleventh consecutive annual gain. Despite many believing that a deal will be done, “Rational” fear ahead of “the” decision continues to pressurize the dollar, hurting bonds and benefiting commodities. The metal is on course for its biggest monthly advance in three-months on concerns over euro-zone debt levels as well as the US debt negotiations. Monetizing US debt rather than fiscal consolidation has investors demanding the metal as a protection of wealth. In real terms you are not making any money by just holding cash, so there is demand for gold as a store of wealth. This ‘one directional trade’ is far from over, with speculators continuing to look to buy the metal on pullbacks until proven wrong ($1,626+$7.60c).

The Nikkei closed at 10,047 down-51. The DAX index in Europe was at 7,325 down-24; the FTSE (UK) currently is 5,913 down-16. The early call for the open of key US indices is higher. The US 10-year eased 3bp yesterday (2.95%) and is little changed in the O/N session.

Some of the pressure was taken off the long end of the US yield curve yesterday, a day after printing two-week high yields, on concerns that the debt debate stalemate would cause the loss of economic growth. Weaker US home sales data helped the belly of the curve to advance. Even a $35b 2-year auction that was not a disaster provided ‘some’ support.

Although not a great auction, speculation that the US lawmakers will agree to lift the nation’s debt limit in time to avoid a default boosted investor demand. The issue sold at a yield of +0.417%. The bid-to-cover was 3.14 compared to the average of 3.19 the prior four sales. The indirect bid was +27.2%, beating last months +22%, but lagging the +31% average.

Today we get the second of this week’s three auctions, $35b of five-year paper, and tomorrow’s $29b of seven-year debt. Expect dealers to do their magic and seek a concession, unless the market gets sideswiped from the debt debate.

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