Japan China and the EU bully the dollar

The dollar has been getting it from all angles this morning. If it’s not Japan, it is China, and if it’s not them its Europe. One minute the planet is buying dollars for surety purposes because of our global growth concerns. Next, its forget protection, dump dollar positions because yields are too low. Make your mind up. The Irish bond auction went well, good for the Irish and good for EUR. China is publicly shying away from US treasuries as yields are not attractive, good for EUR. This mornings disappointing German ZEW index (14 vs. 21.2) will dent hopes that the strong recovery seen in the 2nd Q could continue. Did the index happen to miss the ‘favorable’ Bank stress tests shenanigans? Drown out the white noise, put on your blinkers and keep to your convictions. It is a tight range after all.

The US$ is weaker in the O/N trading session. Currently it is lower against 11 of the 16 most actively traded currencies in a ‘choppy’ trading range.

Yesterday was not a good start for data in the US this week. The headline print for the Empire manufacturing index was poor (7.1) and the details were worse despite the reading pushing higher from the previous month, which was the lowest print in 9-months. Digging deeper, new orders and shipments fell for the first time in a year. The knock on effect of weaker orders will lead to weaker shipments in the months ahead. Worse still is the unfilled order category falling for the fifth consecutive month, which will lead to no order backlog as new orders softens. The circle is broken. Analysts never seem to put much emphasis on this release mostly because of the small sample size. However, it’s an indicator for the overall US manufacturing sector and if relied on, it does not bode well for positive surprises in the factory data out of the US this week. The forward looking sub-category expects new orders and shipments to be higher six months from now. This will be difficult to achieve with a ‘broken’ order cycle. On a positive note, employment growth remained positive, doubling the previous month and the margin pressures are moderating, as prices paid continue to rise, but at a slower pace than earlier in the year.

The USD$ is lower against the EUR +0.38%, CHF +0.17% and JPY +0.08% and higher against GBP -0.10%. The commodity currencies are stronger this morning, CAD +0.39% and AUD +0.50%. Higher yielding, growth sensitive currencies are not immune when we discuss global growth concerns. The loonie yesterday happened to print it lowest reading against its largest trading partner, the US, in just under a month. With Canadian bi-lateral trade amounting to 70% of total trade, it’s impossible not to feel a knock on effect from world’s largest economy. Being long CAD outright is not paying ‘extra premium’ as the world coverts dollars in times of risk aversion. The intraday liquidity is squeezing the weaker long CAD positions out of a tight trading range. To own it on the cross would be less volatile and a ‘safer-heaven’ investment with its stronger fundamentals working for it. Frequently, when the US comes under pressure, the loonie is dragged along because of its proximity. With Bernanke stating that the pace of economic recovery is more likely to be modest has many bulls reassessing the depth of their loonie convictions. Investors have been strapping on some risk aversion trading strategies as equities and commodities retreat. Watch the crosses. It will be a good indicator for the loonie buyers running out of ammo!

The AUD has extended its gains this morning as Asian bourses advanced, boosting the demand for higher-yielding assets. The currency snapped this weeks losing streak against the yen after the RBA minutes indicated that policy maker’s outlook for a stronger economic growth ‘has not changed’. Interest rate differential continue to play a big part of the currency’s attractiveness. The minutes said prices for Australia’s major commodity exports remained at ‘very high levels’ despite a ‘moderation’ in Chinese growth. The market is leaning towards another hike, not now, perhaps later in the year as policy makers seems comfortable remaining on hold. No currency is immune to this ‘questionable growth’ environment. Risk aversion will likely force the bull’s hand this week, capping rallies, as equities find it difficult to maintain traction at the moment. In reality with the outlook for both the US and Chinese economies becoming uncertain, growth-sensitive currencies like the AUD, CAD and KIWI, are unlikely to continue to draw strong buying interest from speculators (0.9028). Follow the Asian bourses for guidance.

Crude is higher in the O/N session ($76.01 up +77c). Crude prices continue to trade near their one month low as mixed global bourses have ignited concerns that the recovery will not be strong enough to revive fuel demand. The market expects to see ‘side-ways trading in a tight-range’ this week because of the ‘stuttering economies’. Prices have gravitated towards these lows on the back of a bearish EIA report last week and on data showing that economic growth in both China and the US is slowing. The weekly supply report showed that US inventories of gas and distillates (heating oil and diesel) climbed last week (+400k vs. a flat expectation, while crude stock fell -3m barrels vs. a loss of -1.9m. Distillate stocks rose by +3.5m to +173.1m barrels (the highest weekly inventory level in 27-years). The demand for oil products also fell, as gas demand hit a 2-month low, while demand for distillates is at the lowest level in 10-months. The report re-confirms the IEA conclusion earlier this month that ‘oil demand could take a substantial hit should economic growth continue to falter’. It’s no wonder that the market continues to pressurize commodity prices. Technical analysts believe that $75 a barrel remains a sticky level to penetrate. The recent macro-data flow indicates that the US activity has slowed down and the market should expect further price pull back as US fundamentals continue to show a market that is still overstocked, particularly on the product side. Speculators remain better sellers on up-ticks in the short term.

Gold prices found firmer footing yesterday after weaker Empire manufacturing data had investors increase their demand for the metal as an alternative investment. A weaker dollar is also helping most commodity prices. The market continues to require safer assets at the expense of equities and other commodities. With a genuine fear for global growth, by default, is boosting the demand for the metal as a protector of wealth. Year-to-date the metal has risen +11%. With treasury yields expected to remain low for sometime and with the Fed announcement last week of their intentions to buy bonds could promote a quickening inflation rate, which would promote pushing commodity prices higher. For most of this year, we have witnessed a gold rally on the back of a weaker EUR ($1,229 +$3). Now that the dollar has entered the technical ‘bull’ trading range as a safer heaven investment, will the EUR’s weakness support higher ‘yellow metal’ prices for much longer?

The Nikkei closed at 9,161 down -35. The DAX index in Europe was at 6,161 up +51; the FTSE (UK) currently is 5,318 up +42. The early call for the open of key US indices is higher. The US 10-year eased 10bp yesterday (2.56%) and backed up 4bp this morning (2.60%). The 2’s/10’s spread continue to flatten (+211), heading towards analysts predicted +200 target. This is certainly making it cheaper for the Obama administration to fund its deficits. Longer dated product’s yields remain coveted, with 10’s happening to print a 16-month low yesterday after US manufacturing data disappointed. With the Fed’s intention to resume buying US government debt to bolster a faltering economic recovery will provide further support for a flattening curve bias. The market will be content in owning longer dated product on deeper pull backs.

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