Recession to Recovery is a Dollar Bear’s Headache

Even the Bank for International Settlements (BIS) is getting its digs in and it is aimed squarely at CBankers. They preach that ‘monetary policy is not fully neutral from a financial stability perspective’ and that the authorities should ‘learn how to factor in the effect of their policies on risk taking perspective’. A low interest rate is encouraging banks to take on too much risk and potentially expose us to further financial failures and asset bubbles. Historically, the trading session day after an NFP print is the quietest trading day of the month. Not so sure this time as we encroach on strong resistance levels in EUR and they do look vulnerable. It seems its back to the drawing board for the Bears!

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 ‘volatile, yet illiquid’ trading range.

Trying to wrap one’s head around these market movements is definitely giving the investor double vision. The weakness earlier last week from various job indicators managed to wreak havoc on Friday’s NFP headline print which was much stronger than expected (-11k vs. -125k). Even the unemployment rates declined 2bp to +10%, despite the White House earlier preparing us for the worst. Combine this with the ever improving jobless claims data has some analysts predicting that the trend will continue for this month. Digging deeper into the report, seasonal distortions did not cause unnecessary grief and the surprise headline can be taken at face value. Even the Sept. and Oct. monthly revisions managed to provide healthy support to the US employment trend. The average work week improved 2-ticks to 33.2 vs. 33, reversing the trend of ‘underemployment’. This can only be good for disposable incomes! Even the temporary employment sub-sector seems to have turned the corner (+52k). Despite only being temporary, employers are beginning to see the need for additional labor, which suggests that ‘permanent’ improvements are likely in foreseeable future. The market is still trying to get its head around the uptick in the unemployment rate. Even with it strengthening, we can expect it to remain high and volatile for some time.

The USD$ is currently higher against the EUR -0.40%, GBP -0.66%, CHF -0.47% and the JPY-0.64%. The commodity currencies are weaker this morning, CAD -0.24% and AUD -0.65%. Oh to be a fly on the wall at the Canadian Stats Bureau! Consistency is everything. Again no analyst was in the same ball park when the Canadian employment report on Friday revealed that five times as many jobs were created last month (+79.1k). Similar to its largest trading partner, the unemployment rate managed to retreat 1bp to +8.5%. Digging deeper, full-time employment rose + 38.6k, while part-time jobs increased by +40.4k. Initially it was a bullish report for the loonie which happened to appreciate close to +1% immediately after the announcement. However, with the USD index aggressively advancing on interest rate speculation after the NFP print, the loonie gave it all up and then some. With commodity prices plummeting on their inverse relationship with the dollar, commodity growth currencies took it on the chin. Tomorrow we have the BOC rate decision. Despite stronger fundamental data of late, Governor Carney is expected to confirm the BOC commitment to keeping rates low for an ‘extended’ period of time. Capital Market’s continue to tout June of next year as the month of the first rate increase because of fading wage gains and slow economic growth. The USD direction remains the barometer for the CAD for the time being.

The AUD erased earlier losses as advertisements for job vacancies jumped down-under (+5.2%) by the most in 2-years. Presently the carry-trade and interest rate dynamics continue to influence the value of the currency. In theory and technically, the currency has remained better bid on pull backs as demand for riskier assets is robust on the back of a stronger NFP print. Currently commodity values are the problem to the currency advancement. Look for speculators to own more of the crosses, AUD/JPY AUD/CHF for value. This will be a similar story for the loonie. Last week the RBA came and delivered, but hinted of ‘no’ further threats to raising future rates as Governor Stevens hiked rates 25bps to +3.75% on compounding fundamental evidence revealing an economy gaining strength. He also signaled that that he may now pause, stating that the board’s ‘material adjustments to borrowing costs are enough to keep inflation within policy makers 2-3% target range’. Rising consumer confidence, higher house prices and China’s demand for commodities continues to drive the ‘new upswing in the economy that will last several years’. On the face of it, the RBA statement was very bullish in respect to other Cbanks, but at the same time distancing them from any aggressive tightening cycle. Plummeting commodity prices will slow an AUD rally short term (0.9100).

Crude is lower in the O/N session ($74.80 down -67c). After early morning gains on Friday on the back of stronger NFP data, crude managed to fall to a new 2-month low by session’s end. With the greenback surging curbed the appeal of commodities to investors. Fundamentals continue to push the black-stuff about in a tight trading range. The Saudi oil minister, al-Naimi, said yesterday that prices are in ‘the right range and there is no need to reduce inventories’. OPEC meets late this month. Weekly US data continues to support the bear trade. Last week’s EIA report revealed that US inventories climbed as consumption dropped. Oil inventories rose +2.09m barrels to +339.9m, w/w (highest level in 3-months). Also surprising was gas supplies surged +4m barrels to +214.1m. The market had been expecting a drawdown for crude of -400k, while gas was to increase by +700k barrels. Demand destruction is alive and kicking as weekly fuel demand slipped -2.6% on the back of refineries reducing operating rates for the 4th time in the last month and a half. It was also estimated that the 4-week moving average for total US daily fuel demand was +18.5m barrels. Other factors continue to contribute to negative price action. Technically, the markets have been paring their open positions ahead of OPEC’s gathering. Secondly, a report last week on Russian output (the world’s largest producer) showed that it remains at a record high for a second consecutive month. Expect the USD’s direction to dictate price action medium term. Support levels look vulnerable here!

Bull headache! Gold just did not fall. It plummeted on Friday and again during this morning session. Many dealers seek an exit as a rejuvenating dollar convinces investors to sell the yellow metal after it printed a new record high. Gold prices have experienced wild gyrations of $20-$40 price swings over the past few trading sessions and Friday’s action was no exception. The commodity fell 4%, the most in a year and will remain vulnerable to further selling pressure if the USD continues to find traction. Seller beware, despite the ‘mother in-law’ and anyone who can, does own this ‘hot’ commodity, these pull backs remain strong buying opportunities as it’s ‘the international currency’ ($1,143).

The Nikkei closed at 10,167 up +145. The DAX index in Europe was at 5,776 down -41; the FTSE (UK) currently is 5,286 down -36. The early call for the open of key US indices is lower. The US 10-year bond backed up 8bp on Friday (3.45%) and are little changed in the O/N session. Last week ended up being a losing week for US treasuries. Surprisingly strong US employment data caused the curve to ‘bear flatten’. 2-year notes prices fell the most in 3-months on the back of the US economy losing the fewest jobs since the recession began. This week $74b of new product needs to get absorbed (3’s-$40b, 10’s-$21b and 30’s-$13b). Dealers for various reasons have significantly cheapened up the curve already. Do not be surprised to see investors acquire product at ‘these’ higher yields. FI is pushing us towards higher yields and equities are telling us low yields are here a long time. One of the asset classes is wrong!

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