The dollar is wilting

It’s Friday and the holiday shortened week is around the corner. Next week trading desks will be ‘light’ of personnel and most currencies short term predictions will be a crap shoot. In the O/N session the dollar has lost some ground, and rightly so, as the technicals have given way to profit taking. The German business confidence index climbed to its highest level in 17-months this morning (94.7 vs. 93.9) convincing investors that yesterday’s negativity was overdone. With little data on offer today, traders will be happy to exit this week with no further damage.

The US$ is weaker in the O/N trading session. Currently it is lower against 12 of the 16 most actively traded currencies in a ‘volatile, yet illiquid’ trading range.

Last week’s disappointment in US initial claims was not a mirage. This week’s headline print rose another +7k to +480k. Analysts have tried to explain away some of the uptick on severe weather conditions witnessed last week, but in reality, the improving trend that we had been experiencing managed to stall during the first fortnight of this month. The breaking of the trend does not bode well for the short term. Digging deeper, continuing claims, in the ‘regular state program’, rose by +5k to +5.19m, this after we experienced a whopping -289k decline the previous week. Surprising to most analysts, the lagged data showed a much smaller increase in ‘raw terms’, a plus in most peoples books. It’s worth noting that if the seasonal adjustment factors are applied to the ‘aggregate’ level of benefits across all programs, the ‘expanded’ level of continuing claims would have fallen by -500k in the 2-weeks since the Nov. benchmark. The report showed that the number of people who have used up their ‘traditional’ benefits and are now collecting extended payments jumped by about +144k to +4.73m. The 4-week moving average of initial claims (less volatile measure) fell to +467k, the lowest level in 14-month. Technically it is too early in the cycle to draw firm positives for the US unemployment rate (+10%). However, we could be onto something better if the improvements remain consistent.

Yesterday’s Philly Fed managed to beat most analysts’ estimates (20.4 vs. 16.0). Capital markets were concerned that we could be on to a hiding after the poor showing of the Empire manufacturing survey released earlier this week (2.6 vs. 24.7). Digging deeper, the details were mixed, with employment posting a positive print (0 to 6.3), the first time in 18-month, while new-order growth decelerated to half the pace we were witnessing last month (14.8 to 6.5). Another sub-component, the price paid, accelerated to 33.8, nearly doubling last month’s print. On the other hand, prices received remained negative. Stronger evidence that manufacturer’s margins continue to get ‘squeezed’. The six month outlook held few surprises. Manufacturers expect to see some growth in the sector, albeit at a slower pace. Weaker expectations for new orders, shipments and capital expenditures accounted for some of the decline in the outlook, while much stronger employment and average workweek offset some of the weakness. Some positives, but not all that positive!

Global equities were sure to underperform yesterday after the debacle of the Citi issuance. We were just lucky that it occurred at year-end rather than the beginning of the New-Year. Hedge funds and portfolio managers have been desperate not to underperform more than they have too. CITI’s plans to repay the TARP did not go according to plan, the total raised, $17b, was $3b short of what was anticipated and the price was nearly -10% below expectations at $3.15. Underwriters continue to be buyers of the stock and are seen as a natural stop-loss for the time being. The US government decided not to participate in the offering as their initial investment remained underwater.

The USD$ is currently lower against the EUR +0.37%, GBP +0.35%, CHF +0.58% and higher against JPY -0.20%. Yesterday’s Canadian inflation numbers were not just confusing for the layman, but for economists too. Yearly core-inflation slowed compared to the previous month (+1.5% vs. +1.8%), but was somewhat higher than economists’ expectations of +1.3%. The yearly headline inflation accelerated from +0.1% to +1.0%, and was also higher than economists’ had predicted of +0.8%. The seasonally ‘unadjusted’ core-inflation advanced over the month from +0.1% to +0.4%, but seasonally ‘adjusted’ core’ slowed down from +0.3% to +0.2%. Confusing? Yep, we go with the yearly core inflation which slowed more in line with the Governor Carneys expectations. Inflation readings must be compared with the BOC expectations since policy decisions are based on this. Despite the loonie experiencing the knock on effect from the dollar’s ‘Bull Run’, the currency has managed to hang on in relative terms compared to other G7 currencies. With the CPI data higher than expected, US leading indicators above expectations, and the Philly Fed outperforming has managed to lend a bid undercurrent to the currency. Couple this with corporate USD sell orders and overstretched technicals is making it an easy decision for investors to rid some of their insurance premium. Is the ‘big’ dollar move sustainable? Currently, the market is still looking at dollar rallies as a sell opportunity. If one prefers being long the greenback, crossing it with a commodity sensitive currency is not the ideal answer (CAD, NZD, AUD and NOK). An investor would get more ‘bang’ for their buck if it was done out-rite with the EUR as analysts continue to favor buying the loonie longer term.

Booking profits, seeking safety, that what most of the action has been about this week for commodity currencies. The O/N session seems to have put a stop to the AUD slid. After the dollar drove the currency to a two month low, investors technically see this as a good buying opportunity. The AUD snapped its three day fall as traders believe that the -2.6% drop this week, the largest vs. the USD, is overdone. The RBA’s deputy Governor Battellino believes that Australia’s monetary policy is ‘now back in the normal range’ after lenders raised business and home-loan rates by more than the RBA themselves have increased (+3.75%) the overnight cash rate target. Traders have been paring their bets that the Cbank is in a position to hike rates for a fourth consecutive time in Feb. Technically the market has gone too far (0.8887).

Crude is higher in the O/N session ($73.41 up +76c). Yesterday, Crude fell for the first time in 3-days yesterday as the dollar strengthened against the euro, printing 3-month highs and limiting the appeal of most commodities as a currency hedge. However, the commodity is poised to have its largest weekly gain in over a month on optimism that fuel demand will increase on the back of stronger global economic fundamentals. Earlier this week oil had advanced after the weekly EIA reported that inventories declined -3.69m barrels to +332.4m vs. expectations of a decline of only -2m barrels. Lending initial support, imports of crude declined -4.5% to +7.77m barrels a day (the lowest print in 14-months). Refineries are operating at +80% of capacity, down -1.1%. On the flip side, US gas consumption rose +1.5% last month, y/y, as the economy recovers from the recession. Gas inventories gained +879k barrels, or +0.4%, to +217.2m barrels last week. The market was anticipating a rise of +1.25m barrels. In contrast, distillate stocks dropped -2.95m barrels to +164.4m, compared with a forecast of a -500k decline. In total, US daily fuel demand averaged +18.8m barrels over the last month, down -1.8% from a year earlier. Demand destruction is healthy and the commodity prices remains range bound. There was nothing bearish about this week’s report. However, the dollar’s action continues to naturally pressurize positive price movements. The reserve currency will dictate the direction of commodities.

Wow! Gold price movements are not for the faint-of-heart. $20-$40 swings seem to be the new norm. That’s not surprising since everyone and their mother wants a piece of the metal action. Yesterday, the ‘yellow metal’ prices fell just under -3% as the dollar’s extraordinary climb has eroded the demand for the commodity as an alternative investment. Year-to-date the metal has climbed +25% reaching a new record of $1,227.50 two weeks ago. Even with all the noise and volatile movements in other asset classes, the ‘yellow metals’ pull backs continue to remain a buying opportunity for ‘the international currency’ ($1,108).

The Nikkei closed at 10,142 down -21. The DAX index in Europe was at 5,885 up +41; the FTSE (UK) currently is 5,246 up +29. The early call for the open of key US indices is higher. The US 10-year bond eased 5bp yesterday (3.49%) and are little changed in the O/N session. Treasuries prices continue their climb as yields near 4-month lows entice investors to add the asset to their portfolios as Bernanke and Co. kept rates close to record lows earlier this week. With the greenback surging, equities underperforming, has investors seeking the safety of the FI asset class. Technically, the market remains better bid on any pullbacks as we head into shortened Christmas week.

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