The Obama dollar hanging tough

Liquidation with a purpose has certainly given long AUD positions a headache. The surprise non-move by the RBA last night has side swiped nearly all analysts. Governor Stevens wants to experience the strength of the recovery before hiking borrowing costs again. In retrospect, their economy is ‘flying’ compared to others and now they question sustainability? The currency continues to have a strong rate premium built in after three consecutive hikes. It’s a slam dunk for ECB and BOE to remain on hold later this week. They are the predictable ones. Now back to market consolidation in other currencies after the steep and violent moves we have witnessed over the last few weeks. The trend remains our friend with the EUR finding it difficult to advance with meaning. Consolidation favors a stronger dollar by default.

The US$ is stronger in the O/N trading session. Currently it is higher against 13of the 16 most actively traded currencies in another ‘volatile’ trading range.

Yesterday’s weaker consumption growth from the US consumer spending data technically has had no affect on GDP. Despite the growth in personal income remaining weak (+0.2% vs. +0.7%), analysts believe that a ‘sustainable contribution’ remains intact and that’s even after the expiry of incentive programs (clunkers). Digging deeper, consumers remain conservative in nature as we witnessed the saving’s rate once again advancing in Dec. to +4.8% (the highest level in 15-months). Some of this increase could be directly attributed to a slower pace of consumption, disposable personal income trending higher and lower taxes (not under the new budget proposals). Inflation remains a non-issue. Personal consumption deflator is up +2.1%, y/y, and accelerating on base effects, while ex-food and energy, prices are up +1.5%.

Turning to the income report, data was mixed, growth was strong (+0.4% vs. +0.3%), however, all the growth was in social benefits (+0.7% m/m), while wages and salaries improved only modestly. Worth noting that government unemployment insurance benefits continued to decline, a strong positive for the US labor market. In respect to consumption, personal spending grew at a slower pace than anticipated (+0.2%), however, the previous months headline print was revised higher (+0.7% vs. +0.5%) as both durable and non-durable goods spending remained strong.

Equities approved of yesterday’s ISM headline print with US manufacturing activity expanding at the fastest pace in five and half years (58.4 vs. 55.9). Is this the ‘V’ shaped recovery that many have predicted? One should remain cautious as there remains a question mark about manufactures inventories. Manufactures independently say they are falling, quarterly GDP backs this up, but monthly factory inventory say ‘not’ so. With something remaining a miss, the inventory position remains very much ‘uncertain’. It continues to remain the scourge of this recession. Digging deeper, most of the sub-components gained. Production (59.7 vs. 66.2), new orders (65.9), employment and imports all experienced acceleration in the pace of growth. Even the prices paid component is accelerating at speed (fastest pace in 30-months), mostly on the back of rising commodity and raw materials prices. The optimist will like the stronger employment component as a positive manufacturing print will bode well for this Friday’s NFP headline. Market consensus is looking for a small positive print (early indications +13k).

The USD$ is currently higher against the EUR -0.09%, GBP -0.27%, CHF -0.23% and lower against JPY +0.04%. The commodity currencies are mixed this morning, CAD +0.24% and AUD -1.26%. Yesterday was a reversal of fortune for the loonie. With global equity indices and commodity prices doing an about face after Friday’s price action, again gave renewed support for the commodity rich countries currency. Last month, the CAD gave up -1.6% to its larger southern brethren, and remains the fourth-worst performer amongst the 16 most-traded USD counterparts. Depending on equities and commodities, any CAD rally will have investors looking to sell some of their long positions. Currently, analysts believe the CAD is still overvalued and are targeting 1.0750-75 near term. This week’s North American employment reports, could by default, renew USD support and temporarily derail the loonies’ strength.

Wow, being sideswiped by ‘transparency’ certainly gives one a big headache. The RBA flatfooted most of the market yesterday by keeping borrowing costs on hold at 3.75% vs. a 65% futures market hike expectation to 4%. The AUD immediately fell and has consolidated at last months lows. Weaker private business confidence reports last night managed to lend support to Governor Stevens and his policy makers ‘surprising’ decision. Technically, falling confidence indicators are a sign the bank’s previous three straight increases are damping marketing sentiment. Currently, there is a lofty rate premium built into the AUD value after three successive hikes since Sept. Analysts now expect the currency to trade back down to the 0.8500 level over the next one to three months.

Crude is little changed in the O/N session ($75.10 up +33c). Crude got a leg up yesterday on a weaker dollar and on a stronger global manufacturing headline prints that speculators believe will increase fuel consumption amongst the world’s biggest energy-consuming countries. Perhaps this week’s US inventory report may dent these early price gains. Further disruption in Nigeria has caused a pipeline leak. MEND denouncing their 3-month ceasefire ‘again’ has added support to the market. Any geo-political tension in an oil-rich region will only ever support global prices. Even the National weather forecast is giving the commodity a helping hand and predicting below normal temperatures for next week along the east coast of North America. Month-to-date, the black-stuff has lost -8.2%, the first monthly decline since last July and the biggest drop in 13-months. On the whole, commodities have declined in the same time period, on concern’s over the pace of the recovery in global demand. Remember one data point does not make a trend. Analysts and traders expect another bearish weekly inventory print this week. Last week’s EIA report showed that gas inventories rose to a 22-month high proving that demand destruction is out there. Crude, on the other hand, dropped -3.89m to +326.7m vs. an expected rise of only +1.5m barrels. Technically, the crude print was the only bullish component of the report. Refineries ran at 78.5%of capacity, little changed from the previous reading of 78.4%. Overall market sentiment remains negative with trading momentum pointing to lower levels, yet yesterday’s action will try and dissuade that train of thought. The market continues to see sellers on upticks in the short term.

Just when you thought it would be ‘safer’ to get out of the water, gold recaptures some of its luster, rallying the most in 3-weeks thus boosting demand for the metal as an alternative investment. Prior to yesterday, gold had shed -1.1% this year, while the dollar rallied just under +3.5%. Dollar bulls seem to breathing a tad easier after last month’s bloodshed. The budget numbers that Obama’s administration is quoting has speculators seeking hard assets like gold and oil. Technical analysts believe that the commodity remains under pressure as a stronger dollar will continue to curb the commodities appeal as an alternative investment. They do not believe that the commodity downfall has run its course, even after two months of previous declines. Liquidation with a purpose will again have nervous investors seeking an early exit. With the EUR remaining vulnerable and the dollar the ‘go-to’ currency, expect to see selling on upticks for the time being ($1,108).

The Nikkei closed at 10,371 up +166. The DAX index in Europe was at 5,667 up +5; the FTSE (UK) currently is 5,245 down -7. The early call for the open of key US indices is higher. The US 10-year note backed up 7bp yesterday (3.67%) and are little changed in the O/N session. Higher yields, higher yields, higher yields. That’s the general dealer’s consensus for the remainder of the year. US manufacturing data yesterday certainly support their theory as yields managed to back up from their yearly lows after reports showed that manufacturing expanded last month at the fastest pace in more than 5-years. Fed member James Bullard has voiced his opinion that the risk of deflation has passed. With US consumer spending rising for a third straight month, investors will probably change their tact and begin to expect inflation to accelerate. Once investor psyche get its head around ‘temporary’ risk aversion, the market should expect to see much higher yields. Expect any upticks in bonds to be sold short term.

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