Markets Today: Dollar days

Less than hard-core Bowie aficionados can be forgiven for not immediately humming this track, which features on the Blackstar album released two days before his untimely death.

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Less than hard-core Bowie aficionados can be forgiven for not immediately humming this track, which features on the Blackstar album released two days before his untimely death. The song is about Bowie’s lack of regret at moving from the UK to America back in 1974 (soon after the death of the Ziggy Stardust persona).

A segue to today’s note is that the dollar has risen for the third successive day. The FT has a piece this morning titled ‘Dollar’s ascent enters autopilot mode’ in which it features a flag-laden graphic showing that with the exception of the yen, the dollar is higher year-to-date against every major currency (led by a 6.85% rise against the South African rand). Purists (and fans of WCRS <Go> on Bloomberg) will note that the NOK is also up on the year, something of a curio given its oil producer status, but doubtless reflective of the fact the State Oil Fund is busily selling offshore assets to help plug budget holes at home. A familiar theme elsewhere among major oil producers, but which has not prevented their currencies from weakening or seen their dollar pegs held – so far.

After risk-rallies engendered by a combination of yesterday’s fourth successive steady PBoC CNY fix and better than expected China December trade data, the turnaround from early New York trade is blamed entirely on latest EIA oil inventory data. This shows crude oil inventories rising by a higher than expected 234k barrels last week and supplies at Cushing, Oklahoma (the delivery point for WTI crude) climbing to an all-time high of 64 million barrels. Though the EIA also has US fuel demand falling 2.5% last week, we’d note that Chinese crude petroleum imports jumped to a record 33.2mn barrels in December, 9% up on a year ago. We are not rushing to join the growing chorus of folks claiming that lower oil prices are a function of falling demand as well as rising supply.

The EIA news has served to refresh downward pressure on oil prices and where Brent crude today has flirted with sub-$30 levels just as WTI crude did yesterday. Both currently sit just above $30, but the news has nevertheless brought about a sharp reversal in the European morning global equity rally. In contrast to the late day rallies we saw into the New York closes on Monday and Tuesday, losses are currently; accelerating with indices 2-3% lower heading into the close.

This has refreshed the bid for US treasuries, with the 10yr yield down a further 3bps to 2.07% after being as low as 2.04% earlier. In currencies, the Canadian dollar is the biggest loser (-0.7%) not just within G10 but all actively traded currencies. AUD/USD is 0.4% lower on Tuesday’s NY close, currently at 0.6960 (the early week low was 0.6925).

The Fed’s Beige Book released an hour ago shows the majority of Fed districts describing their economy as enjoying ‘moderate’ growth, with still-subdued wages a fairly common feature across all districts. In Fed-speak, Charles Evans said he’d have preferred not to have raised rates in December (even though he went along with the majority). Meanwhile Boston Fed president Eric Rosengren – now a voter – says he doesn’t expect oil at $10 but admits it’s possible, and says he ‘hopes’ the Fed doesn’t have to use negative rates like the ECB. I think we can safely rule out a January Fed rate rise.

Coming Up

Today we get the only significant Australia economic event of the week, namely the December employment report. Our economists are of the view that sample rotation issues have overstated underlying jobs growth over the past two months. Nevertheless, markets remain sensitive to headline employment numbers and solid employment growth and above average business conditions have been at the center of the RBA’s more optimistic assessment of the economy.

The consensus is for employment growth this month is -10k m/m and for the unemployment rate to rise to 5.9% from 5.8%. NAB expects employment to print weaker at -25k as we expect some of the sample rotation affects to dissipate.

RBA market pricing has moved significantly since mid-December with rate cut expectations moving from 11 to 23bps of rate cuts for the year ahead. Clearly the market is vulnerable to another positive upside surprise – but like in November this reaction would be quickly unwound if details revealed the main cause was sampling quirks rather than underlying strength. Ditto, we’d expect any knee jerk positive currency reaction in the AUD to be faded.

A fair bit of interest offshore tonight, with the Bank of England meeting and where the minutes and voting record is published immediately upon the policy announcement. So even with no change in Bank Rate from the current 0.5%, the narrative is likely to be of some market sensitivity. We also get the minutes of the ECB’s December policy meeting at which, recall, further easing measures were announced but which underwhelmed market expectations and triggered the violent upwards reaction in all things EUR.
In the US tonight, JP Morgan are due to report their earnings prior to the stock market open (and Intel after the close, so Friday morning our time). US jobless claims are due while St. Louis Fed President James Bullard speaks.

Overnight

On global stock markets, the S&P 500 was -2.10%. Bond markets saw US 10-years -3.33bp to 2.07%. On commodity markets, Brent crude oil -2.11% to $30.21, gold+0.8% to $1,094, iron ore -4.1% to $39.51. AUD is at 0.696 and the range was 0.6951 to 0.7049.

For full analysis, download report:
Markets Today: 14 January 2016 (PDF, 276KB)

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