April 11, 2016

Markets Today: I (don’t) need a dollar

A fairly uneventful offshore session on Friday saw US stocks recover some of Thursday’s losses, bond yields pushing back higher while the US dollar was softer across the board.

A fairly uneventful offshore session on Friday saw US stocks recover some of Thursday’s losses, bond yields pushing back higher while the US dollar was softer across the board. The speculative (futures) market is now short dollars for the first time in almost two years. Oil jumped by about $2.5 in front of next week’s Doha meeting of OPEC and non-OPEC producers but with no tangible reason for optimism that a production freeze will be agreed.  (Incidentally, after Friday’s close, Moody’s cut by one notch their rating on three oil majors – Chevron, Royal Dutch Shell and Total SA).

The Canadian dollar was the clear outperformer in G10 FX, aided not just by oil but also a stellar employment report (employment +40.6k with unemployment down to 7.1% from 7.3% and against expectations for no change). AUD also benefited from firmer commodity prices and the improvement in risk sentiment, finishing NY at 0.7556 and after an only momentary dip below 0.75 last Thursday.  Sterling held its own despite some dire production and trade data and latest ‘poll of polls’ on the UK EU referendum showing the ‘remain’ and ‘leave’ camps running neck and neck.

The S&P 500 was +0.28% to 2047.6 but down 1.2% on the week.  US 2yr yields added 0.7bp to 0.695% and 10s +2.8bps to 1.7167%, so retracing a little of last Thursday’s sharp fall.  In commodities WTI crude added $2.46 to $39.72 and Brent +$2.51 to $41.94.  The LMEX index was +0.46% but iron ore fell by 18 cents to $54.57. Gold was virtually unchanged at $1240.69.

CFTC/IMM data for the w/e 2 April shows overall USD speculative positioning turning to short for the first time since the week ended 6 May 2014.  The prior week’s +25.6k went to -4.5k.  This was on a combination of a reduction in net EUR shorts (-53.5k from -62.8k) and a further extension in JPY longs (+60.1k from +54.4k). This is the largest net JPY long since March 2008 and has only been exceeded on 3 or 4 occasions in history – so clearly extreme.  AUD net longs extended slightly, to 26.8k from 23.5k but are from extreme.

NY Fed President and FOMC vice-chair Bill Dudley embellished his dovish credentials/firm alignment with Janet Yellen in a speech Friday, though his acknowledgement of dollar weakness as having reduced ‘that problem’ could be telling, suggesting the currency may prove less of a constraint to tightening later this year than it evidently has done to date. Dudley said that low inflation expectations were cause for concern, that there is ‘significant uncertainty’ about growth prospects abroad and repeated the call for a cautious, gradual approach to rate hikes and (like Yellen before him) stressed the limited ability to lower rates as reason for this policy caution.

US February wholesale inventories fell by 0.5% (-0.1% expected) and wholesale sales were also weaker than expected at -0.2%.  This prompted the Atlanta Fed to revise its Q1 ‘GDPNow’ estimate to just 0.1% from 0.4% as of last Tuesday and 0.7% the Friday before.

UK February manufacturing production fell by 1.1%, much worse than the +0.3% expected with January revised down to 0.5% from 0.7%.  Total industrial production fell by 0.3% against +0.1% expected with January revised down to 0.2% from 0.3%. This saw the NIESR to downgrade its estimate for Q1 GDP (due 27 April) to 0.3%. The February UK trade deficit came in at a much worse than expected GBP12bn (-10.2bn expected) with January revised to -12.2bn from -10.3bn.

Sunday’s CoreLogic RP data preliminary auction clearance rates showed a city-weighted national average of 67.8% up from 66.6% last weekend.  Sydney cleared 67.4% of auctions down from 69.8% and Melbourne 73.2% up from 69.2%.

Coming Up

It’s a big week internationally. The US earnings season kicks off tonight with Alcoa and three of the major banks report on Wednesday, Thursday and Friday (JPM, BAML and Citi respectively). Retail sales (Wednesday) and CPI Thursday) top the economic calendar. China has Q1 GDP on Friday (expected at 6.7% QTD YoY from 6.9%) alongside the usual raft of (March) activity readings and before that we’ll get CPI (today) and trade figures on Wednesday.

Locally it’s a big week too with two important inputs in the lead up to the 3 May RBA meeting. NAB’s latest business survey is tomorrow and The March labour force survey on Thursday. Barring particular weakness in one or other of these reports, the AUD looks like being well supported above 0.75 this week, having spent less than two hours below this level last week.


On global stock markets, the S&P 500 was +0.30%. Bond markets saw US 10-years +2.78bp to 1.72%. On commodity markets, Brent crude oil +6.37% to $41.94, gold+0.5% to $1,243, iron ore -0.3% to $54.57. AUD is at 0.7546 and the range since Friday’s local close has been 0.7526 to 7579.

The 2016 Euromoney FX poll is now open for voting and may be accessed at www.euromoney.com/FX2016

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