Dollar falls to rising crude, equities, and negative central bank rhetoric:
Once
again the dollar was handed more losses to the euro and pound sterling
courtesy of crude oil and US equities. The front month crude contract
broke the $73 level today, pushing the S&P 500 to fresh 7-month
highs. After better than expected US fundamentals (retail sales, jobs)
the dollar didn't stand much of a chance against the higher-yielding
currencies and their correlated markets as they all made strong upside
moves pushing the dollar lower as the USD Index slid back under the key
80 level.
30-year bond auction contributes to dollar weakness--
The
strongest move against the dollar came in the afternoon NY session. At
1303 EST the results of the 30-year bond auction were released and it
went much smoother than the markets were expecting. What made this a
good bond auction which was good for equities, crude, and gold, and bad
for the dollar was two main factors:
- Low yield
- Strong foreign demand
The
expected yield for this auction was 4.80% but due to the bidding and
healthy demand, the auction high yield was just 4.72% and the 8bps net
positive differential between the expected and the actual is very
bullish and favorable. If market participants wanted to force the
Treasury to pay more to borrow their money for 30-years they would have
forced this through a higher yield.
The other factor that
made this auction go well was the indirect bidding which came in at 49%
vs. an average of just 25.8% and a full 2.6% higher than the previous.
Indirect bidders are those from foreigner nations like China and Russia
and the fact that foreign sovereign money-flows showed a healthy
appetite for US debt helped rally Wall St. and sinking the dollar.
Now despite the strong gains made after the 30-year bond auction
this afternoon the equities market dropped into the close which is
further proof that participants need news and positive fundamentals to
keep buying and once the euphoria wears off, prices drop again. The
S&P 500 failed again to close above the key 950 level and this has
been a reoccurring theme this week. As I said in yesterday's
update I am not a believer in what we're seeing on Wall St. but I'm not about to go against the flow either...
Fed wants dollar to continue depreciating:
Around 1350 EST Atlanta Fed Lockhart gave the markets with more anti-dollar rhetoric:
"USD role as reserve currency may decline; not made up mind yet to increase Treasury purchases"
As
soon as those comments from Lockhart hit the wires the dollar took
another hit and his rhetoric helped send the euro and pound sterling to
their highs. Basically there wasn't a single fundamental, geo-politcal,
or market correlation reason to buy the dollar today, it was pressured
lower from every side. And reading between the lines on Lockhart's
comments I believe what he's saying is that he is open to the idea of
seeing the Fed monetize more sovereign debt which is obviously a very
USD negative factor.
The Fed still wants the markets to sell the
dollar, it's clear as day. When the Fed starts talking about the
possibility the dollar will be removed as the world's reserve currency
I do not see how it gets any more obvious they want the dollar to
continue depreciating in the near-term. In recent years the Fed has not
made a single mention of the dollar potentially being dethroned as
currency king of the world and now they are changing their tune and I
believe this is the Fed's way of assaulting the dollar but in a
somewhat subtle manner.
The Fed obviously can never came
straight out to tell the markets to sell the dollar, geo-politics don't
quite work that way but the smart money, who are the real market
movers, know how to read between the lines and they know better than to
go against the Fed. And I'm the same exact way... no, my two or three
standard lot contracts aren't moving any markets but I know better not
to fight the Fed and as bearish as I am on the euro at least the ECB is
doing what they can to talk the euro up. The ECB has done nothing
lately from a monetary policy perspective or with verbal rhetoric to
depreciate the euro like the Fed has been doing to depreciate the
dollar.
From a pure monetary policy standpoint the Fed
and ECB diametrically opposed to one another. The ECB has acted to make
sure the euro still yields at least 75bps more than the dollar, they
have not gone down the path of monetizing sovereign debt, they are not
running the printing presses to pump euros into the money-supply, their
credit standards are tighter than the Feds and overall the ECB has a
stricter monetary policy when compared to the loose and sloppy path
Bernanke has taken the Fed.
When you combine all of those
monetary policy and geo-political factors in addition to the factor of
the Fed clearly telling market participants to sell the dollar on its
strength you have a situation where the euro continues to gain on the
dollar despite some horrific fundamentals in the Eurozone. Almost every
day a trader will ask me when I know it's time to change my anti-dollar
bias to an anti-euro bias and the answer is simple -- when the Fed
stops telling the markets to sell the dollar or when the ECB starts
telling the markets to sell the euro.
There may be a season in
the near future where the ECB joins the Fed to use monetary policy and
verbal rhetoric to depreciate the euro and if I see both central banks
starting a currency war I'll likely stop trading the EUR/USD and focus
on another pair more exclusively but until then I'll do exactly as the
Fed is telling me to do and I'll keep selling the dollar, it's been too
easy to do anything different than that the past two months.
Battle of the worsts--
The
Fed is in a bit of a currency war with the BOJ right now and that's the
main reason I refuse to even look at the USD/JPY let alone risk a trade
on it. Out of all the major world currencies the US dollar and Japanese
yen are the two worst of all. Both US and Japanese fundamentals are
deplorable and both central banks want their respective currencies to
tank, so trying to trade a currency where both the dollar and yen are
paired together makes no sense to me right now because there's no clear
bias either way, it's literally a battle of the worsts and a race to
the bottom.
In the end, it doesn't matter what any chart or indicator might say,
until the Fed wants the dollar to stop depreciating or until crude oil
falls off a cliff, the euro and pound sterling will stay on course and
keep beating the crap out of the dollar, it can't go any other way.
Does the dollar lead crude or does crude lead the dollar?
Ever
since I started writing blogs on Forex and on trading I've strongly
encouraged EUR/USD traders to use the price of crude oil as a trade
indicator because the inverse correlation between crude and the dollar
is about as cut and dry as it possibly gets. There's no debate at all
that when crude goes up the dollar goes down but what many traders ask
me is which market leads and which market follows?
If you
listen to most of the analysts and economists they will tell you the
weaker dollar leads to higher crude but I do not agree with this
assumption at all and there's a very simple reason why -- the dollar is
not denominated in crude oil. In my view, the reason why crude leads
the dollar is because crude is denominated in the dollar, not the other
way around. When crude is bought its is the exact equivalent of selling
the dollar.
It doesn't matter what the reasons are that make
crude go up all that matters is a higher valuation in crude and an
appreciating price of crude will lead the dollar lower because the
dollar is denominated in this commodity. A market participant who buys
crude is also selling dollars at the same time, but a market
participant doesn't have to sell crude to buy a dollar.
Think
about the correlation between crude and the dollar the same way that it
works with the EUR/USD pair... because of the way the currency market
works, the euro is conjoined with the dollar, so when you trade the
EUR/USD and you buy it, you are selling dollars against euros and when
enough of the market is doing the same, the price of the euro moves
higher against the dollar. So when the market buys crude it's selling
dollars and the buying of crude is what's leading the dollar lower.
It's about as simple a market correlation as it gets.
All
the talking heads who think a weak dollar translates into higher crude
should probably do some homework to better understand the
dollar-denomination correlation to the price and valuation of crude.
And I'll renew my encouragement to traders to use crude as it's a true
leading indicator, the correlation between crude and the EUR/USD is a
beautiful thing.
Friday trading:
Bottomline,
do not trade the market tomorrow... if you made a profit this week hang
on to your profits and sit on the sidelines because I'm expecting very
choppy price action and some volatile price swings. We have key
fundamental events out of Europe and the US in addition to a few
Trichet speeches and Fed speeches. Plus tomorrow will be the start of
the G20 meetings in Berlin and there's no way to predict what kind of
market-moving rhetoric and verbal manipulation will come out of the G20
this go around.
Typically the G20 is a worthless do-nothing
event but that doesn't mean it will be the same this go around. When
you put a couple dozen central bankers and finance ministers together
in light of current market and economic conditions there's no telling
what kind of stuff they will hit the markets with. I do not trust any
of these guys and I would not put it past any of them to make some
off-handed comments about currencies, sovereign debt, crude oil or the
fundamentals.
The other reason I suggest sitting on the
sidelines is due to the typically Friday volatility that comes with
major market participants squaring their books for the week. If you
took a hit on your trading do not attempt to revenge trade tomorrow,
it's not worth it. Let the big boys square their books and let the G20
do their thing.
The euro and especially the pound sterling
have made strong gains this week and it would not surprise me to sell a
pullback based on profit-taking. Not all participants will want to let
their positions run over the weekend and any profit-taking on euro or
pound long positions will bring the EUR/USD and GBP/USD lower. The only
way I see those pairs being able to move higher tomorrow is if crude
and the S&P keep going up, otherwise, they will either range or
likely come lower.
If you do trade tomorrow I suggest using
half of your normal position size in order to better mitigate risk. Be
smart with your risk and money management and have a great weekend.
-David
Visit Verite FX
