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#Post#: 88--------------------------------------------------
Dollar Firms, but Focus is on Equity and Oil Meltdown
By: fxvictory Date: October 10, 2014, 11:19 am
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The dollar retains a firm undertone, after yesterday's recovery
in the North American session from the week's lows. For the
first time in months, the dollar has lost ground against all the
major currencies this week.
The Japanese yen is the strongest, gaining about 1.7% against
the dollar, helped by tumbling equity prices. It is not so much
that the S&P 500 is off 0.92% over the past five sessions. The
complete reversal of Wednesday's gains dealt a body blow to
market psychology.
Even though the major currencies have broadly stabilized,
implied volatility remains firm. Option pricing suggest that
some participants (hedge funds, CTAs?) are moving from long
dollar spot/forward positions to buying dollar calls/currency
puts. This allows the expression of a bullish dollar view, and
may offer greater ability to sit through the choppy price
action.
Yesterday, was the lowest close in the S&P 500 since August 7,
when the last swoon ended. It may be difficult for risk
sentiment to strengthen much ahead of the weekend. Moreover,
Tokyo is closed on Monday, and the US has a partial holiday
(Columbus Day). The fact that after the 2% fall yesterday,
buyers have yet to emerge, and US shares are trading lower still
weighs on sentiment. The recent S&P 500 lows in the 1925-1926
will likely be exceeded at the opening. Key support is seen near
1900.
The main narrative being told is that world growth expectations
are being scaled back. The IMF revised down GDP forecasts,
though of course the timing of the announcement is its meeting,
not when the economic assessment changed. The OECD did it
earlier, as its schedule dictates. That said, the poor German
data, and reports suggesting the German government is planning
on cutting 2014-2015 growth estimates play into the theme.
So too does the apparent cooling of the UK economy, with a
dramatic 3.9% drop in August construction output. It is a
volatile series as the upward revision in July illustrates. It
initially was reported as flat and was revised to 1.9% today.
Still, the 5.5% decline in house construction collaborates other
recent evidence the that housing market coming off the boil.
The sharp drop in oil prices is also being linked by most to
weaker demand. While there may be some role here, we encourage
investors to give supply factors their due. Not only is US
output adding substantially to supply, but there is something
afoot in OPEC. Rather than cut output as the Saudi's typically
do in such circumstances, it has signaled an increase. As the
low cost producer, it will make up in volume the revenue lost by
the decline in price. Last week Saudi Arabia reduced the price
of Arab Light crude to Asia to six year lows.
Many pundits thought the US was the main loser in the
mega-energy deal between China and Russia earlier this year.
They are reducing the role for the dollar, was a common
assessment. That is a side show and of little consequence as the
dollar's appreciation in recent months has demonstrated.
Instead, the deal may have opened a new front of competition for
OPEC.
Saudi Arabia's decision that leads to increasing it market share
intensifies the competition within OPEC. Today, Iran announced
it will cut the price of its oil exported to Asia, apparently
matching the Saudi's move. This is what a price war would look
like and it is squeezing some producers, like Nigeria, already.
Next week, Kuwait and Iraq will announce their prices. Not to
cut prices, would see them lose market share, but to cut prices
feeds the price spiral.
The drop in oil prices can only exacerbate the deflationary risk
in the euro area. If sustained, it may also hamper the BOJ's
effort to drive core inflation (core means excluding fresh food,
not energy) to 2%. In the US, the drop in oil prices, if
translated into gasoline and heating oil prices, will help boost
disposable income, which may be noteworthy given the lack of
real wage increases, and therefore consumption. The Fed targets
core inflation (for which core excludes food and energy). Rather
than focus on the impact on prices, policy makers would likely
focus more on the positive impact on demand.
The North American session features the Canadian jobs report.
The Bloomberg consensus calls for a 20k increase in employment
and an unchanged unemployment rate (7.0%). The Canadian economy
is lagging a bit behind the US economy. Although Canada reports
both full- and part-time employment, the market tends to react
more to the headline, which combines both parts. The US reports
import prices. Import prices blipped up to 1.2% year-over-year
in June, which was a two-year high. However, they fell 0.4%
year-over-year in August and are expected to fall 1.4% in
September, which would be the most since last November. A larger
than expected decline could see revisions in estimates for next
week's PPI report.
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