Fundamentals Take Dollar For A Ride
The data floodgates opened on the US
dollar Friday morning in New York as inflation, trade and factory activity
numbers hit the newswires each with surprising results. Looking to
price action, the massive dollar swing that took place across the majors began
after the softer than expected CPI report ran across screens.For the EURUSD,
which had made a dollar advance earlier in European session, the news shot the
pair off of 1.31 resistance for an 85-point rally before completely retracing to
1.2075.
A similar scenario played out for the pound when a rally from
1.9555 to 1.9665 quickly turned into a 160-point plunge leaving spot just north
of 1.95. The USDCHF pair found a stop on its initial dollar declines around
1.2115, only to be then lifted 1.2230. Finally, the USDJPY held on to its
uptrend all the way up to 118.35. From there, the yen pushed back to 117.45,
proceeded to form an unusually volatile 50-point range.
As big traders are closing their books to get a jump start the
on holiday, the thinning liquidity has upped the ante for those still at their
terminals and trading off economic releases. Short-term and long-term traders
both received a shock when the first piece of US data was printed this morning.
Consumer-basket inflation in November stagnated in both its headline and core
measurement according the BLS numbers. From the headline read, the energy group
had eased its declines with a modest 0.2 percent dip compared to the 7.0 percent
drop revealed in the October. While overall inflation was directing some
traders, the real interest was in the core statistics. The last time price
growth excluding food and energy went unchanged was June of 2005. Whats more,
this matches the lowest level in the monthly indicator since December of 1982.
The annual report was not as dramatic, but just as telling. Expected to hold up
its 2.7 percent pace, the read actually slipped to a six month low 2.6 percent
rate of expansion. While this print is still well above the Feds 2.0 percent
target, it better allows for an eventual cut to stabilize the economy. Market
participants had little time for a breather.
The TICS data was up only half-an-hour after the surprising
CPI print. Settling the bearish bias for the dollar somewhat, net foreign
purchases of US securities grew more than expected in October. Easily filling in
the physical trade shortfall, capital inflows from asset purchases grew $82.3
billion, while the previous month was revised higher by over $5 billion. As was
predicted, most of the improvement was from treasury and stock purchases.
Treasuries rebounded from the $233 million deficit in September to a robust
$26.3 billion surplus, helped along by a temporary jump in yields. The last set
of data for Friday morning was the governments factory activity numbers. A
superficial read of Novembers industrial production print propped the dollar
bulls with a 0.2 percent increase that rebuffed the ISMs manufacturing report
for the same period. However, when the survey was broken down, there was little
suggesting the manufacturing sector was not contracting. Excluding auto
production, factory activity passed the month unchanged. More over, the 3.7
percent increase in vehicle construction is actually predicted to be a temporary
prop as many American car makers have announced production costs and layoffs.
The benchmark equities indices were pulling down new record
highs Friday morning after the softening inflation gauge raised expectations for
a drop in lending rates. The NASDAQ Composite took the lead with a 0.53 percent
rally to 2,466.90 by 16:05 GMT. The Dow followed closely behind with a 0.5
percent advance to 12,479.41 while the S&P 500 rose 0.4 percent to 1,431.20.
While the rally in stocks was relatively broad-based on the inflation data,
there were a few headliners. Adobe Systems Inc. paced tech shares with a 5.2
percent rally to $42.92 after posting fourth quarter fiscal earnings in line
with expectations and revenues well above Wall Streets predictions.
Contrasting this, Black & Decker Corp. shares plunged 8
percent on a $6.92 decline to $80 when its fourth quarter forecasts failed to
match up with the markets consensus. Treasury yields were also guided by the
surprising CPI reads. By 16:05 GMT, the ten-year note was 17/32nds lower at
100-24 with a yield off 7 basis points at 4.53. T-Bonds bounded 25/32nds higher
to 97-13 while its own yield shed 5 basis points to 4.662.