Here’s How Oil is Affecting the US Dollar
US Dollar
For once, we are seeing a bit of consensus price action in the dollar. Picking
up from where it left off at the beginning of the year, the dollar has weakened
across the board. The economic calendar is fairly barren yesterday with the
release of only weekly data. Mortgage applications for the week ending January
6th increased a seasonally adjusted 9.9 percent. This is the first increase in
applications that we have seen in five weeks. The improvement was most likely
attributed to the fall in mortgage rates.
The relatively subdued action in the far end of the curve has
helped keep the growth in mortgage rates relatively tame. The 30-year fixed rate
mortgage rate decreased from 6.15 percent to 6.08 percent, which is also the
lowest rate seen since October. Although this report, though volatile, should
have been mildly dollar positive, the dip in inventories reported by the Energy
Department offset any bullish momentum. Crude prices have ticked higher once
again as lower supplies come at a time when there is growing tension in Iran,
Venezuela and Russia.
Today, we will finally receive some meaningful US data. The
trade deficit for the month of November is expected to shrink from $68.9 billion
to $65.4 billion thanks to a 10 percent slide in crude prices during the same
month. With triple digit net foreign purchases of US securities in the last 2
months, worry about funding the deficit will be shoved onto the sidelines for
the time being. In all likelihood, the stronger report will be taken quite
positively by the market. The risk for another record high trade deficit seems
unlikely in November, but we should not forget that even if the deficit does
improve, funding of the deficit is becoming a greater concern with talk of
reserve diversification throughout Asia.
Euro
After two days of losses, the EUR/USD has resumed its rally once again as the
market waits patiently for today’s ECB rate decision. Although no changes are
expected from the ECB, with the economy showing clear signs of improvements, ECB
President Trichet could very well make some new hawkish comments.
However we do want to point out that with the rally exhausting
below recent highs, should Trichet fail to deliver hawkish enough comments to
satisfy the market, the Euro could take a slide back below 1.2100. The only
piece of data released from the Eurozone yesterday was the French trade balance.
The deficit increased from EUR 2.4 billion to EUR 3.1 billion due to a rise in
both imports and exports. Despite the rise in the trade balance however, the
outlook for growth is not comprised.
Just look across the Atlantic to the US, where the trade
deficit has continued to grow and yet, there have been plenty of analysts who
expect slower, but still robust growth. Meanwhile geopolitical risks remains a
concern around the world thanks to the latest comments from the President of
Iran who said that he is not afraid of the global superpowers or their “noise.”
British Pound
You could never tell that the biggest news yesterday was from the UK by looking
at the British pound’s unchanged price quote against the dollar. However the UK
trade deficit came in much wider than expected, increasing to a record high from
– GBP 5.05 billion to — GBP 5.96 billion. The market had actually expected the
deficit to contract to — GBP 4.9 billion. Part of the increase has been due to
fact that the UK remained a net oil importer for the fifth consecutive month
while exports to countries outside of the European Union suffered tremendously.
Although the Bank of England will not view this change
positively, it will probably have a limited impact on their decision to keep
rates unchanged once again. Unlike the ECB, the BoE does not issue a statement
or make comments on the economy when they make no changes to their monetary
policy. Right now, the UK is yielding 25bp more than the US. However if the BoE
stands pat and the Federal Reserve raises rates at the end of this month, the
yield advantage of the pound over the dollar would be zero which means that
going forward, the outlook for rates then becomes negative. Hit by a bit of
nostalgia — it seemed as if it was only yesterday that the UK was yielding 325bp
more than the US (but in reality, that was a year and a half ago).
Japanese Yen
The dollar has now weakened against the Japanese Yen for the seventh consecutive
trading session. China continues to grab headlines as they posted a new record
trade surplus. In 2005, their trade surplus more than tripled to $102 billion to
the envy of other export dependent nations. Despite such rapid growth, there are
many who still believe that the trade surplus could grow even more this year.
Therefore even though China has downplayed their recent comments about selling
dollars, their growth will make further revaluation an even bigger likelihood.
At this point it is inevitable that we will see another major
announcement related to currency flexibility by the Chinese government this
year. The stronger Chinese data has helped to bolster the Japanese Yen, which
tends to be seen as the general barometer for Asian strength.
Kathy Lien
Kathy Lien is the Chief Currency Strategist at
Forex Capital Markets. Kathy is responsible for providing research and analysis
for DailyFX, including technical and fundamental research reports, market
commentaries and trading strategies. A seasoned FX analyst and trader, prior to
joining FXCM, Kathy was an Associate at JPMorgan Chase where she worked in Cross
Markets and Foreign Exchange Trading.
Kathy has vast experience within the interbank market using both technical and fundamental analysis to trade FX spot
and options. She also has experience trading a number of products outside of FX,
including interest rate derivatives, bonds, equities, and futures. She has a
Bachelors degree in Finance from New York University. Kathy has written for
Stocks and Commodities, CBS Market Watch, ActiveTrader, Futures and SFO
Magazine. She is frequently quoted on Bloomberg and Reuters and has taught
seminars across the country. She has also hosted trader chats on EliteTrader,
eSignal, and FXStreet, sharing her expertise in both technical and fundamental
analysis.