The US Dollar Is At The Lowest Level Since The Presidential Election

Originally published by AxiTrader h2 Market Summary/h2

The FTSE 100 made another record high, and the Nasdaq 100 just keeps keeping on overnight but the S&P 500 and Dow Jones Industrial Average were both mildly lower in what is a very interesting time in markets.

There has been a lot of focus on what president Trump disclosed to the Russians and he confirmed this morning that he did share information which – again – appeared to contradict those who had sought to defend him yesterday.

But while that’s interesting it’s less important for traders in the short term. Rather weaker data in the US and continued flows out of the US and toward Europe were the big story of the night with the US dollar under intense pressure. That’s seen the euro at its highest level since the election last November at 1.1085. The Aussie (0.7424) found support just below 74 cents in this environment but it is lagging as another US investment bank weighed in with a bearish forecast.

Elsewhere Crude oil (WTI, $48.23) is now getting hammered after the API inventory data showed an unexpected build of 882,000 barrels against expectations of a 2.67 million draw. Gold is higher on a weaker dollar and uncertainty while copper and the base metal complex extended their gains again overnight.

Today in Australia it’s consumer sentiment and wages data that we’ll be watching. This combination gives an eye on the future for the domestic consumption.

• S&P 500 -2 (0.08%) 2400 (7.16 Sydney - change since previous day)
• Dow -1 (0.01%) 20979
• Nasdaq +20 (0.33%) 6,169
• SPI 200 +1 (0.0%) 5,855
• AUDUSD 0.7423 (+0.13%)
• Gold $1236 (+0.5%)
• WTI Oil $48.23 (-1.27%)

• The US president has admitted that he did share information with Russia. On Twitter he defended his right to do so and didn’t back down one step. The row is intensifying in the US press and politics.

• Some say this contributed to the US dollar’s fall last night. It sounds like ex-poste rationalisation to me. But that said what’s potentially important for markets in the weeks and months ahead is that the president’s apparent missteps may galvanise his opponents which could make it harder to implement his economic agenda. That’s the bit I’m keeping an eye on.

• US economic data was interesting last night. Industrial production for April beat expectations with a 1% print but building permits fell 2.5% and housing starts dipped 2.6% undershooting expectations. That’s driven the Citibank economic surprise index to -37.6 which is its lowest level since this time last year. But what’s interesting is that the Atlanta Fed GDPNow for Q2 was upgraded last night to 4.1%! This is an intriguing divergence. But it’s also a critical one for the outlook on Fed rates and the market.

• And speaking of the Fed, Goldman Sachs (NYSE:GS) is worried about the outlook for inflation in the US has mildly downgraded their odds for a June rate hike from 90% to 80%. The data needs to bounce back to support the Fed’s claim the slowdown in Q1 was “transitory”. This is what’s hurting the US dollar, not the president.

• Across the pond UK data showed inflation is on the rise. Headline inflation in the year to April accelerated to 2.7% after a 0.5% increase during the month. Producer prices for output rose 3.6% but the fall in Sterling saw inputs prices rose 16.6% through the year to the end of April. Retail sales rose 0.5% in the month taking the yoy rate to 4.1%. And while I’m on data EU GDP for Q! printed as expected at 1.7% yoy and 0.5% for the quarter. In Germany the ZEW survey printed 20.6 for sentiment and 83.9 for current situation. This hurt the US dollar as well.

• Something I missed yesterday on China but which is important for the outlook is that authorities are cracking down on disclosure rules for the giant wealth management Product (WMP) industry. That’s another sign China is serious about economic reform and cracking down on its shadow banking sector.

h2 Australia/h2

• The 12 point rally on the ASX was a little disappointing yesterday. I say that even with the negative drag from the National Australia Bank Ltd (AX:NAB) and Macquarie Group Ltd (AX:MQG) going ex-dividend. Sure the miners had a good day, as did the other 3 big banks. And perhaps the rally of 32 points in futures relative to the 12 point gain in the physical suggests a better outlook for the market going forward. But for me the question I raised yesterday about the possibility that the S&P/ASX 200 – and Australian big capitalisation stocks in mining and financials – have been rerated down by investors remains unanswered.

• We’ll see whether this yawning gap between the performance of the local market and the S&P gets closed anytime soon.

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• Looking at the day ahead the SPI is down a few points this morning suggesting it will up to traders on the day and news flow to drive the market. On that front wage price growth for the first quarter of 2017 will be released this morning along with Westpac’s consumer confidence data. There is naturally a linkage between these two series and with wage growth slow of late and a focus on APRA, the RBA, and the governments attack on housing and the banks it will be interesting to look at sentiment and the sub-indexes underneath. Worth noting yesterday’s release of the ANZ consumer confidence collapsed to its lowest level since September 2015.

• Yesterday the RBA minutes were pretty upbeat – you can read that anywhere. But there were also two standout pieces of information which traders and investors need to appreciate with regards to the RBA’s thinking. The first is that they pointedly say the board had an “in-depth discussion” about the labour market with the key takeaway that the nature of employment has changed and we should all stop worrying about the part time/full time split.

• The RBA also had an interesting little kernel in the minutes on the linkage between consumption and household debt. This is something I have written about quite a bit and readers know I believe that there is a strong chance that APRA and the RBA’s pursuit of lending and house price growth means households will start to focus on their debt pile and repayment of same. The RBA said yesterday “if households were becoming more focused on paying down debt, this would imply some downside risks to the outlook for household consumption growth. A fall in housing prices could also weigh on consumption growth”.

• And here is a chart I picked up by HSBC via Business Insider yesterday. It shows Aussies are the world champions when it comes to household debt. This is not an idle concern I hold.

h2 Forex/h2

• The US dollar has lost 0.75% in US Dollar Index terms over the past 24 hours. Euro (1.1086) and Swissie (0.9853) are the sharpest movers with gains of more than 1% but once again the weakness is across much of the forex universe with emerging market currencies again among the winners. The dollar index – and the euro naturally – are at levels not seen since election night last November.

• As I’ve written recently what seems to be driving the latest bout of US dollar weakness is genuine asset allocation shifts – and associated money flow - away from US markets as investors focus on opportunities in Europe and other regions now that the president’s agenda looks like it’s stalling and while the US dataflow is weak. A refocus on the fed could provide support for the US dollar. But the data will need to improve for that to be a big positive.

• You can see this is as much a euro move as it is a dollar move just by looking at the moves in the euro crosses. EUR/JPY, EUR/GBP, and AUD/EUR – to name a few – all rose over the past 24 hours.

• The Aussie dollar at 0.7429. It’s only up 0.23% which is around the same level of strength the Canadian dollar has shown but sentiment toward the Aussie remains somewhat negative right now. The latest bulge bracket bank to downgrade the outlook for Australia and the Aussie is Bank of America Merrill Lynch (NYSE:BAC) which says will fall to 70 cents on the back of China.

• Elsewhere the Yen strengthened by two-thirds of a per cent with USD/JPY now at 113.04 while the pound has lagged badly with a rise of just 0.2% to 1.2917. But that’s still around 70 points from the overnight low.

h2 Commodities/h2

• Venezuela and Kuwait have both said they support the Saudi and Russian plan for the OPEC production cut extension. As well they might given the International Energy Agency said overnight that progress toward the stated goal of inventory reduction is slow. “It has taken some time for stocks to reflect lower supply when volumes produced before output cuts by OPEC and 11 non-OPEC countries took effect are still being absorbed by the market,” the IEA said in its monthly report. It is worth noting however that the IEA did support OPEC’s claim the rebalancing is actually happening.

• The API inventory data is up, not down as the market expected, and that has knocked the price of crude for six. This is where the jawboning either fails or succeeds as there is no point talking tough on rebalancing if there are scant signs its happening. Tomorrow’s EIA inventory data is also going to be important given it has quietly showed strong drawdowns in inventories in the past month or so. Inventories are the key to the effectiveness of the production cut.

• Anyway as I write Crude is down around 1.08% in WTI terms at $48.32 and down about 0.96% in Brent terms at $51.32.

• Gold is higher this morning as the technicals, a weaker US dollar, and the uptick in uncertainty combine to see the buyers push a little higher. It’s up 0.6% to $1236.

• Copper, and indeed base metals, have had a better day of it with gains across the board. Copper has risen 0.4% to $2.55 a pound in what continues to be a broad based recovery across the space. Iron ore is higher as well.

Have a great day's trading.

Written By: Axi