Why Comm Dollars Have Roared Back

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Market Drivers Feb. 4, 2016

ECB Commission cuts forecasts
BoE meeting on tap
Nikkei -0.85% Eurostoxx 1.06%
Oil $32/bbl
Gold $1147/oz

Europe and Asia:
AUD NAB Business Confidence 4 vs. 0

North America:
GBP BoE Meeting 7:00
USD Weekly jobless claims 8:30
USD Factory Orders

After a very volatile North American session yesterday, currencies settled into a much sedate pace during Asian and European dealing as traders digested the price action and prepared themselves for tomorrow’s NFPs.

Yesterday dollar rout was caused by the tempering of rate hike expectations with NY Fed’s William Dudley practically telegraphing to the market that the Fed is likely to hold off on any tightening in March given the global economic slowdown. It’s hard to believe that the market reaction would be so extreme given the fact that Fed funds futures were only forecasting 25% probability of a March hike. Still Mr. Dudley’s words provided official confirmation that US monetary authorities are clearly concerned about the growth prospect in H1 of this year and that has totally killed sentiment for a dollar rally.

The greenback remained weak in early European dealing today, with euro making fresh year to date highs at 1.1169 but it was really the comm dollars that showed the strongest bid. With oil close to $33/bbl and gold closing in on the $1150/oz. mark Aussie kiwi and loonie all pushed higher.

The commodity currencies are getting the double benefit of stronger commodity prices and higher yields. With Fed likely to remain stationary for the time being carry traders have plowed back into kiwi and Aussie which has only spurred further covering from late shorts. The move is a classic short squeeze and the rally is likely to peter out relatively soon, especially as the deteriorating fundamentals begin to catch up with the pairs, but after the relentless selling of the past several months, this week’s short covering move is really not a surprise.

Elsewhere today the market will get a look at the BOE statement as well as Governor Carney’s testimony 45 minutes later. Cable too has seen a strong rally this week. As our colleague Kathy Lien noted yesterday,”f the BoE sounds optimistic, we could see the pair hit 1.4800. However handicapping the bias of the BoE is difficult because while we’ve seen a lot more improvement than deterioration in the U.K. economy since the last monetary policy meeting with the PMIs, inflation and unemployment rate improving, earlier this month Bank of England Governor Carney expressed concerns about inflation and growth and his sentiment could be reflected in the Quarterly Inflation Report. This report also looks back further than the past month and if we take a 3 month prospective, conditions have certainly weakened and lower forecasts are necessary.”

With US economic calendar basically barren today, the focus is likely to be on macro factors, as currency markets will keep a close eye on oil, rates and equities. The loonie has been remarkably well bid and has already slipped below 1.3700 figure in overnight trade. If crude continues to climb to $35/bbl USD/CAD at 1.3500 may not be far behind.

Boris Schlossberg
Managing Director

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