Just when you thought it was safe to call the USD dead, US Retail Sales has to come out and print the best print since December. It’s worth noting that speculative positioning as shown via the CFTC is highlighting USD as an overcrowded short from institutional speculators. This is important because with the combination of NY Fed President Bill Dudley said he would support another rate hike on Monday and the American consumer showing signs of health (consumption is ~80% of US GDP), it’s worth noting that a rally in the USD could linger longer especially against weaker currencies.
Elsewhere, we are seeing the USD pick up the slack as others are letting it out. Looking at other majors, JPY, GBP, and NZD are down around 0.75% on Tuesday. The JPY weakness is thanks in part to the further unwind of haven assets as the geopolitical spat is looking to blow over whereas UK inflation is showing that the Bank of England likely can put to bed concerns of raising rates to stem inflation despite rather weak growth ahead of an uncertain Brexit. Sterling traded at 5-week lows on the inflation data miss. The New Zealand Dollar is looking rather weak thanks in large part to weak dairy sales (~25% of NZ GDP). NZ milk prices fell -0.4% vs. -1.6% previously. NZDUSD has fallen over 4% in the last three weeks of trading on threats from the RBNZ that interventions would give NZ the boost needed.
Another point before we get on to fixed income is the US data is surprising economists compared to EU data. While the EU data has been better on an absolute basis in 2017, it could allow EUR/USD a bit of room to the downside, which the speculators do not want to see as they built into the dollar shorts last week.
In fixed income, there are signs of confusion and the US 10Y Treasury Note Yield may be playing games with the minds of traders in much the same way USD/JPY has. In short, after being within a whisper of the YTD low, the UST 10Yr Yield is bouncing handsomely, and could well show that signs and rumors of an imminent recession are overblown and should be curbed.
Speaking of being curbed, what is OPEC going to do regarding their plan to curb production to bring Brent supply down the long-run 5-yr average. The signs of success that their plans would bring appears to be slipping as US Oil production is showing little signs of slowing down. Producers in the US can remain profitable at current levels, and signs of hedging via puts is likely to give US E&P firms little reasons to slow down production even if Oil prices drag lower.
We have discussed fundamental signs of support such as backwardation in the Futures Curve. However, it appears for now that pressures will remain on OPEC for time to come (years?) as China data has shown a downgraded Oil demand forecast via the world’s largest refiner in China. Per Bloomberg, Chinese oil processing in July dropped 4.4 percent from the previous month to about 10.76 million barrels a day. The other question regarding OPEC success is how they will bring supply back to the market at the rate they expect to without hurting the market? The weight of this question increases with the Saudi Aramco IPO down the pike. The losing battle to reduce supply in hopes of long-run success will have shareholders angry about the effort of the cartel to cut back supply/ revenue in a long-term possibly losing strategy. However, it is fair to say that shareholders are likely to have little say in the Kingdom’s oil company strategy.
In other markets, Gold is seeing a rough day and is down 0.7% in US afternoon trading. If Gold traders want to feel better about themselves, though this will only apply to today’s performance, they can look to see Bitcoin is down ~3.5%. However, Bitcoin’s price has rebounded from an intraday low of nearly 10% showing the mania, while volatile, is still in play.