Is USD To Blame For These Multi-Year Lows?

By Kathy Lien, Managing Director of FX Strategy for BK Asset Management.

Blame the Dollar? These 4 Currencies are at Multiyear/Record Lows

At first glance the U.S. dollar did not perform extremely well on Tuesday, but if you look beyond the majors, the rising dollar is crushing other currencies. The U.S. dollar hit record highs versus the South African rand, Malaysian ringgit and multi-year highs versus the Canadian and Singapore dollars. Just this week similar milestones were reached against the Brazilian real, Turkish lira and Norwegian krone. Most of these are commodity currencies that have been hit hard by falling energy, metal and agriculture prices. But the decline in commodity prices is a direct result of weaker Chinese demand and U.S. dollar strength. If the Fed were not inches away from raising interest rates, commodity prices and emerging-market currencies would not be as weak as they are today. However the relative strength of the greenback can’t be blamed for all of the weakness because the prospect of a change in Fed policy is not the cause of China weakness. Singapore, for example, is feeling the ripple effect of softer growth in the region and the deepening concern that the haze could jeopardize the economy. The Turkish lira, on the other hand, is pressured by election uncertainty and the prospect of a sovereign downgrade from rating agencies. Buying U.S. dollars and selling emerging-market currencies are one the market’s favorite ways to position for a Fed liftoff and, as such, it is also one of the world’s most crowded trades.

Meanwhile there was very little consistency in the USD’s performance against the majors Tuesday as the greenback weakened against the JPY and EUR but strengthened versus GBP, NZD and CAD. U.S. data was mixed. According to S&P/CaseShiller, house prices declined 0.2% in July. Economists had been looking for a rebound but the decrease was small and raises zero concern about the overall housing-market recovery. Consumer confidence rose strongly, which was a bit of a surprise considering that similar surveys from the University of Michigan and Investors Business Daily reported deterioration in sentiment. With nonfarm payrolls scheduled for release this week, the uptick in confidence raises hope for a further recovery in the labor market. Starting Wednesday, we turn our focus to the leading indicators for nonfarm payrolls with the release of ADP’s employment change report. Chicago PMI is also on the calendar and weaker manufacturing activity is anticipated after the surprise slowdown in the NY and Philadelphia regions.

On Monday we said the worst-performing currency was the New Zealand dollar and on Tuesday it was the day’s best performer. But overall, NZD/USD remains weak because the rally fell short of covering Monday’s losses. Since no economic data from New Zealand was released, Tuesday’s move can be best attributed to the mild recovery in risk appetite and continued consolidation in the currency pair. Trading should get a bit more exciting as NZ building permits and business confidence come out . The Australian dollar ended the day marginally higher on the back of the stabilization in commodity prices. Building approvals were also due from Australia Tuesday evening.

The big story Tuesday was USD/CAD, which climbed to fresh 11-year highs. Nine days have now past without a down day for the currency pair — the longest since August 2011. The persistent strength of the currency is surprising, especially on a day when oil prices moved higher. Data from Canada was also better than expected with industrial product and raw material prices falling less than anticipated. The rally in USD/CAD is getting overstretched and Wednesday’s July GDP numbers could halt the rise. Economists are looking for growth to slow but with retail sales and trade activity improving in July, an upside surprise would turn around the currency.

Both euro and sterling ended the North American trading session unchanged. Eurozone confidence improved in September but consumer prices in Germany declined more than expected. Bundesbank head and ECB member Weidmann doesn’t seem to be worried. Early Tuesday he said concerns about deflation have dissipated further. German unemployment numbers are scheduled for release on Wednesday along with the Eurozone’s latest unemployment rate and CPI report.

Eight trading days have now past without a rally for the British pound versus the U.S. dollar. Higher mortgage approvals in the U.K. were offset by weaker consumer credit. A long stretch of weakness or strength for the currency pair is not unusual. In late August for example, GBP/USD fell for 9 days straight before bottoming. In mid June, it rallied for the same number of days before reversing strongly. When GBP/USD turns, the move is strong and can range from 200 to 800 pips.

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