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Tue, 28th February 2017

Anirudh Sethi Report

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Archives of “Dollar” Tag

Dollar Extends Longest Winning Streak Since 2012 As March Rate Hike Odds Surge

Following this morning’s soaring inflationary and retail sales data, and following Yellen’s hawkish tone yesterday, March rate-hike odds have soared from below 25% to over 40%. The Dollar Index is extending its recent winning streak on this move – now up 11 days in a row, the longest streak since May 2012.

Rate hike odds are ripping higher as The Fed gets its way of pricing in a March rate hike…

And The Dollar Index continues to rise…

This is the longest USD win streak since May 2012.

  • July 1975 – 11 days in a row
  • Sept 1975 – 11 days in a row
  • May 2012 – 14 days in a row
  • Feb 2017 – 11 days in a row

And notably, if extends to 12 days tomorrow, will be the second longest winning streak in dollar history.

China’s 2016 capital outflows estimated at over $700bn

A new report from Standard Chartered estimates capital flows out of China totalled almost $730bn in 2016, a near-record level.

Analysts Shuang Ding and Lan Shen estimated outflows had moderated in December to $66bn, down from November’s $75bn.

Beneath the headline figure foreign direct investment flows turned positive for the first time in eight months with a $3bn inflow, while non-FDI outflows remained unchanged from the previous month at $69bn.

They also estimated China’s foreign exchange reserves had fallen $41bn last month to end the year at $3.01tn as depreciation of the euro, yen and pound against the greenback. That reduced the dollar value of China’s holdings in those currencies by about $13bn.

Just How Crowded Is The “Long Dollar” Trade? The Answer In One Chart

Until last night’s Trump statement that the US dollar is overvalued, it was smooth sailing for Wall Street’s momentum chasers, who happily piled into what until recently was Wall Street’s most crowded trade. How crowded?

For the latest answer, we go to the latest just released monthly Fund Managers Survey conducted by BofA’s Michael Hartnett who shows that according to Wall Streeters themselves, the dollar is the most crowded trade by orders of magnitude. In fact, in January the number of respondents who said the “Long USD” is the most crowded trade has risen from 35% in December to a whopping 47%, the highest response rate in the last few years of the survey. Far behind, in second and third place, are “short government bonds” and “long high quality/minimum vol” both at 11%.

 

What makes this observation paradoxical is how reflexive it is, because in the same report BofA writes that contrarians note “long US dollar seen as most crowded trade by a country mile”, and adds that the percentage of investors who think USD is overvalued is the highest in over a decade, or since Nov’06 (net 22%).

Still, they refuse to sell… until now. Because now that the president-elect has publicly taken the other side of the trade, we urge readers to take a second look at RCB’s warning that the “Pain Trade”, i.e. the inversion of Long-USD positions, has begun.

Overnight US Market :Dow closed -43 points.

Stocks ended mixed Thursday as retailers dominated the news with Macy’s and Kohl’s both plunging following weak holiday-season reports that led the chains to cut their profit forecasts.

Still, the Nasdaq composite’s modest gain of 11 points, or 0.2%, was enough to notch a new all-time high. Settling at at 5487.94, it topped the old record by half a point.

The Dow Jones industrial average finished down 43 points, a 0.2% decline to 19,899.29. Losing 0.1% was the S&P 500, which settled at 2269 even.

nvestors were also focusing on upcoming U.S. jobs data following the publication of the minutes to the Federal Reserve’s last board meeting.

Private U.S. companies added 153,000 jobs in December, according to payroll processor ADP. That total was a bit lower than analysts expected and slightly slower than the pace of hiring for the rest of 2016. The government will issue its own hiring report on Friday.

Bitcoin Surges Above $1,000 As China Unveils New Capital Controls

As noted yesterday, for the first time in three years, and only the second time in history, bitcoin rose above $1,000 in Yuan-denominated Chinese trading, however it was limited to the lower side of this “round number” psychological barrier in US trading, as BTC flirted with $999.99 for most of the day on the popular Coinbase exchange, without crossing it.

Overnight, however, Chinese demand proved too great and US markets had no choice but to arb the difference. So with Bitcoin trading in China at an implied price of over $1,050 at this moment, bitcoin finally soared above $1,000 in the US as well, trading just around $1,024 on Coinbase as of this moment.

 

Copper sinks to 4-week low as inventories swell

The price of copper has sunk to its lowest level in almost a month after the London Metals Exchange reported the biggest one-day rise in 15-year in inventories of the red metal.

Copper for delivery in three months dropped $116, or 2 per cent, to $5,525 a tonne after the LME said stocks has increased by 38,400 to more than 345,000 tonnes, 

Since hitting 213,000 tonnes on December 8th, inventories have surged by 60 per cent as refined copper has moved out of China and into LME licensed warehouses in Asia. 

The copper market has been roiled several times this year by large movements of stock.

Some analysts believe the latest movements are driven by cheap freight and storage incentives, which have encouraged Chinese traders to deposit stock in LME warehouses. Others say the stock has been placed there by a large commodity trader as part of a complex trading strategy.

But there are other explanations. In a recent report Standard Chartered flagged a significant build-up in unreported copper stocks outside, which it puts at almost 500,000 tonnes since the end of July.

Global Bonds Plunge As “Trumpflation” Rally Returns, Dollar Jumps

After taking a one day breather, the “Trumpflation” Rally returned with a vengeance as global government bonds tumbled and the dollar rose on renewed speculation the economic outlook is strong enough to allow the Federal Reserve to hike in December (odds are now 94%). Asian shares rose, industrial metals and crude oil fell, European shares and US equity futures were pressured.

As reported last night, the latest bond selloff started in Japan where JGB futures slid after a BOJ buying operation was poorly received, and yields on both the 2Y and 5Y rose to or above the BOJ’s -0.1% interest rate. 10 year Japanese yields have edged back above zero intra-day for the first time since September 21st and the market will at some stage focus on whether the BoJ will defend the zero level, especially if the global yield sell-off gathers pace over the coming weeks and months. It would be a strange decision to abandon the new policy so soon after announcing it so assuming global yields remain elevated they may be forced to buy more JGBs than they thought when the new scheme was announced. 

Crucial Update -Forex ,Crude

We had anticipated the dollar would be under pressure in the first part of the week.  Today’s losses are coming despite slightly wider US 2-year premiums.  Position adjusting seems to be the main factor, but it is not immediately clear if it is ahead of the ADP jobs estimate and FOMC meeting tomorrow or the US election.  Trump’s support had bottomed before the FBI re-opened the investigation into Clinton’s emails, and his support appears to be continuing to edge higher.  
We noted in our last technical view that the Dollar Index snapped a three-week advance last week.  We identified initial support in the 98.00-98.20 area and warned that a break could see 97.60.  Today’s low thus far is 97.74.  The Dollar Index has fallen through the 20-day moving average for the first time in a month.  A break of the 97.60 area would suggest a deeper correction is in store that could carry it toward 96.75. 
The euro recorded a seven-month low on October 25 near $1.0850.   It reached nearly $1.1065 today, which is the best level since October 12.  We had foreseen potential toward $1.1030-$1.1040.  Today’s high meets 50% retracment of the slide since the September 26 high near $1.1280.  The 61.8% retracement of that move is found by $1.1115.  
We had envisioned the dollar to test the JPY104 area, and that is also where the 20-day moving average is found.   Our idea that a break of JPY104.00 could spur a move toward JPY103.20 still seems reasonable.     Recall that unlike the euro (and sterling) speculators in the CME futures are net long yen. 

Overnight US Market :Dow closed -105 points.S&P 500 posts 6th straight loss

Stocks tumbled Tuesday, with the S&P 500 posting its sixth straight loss as nervous investors continued to monitor the run-up to the 2016 election and wait for news from the Federal Reserve, which concludes a two-day policy meeting on Wednesday.

The Dow Jones industrial average ended down 105 points, or 0.6%.  The Standard & Poor’s 500 index fell 0.7% and the Nasdaq composite dropped 0.7%.

Increasingly, investors’ focus has been the presidential election, as polls between Hillary Clinton and Donald Trump appear to have tightened following last week’s news that the FBI had opened a new investigation into Clinton’s private email server. The narrowing in the race has introduced a new element of uncertainty into the market, something that analysts say is likely to keep trading in check.

There were signs of nervousness in the market. Gold prices rose more 1% and the Mexican peso, which has become a proxy for Trump’s chances to win, has been falling steadily against the U.S. dollar since Friday. The peso is down 1.2% against the dollar, a significant move in currency trading.

Investors are also keeping an eye on the Federal Reserve as policymakers started its two-day meeting on Tuesday, where it is widely expected the nation’s central bank will keep interest rates stable.

U.S. manufacturing grew last month at the fastest pace since July, a sign that American factories are coping with economic weakness overseas and a strong dollar. The Institute for Supply Management says its manufacturing index came in at 51.9 up from 51.5 in August. Anything above 50 signals growth. Production and export orders grew faster in October.