Connecting the dots in global markets.
A day after his Treasury Secretary tanked the dollar by commenting that a weaker currency is good for the U. S. economy, President Donald Trump sought to make things right by saying the remarks were taken out of context. In fact, Trump told CNBC, “ultimately I would like to see a strong dollar.” No matter that a strong dollar would be a headwind to Trump’s efforts to cut the U. S. trade deficit and that “ultimately” is a vague time frame, currency traders decided it was time to stop beating up on the greenback. The Bloomberg Dollar Spot Index reversed a decline of as much as 0.77 percent to gain 0.15 percent. Whether this marks a reversal in the dollar after it fell 11.6 percent against a basket of major peers since the start of 2017 through Wednesday remains to be seen, especially since it was only a year ago that Trump said the currency was too strong and “it’s killing us.” Perhaps that’s a reason why despite Trump’s comments, the Bloomberg Dollar Index only recovered about half its Steven Mnuchin-induced losses.
The U. S. currency was falling hard for most of the day as European Central Bank President Mario Draghi sent the euro higher by expressing the conviction that euro-area inflation will accelerate even as he hinted that the shared currency’s recent strength bears watching. “The ECB’s moderate tone on the exchange rate might be interpreted as a green light for the currency to rise further,” Bill Adams, an economist at PNC Financial Services Group, told Bloomberg News. CAREFUL WHAT YOU WISH FOR For all of Trump’s tweets about how the big gains in the stock market are due to his policy, equities traders didn’t like what he had to say about the dollar. The S&P 500 Index erased its gains and ended little changed, showing just how much the rally might be due to the dollar’s decline. (The narrower Dow Jones Industrial Average rose 0.54 percent while the Nasdaq Compsoite Index was flat.) A weaker currency helps exporters by making their goods more competitive in foreign markets. Just consider Caterpillar Inc., which sends its signature yellow mining and construction machines all around the world. On Thursday, the company projected higher 2018 earnings than analysts estimated. Nevertheless, its shares spent the day little changed to lower on the rising prospect of what a William Blair analyst called a trade and currency war. In a telephone interview with Bloomberg News, Caterpillar Chief Financial Officer Brad Halverson said the company is concerned that the Trump administration’s policies will ignite a trade war but it is worried they could push up the cost of steel used to build its equipment. “If we have a significant price increase, that would put us at a competitive disadvantage,” he said.
BOND DEMAND A weaker dollar before Trump’s comments didn’t deter buyers at the Treasury Department’s auction of $28 billion in seven-year notes. The worry is that foreign investors would shy away from buying U. S. debt if they felt the Trump administration was trying to jawbone the dollar lower, making dollar-denominated assets less valuable over time and sparking faster inflation. Even so, a group of bidders that some view as proxy for foreign demand showed up in droves. Indirect bidders bought 78.1 percent of the amount offered, the most since April and the second-most on record. The yield offered on the notes was the highest in 6.5 years, or 2.565 percent, which “was a definite enticement to buyers,” Peter Boockvar, the chief financial officer at Bleakley Financial Group, wrote in a research note after the auction. The strong auction contributing to a rally across all Treasury maturities, with the yield on the benchmark 10-year note falling to its low of the day, or 2.62 percent from as high as 2.67 percent earlier.
KEY LEVEL BREACHED Oil burst above $66 a barrel to the highest since 2014 amid deflating U. S. crude stockpiles and robust demand. Futures advanced as much as 1.6 percent in New York, putting crude on course for its strongest January performance in more than a decade, before erasing those gains in late trading following Trump’s comments. Spare oil at the biggest U. S. storage complexes is at lows not seen in about three years as refiners pay up for immediate shipments, creating a market structure known as backwardation, where barrels available now command higher prices than future supplies, according to Bloomberg News’ Jessica Summers. Prices are rising because of “incredible reductions in inventories” at the massive oil-storage hub in the northeast Oklahoma town of Cushing, Thomas Finlon, director of Energy Analytics Group, told Bloomberg News. “Backwardation is looking mighty solid right now.” Crude stockpiles in the U. S. have fallen for 10 consecutive weeks, the longest stretch of declines on record, according to Energy Information Administration data released on Wednesday.
CHINA’S YUAN IS GAINING Lost in the focus on the dollar and the euro is the big move happening in China’s yuan. It’s rallying so hard against the dollar that it’s now less than 2.5 percent away from the 6.2 level last seen before the August 2015 devaluation. There is growing speculation that Chinese policy makers will take steps to slow the pace of gains, although the currency’s relatively slower ascent against a basket of peers may make the strength less of an issue than in the past, according to Bloomberg News’ Xiaoqing Pi and Emma Dai. “The rapid strengthening has triggered a panic in the market, aggravating the sentiment to sell the dollar,” Tommy Xie, an economist at Oversea-Chinese Banking in Singapore, told Bloomberg News. “Apart from the weakening dollar, high onshore funding rates and strong demand for cross-border financing will both take foreign currencies back to China.” The yuan could test 6.10 per dollar by year-end, strengthening from 6.3263 Thursday, amid a combination of dollar weakness and flows into Chinese bonds and stock, according to Sean Yokota, head of Asia strategy, at Skandinaviska Enskilda Banken.
TEA LEAVES When Trump gives his speech to the delegates at the World Economic Forum in Davos, Switzerland, on Friday, he is expected to proclaim that they were wrong to doubt his ability to spur the U. S. economy and stocks. The economic data due out on Friday are likely to give him plenty of ammunition. That’s when the Commerce Department is forecast to say that U. S. gross domestic product expanded at a 3 percent rate in the final three months of 2017.
