Dollar Losses Mount

Daily Analysis - 22/07/2015

Softness in the US Dollar Comes Amid Federal Reserve Data Revisions


The moves by the United States Federal Reserve to revise key industrial production and capacity utilization numbers to the downside reflects growing fears that the underlying fundamentals supporting the American economy continue to crumble, hurting the outlook for interest rates.

Dollar Reversal

In a reversal that began yesterday during a session with limited economic data, the dollar slowly began to turn after hitting 5-week highs against a basket of currencies. The move was sharp and swift with the USDJPY unwinding while the Euro climbed over 1% versus the dollar before experiencing a technical pullback. The risk-reversal in the dollar highlights that recent momentum higher has been founded on the idea that September is the date for liftoff, whereas yesterday’s Fed revisions point to a later date as economic fundamentals stumble. Aside from the dip in the dollar, stocks also closed lower, led by the Dow Jones Industrial Average which fell 1.00% during the cash equity session. The main drivers behind the tumble were the substantial losses in United Technologies and IBM which plunged -7.03% and -5.86% respectively. Apple earnings are also likely to drag further on the index today after guidance missed analyst targets.


China Capital Outflows Accelerate

After last week’s economic data appeared to show the Chinese economy expanding at a blistering 7.00% annualized rate there are growing concerns that the equity bubble is just one sign of the growing malaise facing policymakers. Capital outflows are accelerating as evidenced by the nation’s plummeting foreign exchange reserves which are estimated to have fallen $36 billion in the second quarter. Total capital outflows over the same period are currently estimated at $225 billion over the time period, meaning on an annualized basis, China is looking at an exodus of near $1 trillion in net outflows if current trends persist. Despite efforts at shoring up confidence in the equity market, the housing market continues to experience headwinds and the drop in commodity imports is far more telling that industrial production is about to ebb and slow further. The USDCNH pair is strengthening after falling yesterday on the back of a weaker dollar.


API Surprises to the Upside

The American Petroleum Institute’s figures on crude oil stockpiles showed a surprising uptick in stored crude oil, beating expectations of an expected 1.900 million barrel drawdown after seeing 7.300 million barrels leave inventories in the prior week. The 2.300 million barrel gain in stockpiles could be indicative that the recent streak of draws might be over as demand falters and production remains near cycle highs. Today’s Department of Energy crude oil inventory numbers are forecast to show a decline similar to the estimates for yesterday’s API number, however, there is substantial room for an upside surprise following yesterday’s gains. Fears are once again being raised that US storage facilities will be filled to capacity once the summer driving season abates, sending crude oil prices plunging once more. Falling Saudi exports and increased price competition amongst oil producers could also foment another round of downside momentum.


Natural Gas Equidistant Channel Technical Pattern

Gas prices have not been immune from the price weakness in the crude oil complex as evidenced by the most recent price action. Plagued by a supply glut akin to the problems facing the outlook for crude oil, producers are cutting back sharply on costs in an effort to ensure survival through another price depression in energy. Yesterday’s announcement that Chesapeake, one of the largest US producers, would be cutting a dividend to add to cost savings highlights that the probability of a near-term price recovery is not strong considering the fundamentals. Natural gas prices continue to trend lower, trading within an equidistant channel formation exhibiting a strongly bearish bias. Ideal positions initiated near the upper channel line should target the lower channel line, recognizing that fighting the near-term downtrend could result in weakened reward potential and higher risks.


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