How Low Can the Dollar Go?

[Excerpted from Bill Cara's Daily Report]

This story is getting old. Just when it looks like the equitymarket needs a boost, the US Dollar plunges almost -1% ($USD 76.08-0.70 -0.92%) and Financials (XLF +2.3%) and Energy (XLE +1.6%) fall inline. How low can the Dollar go?

As Russia admits their economy is in dire straits, the Humungous Bank & Broker unit of Goldman Sachs (GS), JP Morgan (JPM) and UBS make a simultaneous decision to combine with research reports that opine that Russian stocks are the place to be. The mind boggles.

This is surprising because Russia's central bank has stated they anticipate an outflow of capital of -$42 billion this year.

But was this surprising piling on an attempt to lower the $USD, add support for the Administration’s sudden policy reversal of the long-range missile shield for Eastern Europe and their call for WTO status for Russia this week, or posturing for HB&B's participation in Russia’s plans for privatization? All of the above?

With the FOMC policy decision slated to be reported at 2:15pm ET today and the G-20 meetings to get underway in Pittsburgh tomorrow, politics and money are on the front burner.

At the close in New York, the markets ended stronger. The S&P 500 (1,071.66 +7.00 +0.66%), DJIA (9,829.87 +51.01 +0.52%), and NASDAQ Composite (2,138.04 +5.18 +0.24%) all closed higher with the defensive Healthcare and Utilities sectors (XLV -0.3% and XLU -0.3%) both pulling the indexes back a little.

So risk-taking was the order of the day as the Dollar sank, and Crude Oil ($WTIC 71.76 +1.83 +2.62%) and Gold ($GOLD 1,014.50 +10.70 +1.07%) were floated.

With Financials being pushed to the upside, and the USD let to drop, the REITs, Broker-Dealers and Banks all saw solid gains ($DJR +3.3% $XBD +2.4% $BKX +2.3%) and so did the Goldminers ($XAU +2.3%). Of course, the downside would be, as expected, the big hit to Treasury bonds, and the US long bond did plunge ($USB 119.16 -1.81 -1.50%). With the higher oil price, the one industry group that took a hit was Airlines ($XAL -2.1%).

No, markets don’t trade in a vacuum. The link between cause and effect is usually immediate and quite obvious.

None of this was unexpected as prior to the market open, following three days of USD strength; I reported in this space, “Today, however, there is a positive spin to the commodity and equity markets as the Fed begins to contemplate a policy decision slated for release tomorrow at 2:15pm ET. Traders are figuring the wording will be positive about economic recovery, which may be a bit of posturing ahead of the following day start to the important G-20 meetings in Pittsburgh.”

With the $USD down sharply Tuesday after being up for three days in a row, it’s also not surprising that the Toronto Exchange Composite (11,585.73 +161.12 +1.41%) and Venture market (1,281.63 +16.63 +1.31%) were soaring. Hot money was chasing commodity beneficiaries and financials. Capital was also flowing into the Euro (147.92 +1.13 +0.77%), Yen (109.72 +1.03 +0.95%), Pound (163.54 +1.39 +0.86%), and Canadian Dollar (93.56 +0.82 +0.88%). Markets are frothy.

Just like Monday when the Treasury bond soared, and perversely so did yields, Tuesday was the mirror image. As the US long treasury ($USB) dropped -1%, yields also dropped sharply on the 30-year (4.208 -0.37 -0.87%), 10 year (3.456 -0.31 -0.89%), and 5 year paper (2.425 -0.36 -1.46%). It would be helpful if these markets were synchronized.

As more risk was taken, the T-bill yield bumped up a tad more (0.095 +0.05 +5.56%), but the extremely low rate continues to show that traders will hold cash without return, a sign of perceived capital market risk. It’s obvious that bankers don’t want there to be funds parked in T-bills. They want it traded in forex markets.

For the Cara 100 company stocks on Tuesday, based on the Russia story, Vimpel Communications and Mobile TeleSystems (VIP +11.7% MBT +4.7%) were hot. So too were Embraer, Applied Materials and on good earnings (somehow) Carnival Cruiseline (ERJ +6.0% AMAT +4.8% CCL +4.8%). Still showing distaste for the dilution over the Perot systems acquisition, the shares of Dell Computer (DELL -1.7%) were down again, following the previous day’s loss of -4.1%.

Earlier Wednesday in overseas equity markets, Australia (4,741.0 +1.50%) made some headway because of the froth in the commodity markets, but Shanghai (2,842.7 -1.89% for a loss of about -4.25% over two days), Hong Kong (21,595.5 -0.49%) and India (16,719.5 -0.99%) pulled back. The Nikkei 225 of Japan was closed again. But by 6:16AM ET, France (3,827.4 +0.10%), Germany (5,715.3 +0.10%) and the FTSE 100 of London (5,159.3 +0.32%) were a tad stronger, and closely watching the forex market where the Euro was a bit softer (1.4783 -0.0007 -0.05% 06:19am ET).

The precious metals market was a little softer with the moderate strength in the $USD. Earlier this morning, the spot (cash) trades were as follows: for gold (1012.20 -4.70 -0.46% 06:29am ET), silver (17.010 -0.145 -0.85% 06:29am ET), platinum (1324 -11 -0.82% 06:25am ET) and palladium (297 -2 -0.67% 06:25am ET).

In other futures markets, the DJIA December futures (9769 -2 -0.02% 06:18am ET) are flat, and the Crude Oil futures (71.30 -0.46 -0.64% 06:19am ET) trading a bit lower.

The dance continues as the Fed and then the G-20 orchestra play on this week.

Comments

[John Mylant:]

I have read that the dollar will continue to fall another 15% in 2010, but with this attempt at manipulating the market so the big hedge funds can have themselves look good on paper by the end of the year who know s what's gonna happen next year. I guess follow the bulls as long as we can even though they appear technically manipulated.

Sep 23 10:55 AM