December 9 – The dollar is breaking lower again this morning, following several days of consolidation. The consolidation was anticipated after such a sharp break Thursday on the heels of the European Central Bank’s decision not to expand its asset purchasing program. That decision sent the euro surging more than 3% on Thursday. The dollar’s bounce failed to even come close to a 50% retracement of Thursday’s trading range, reflecting damage done to the greenback’s charts on the break. That leaves the dollar vulnerable near-term, with Thursday’s low providing the first area of significant support.
The Federal Reserve is certainly expected to raise rates 25 basis points next Wednesday. That’s been priced into the market for quite some time. Longer-term, the dollar continues to have good fundamental support relative to the euro. The bull market move by the dollar that started less than 18 months ago is relatively short in duration relative to historical moves, suggesting more strength ahead. As such, I’m not surprised by the near-term weakness, which could linger into the winter, but I continue to see the dollar in a longer-term move higher relative to the euro and other major currencies. In fact, some big hedge funds apparently share that sentiment, maintaining their bullish bets on the dollar, although modifying their near-term objectives following the ECB’s action last week.
Europe’s third quarter GDP growth of 0.3% continues to reflect an economy that is anemic, with several challenges still ahead of it. The great Euro-zone experiment still has not found the answer to many of its foundational problems. A common currency and economic structure for a group of countries possessing their own individual political units is destined for trouble as those countries that are weakest economically become addicted to merely feeding on the generosity of the strong until they pull them down with them to a commonly weak level. The current refugee crisis stands to simply compound the problem as it drains social programs and provides a drag on trade. Germany has been one of those stronger units supporting the weaker, but trade data released overnight showed it had weaker than expected exports and imports in October, reflecting a slowing economy.
China’s yuan continues to break lower, falling to its lowest level since 2011 on the currency markets this week. The yuan continues to fall in the days after acceptance into the International Monetary Fund’s reserve basket. The depreciation has the appearance of a central bank trying to position the currency for next week’s anticipated rate hike by the U.S. Federal Reserve. The yuan’s deprecation is an attempt to bolster Chinese exports. That should combine with the strength in the dollar to favor larger shipments to the United States in the months ahead if in fact our economy maintains sufficient strength to support consumer buying. The yuan’s weakness is certainly making headlines, but it’s been much weaker, particularly when it traded to 8.2 yuan to the dollar a decade ago.
The potential weather story in the Black Sea region appears to be over for now. Rains over the past month have dramatically improved the winter crops, although acreage has been lost, which will be made up by lower-yielding spring crops. A potential story may emerge in South America beginning next week. Crop stress has been confined primarily to the northern and eastern 10 to 15% of Brazil’s crop belt. However, recent rains have disappointed. That makes a system early next week critical for avoiding increased crop stress. Failure to see forecasts verify this time around could result in expansion of crop stress to a third of the belt.
USDA releases its December WASDE crop report at Noon EST today. The December report is known for its lack of surprises. As such, the market anticipates modest increases in supplies; both domestically and globally, but little other market-moving news.
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