Mon, September 11, 2017 9:08 am

From this week’s Week Ahead Flash:

Post-election the U.S. Dollar was on a tear as the “Trump bump” filtered into markets. On election day, a dollar bought 6.784 Chinese Yuan (CNY). By mid-December a dollar bought 6.958 CNY, an increase of just under 2.6%. To put that in perspective, a ton of thermal coal that sold for $80 on election day would cost the Chinese buyer, all other things being equal, $82.05 by mid-December. Then something interesting happened. While the stock market continued to soar and economic data looked strong, it became increasingly clear that easy monetary policy would continue and the Fed would not be raising interest rates anytime soon. The President himself stated that he liked lower rates and, despite strong job numbers, inflation remained very muted. As time passed by, in July of this year the dollar had fallen back to roughly the level that we saw it on election day – the “Trump bump” for the dollar had evaporated.

Since then events have been coming fast and furious to beat down the dollar. North Korea fired multiple missiles and received a tongue lashing from the President. Despite this, North Korea then threatened to bomb Guam, extended their missile range, tested a hydrogen bomb and said the US will pay a “due price” if harsh UN sanctions are approved later today. These events have left many in the market concerned about a real conflict with the North. Piling on, Hurricane Harvey hit the gulf with estimated damages of over $100 billion. Irma, which hit the Florida Keys as a Category 4 hurricane and is currently thrashing Florida, could cost even more. On top of all that, the President last week sided with the Democrats and approved a spending bill that only increased the debt ceiling for three months. The specter of a debt ceiling showdown and possible government default, in short, has reared its ugly head again.

The result of all this is as of this writing, one dollar bought only 6.4821 CNY. The dollar has, in short, now fallen nearly 4.5% against the CNY since election day. So why does this matter to coal? That same $80 worth of coal cost roughly 11.79 CNY to buy back in November. Today it would cost 12.34 CNY or, looked at another way, 11.79 CNY can now buy only $76.44 worth of coal. NEWC prompt month this week closed at $96.80/MT. That translates to roughly 14.93 CNY. Back on Election Day, 14.93 CNY could buy $101.29 worth of coal. On election day, NEWC prompt month was $106.80. Back in November 2016, China had recently relaxed its 276-day policy due to high prices and production was increasing by tens of millions of tons a month. By December, NEWC prompt month prices were back down below $80. Our clients have asked us why our forecasts for both thermal and met are below futures strips right now. As the old saying goes, while history does not repeat itself it does rhyme. A year ago prices at this level, currency adjusted, were seen as too high and China implemented policies to bring prices back down. We leave this as an open question, at these prices could we be seeing something similar in the future?

Other headlines this week:

Hurricane Impacts Weekly Power Output

Delays Impact Coal India’s Projects

Thermal Market Heats Up

Met Market Moves Higher, but May be Weakening

US Weather Patterns to Flip Post-Irma

Disrupted Demand Brings Natgas Lower

Contact Steve Ristevski at sristevski@doyletradingconsultants.com or (212) 520-2774 to see more.