Freddie and Fannie Flop?

The USD$ is weaker in the O/N trading session. Currently it is lower against 13 of the 16 most actively traded currencies in a ‘whippy’ trading range as fear rules greed.

With no US data to provide guidance yesterday, investors took their lead from global equities. Commodity prices eased as geo-political tensions subsided at first providing a ‘positive’ for the DOW. But, heightened Freddie Mac and Fannie Mae issues (banks were unloading more mortgage bonds) initiated further off-loading of US financial stocks and a negative impact on the greenback. Analysts are predicting that they will need to raise another $75b of new capital due a potential change in an FASB rule. These numbers are outlandish, new capital is required all the time, sooner or later the ‘kitty’ will run dry and one can expect second tier financial flops.Traders continue to gravitate towards the FI asset class and unwind ‘carry trade’ and sell the ‘crosses’ vs. JPY and CHF for safety reasons. Bernanke takes to the airwaves this morning. He is due to speak about financial regulation and stability at the Fed Deposit Insurance Corporation’s Forum on Mortgage Lending. With one eye on him and the other on G8, traders are hoping to receive some concrete guidance on the ailing greenback. If not, then recent EUR highs will appear on the radar again sooner rather than later. To date the G8 had not directly commented on currencies, but, but noted their concerns of global growth and the effects of higher commodity prices.

The US $ currently is lower against the EUR +0.02%, GBP +0.09%, JPY +0.74% and CHF +0.44%. The commodity currencies are mixed this morning, CAD +0.03% and AUD -0.27%. The loonie strengthened across the board yesterday after a BOC survey showed the outlook for future sales growth rose to the highest level in a year during the 2nd Q. Digging into the report, there are a number of interesting conclusions. Firstly, that inflation expectation is soaring, but so are investment intentions in productive capacity. Secondly, the percentage of firms expecting higher ‘output’ prices was slightly larger than firms expecting higher ‘input’ prices. Conclusion, some firms may expect to have to absorb rising input costs in their margins rather than passing it onto the end user. Nevertheless, the percentage of firms expecting CPI inflation to rise above 3% (BOC threshold) over the next two years advanced to its highest ever (perhaps inflation expectations are getting ahead of the BoC). The market should not expect this to influence governor Carney decision on July 15th. It just highlights the BOC concerns of late. With the FED and in some respect the BOC expecting dis-inflationary pressures to unfold going forward as both the US and Canadian economies stumble in the 3rd Q, combined with weaker commodity prices should have USD/CAD trading at the upper end of its range sooner rather than later (a lot of ‘if’s’).

Last week, RBA governor Stevens left borrowing costs on hold at 7.25%. This week has started with AUD$ under pressure as falling global equity markets has investors selling higher yielding currencies funded by borrowing JPY. With growing demand for ‘risk aversion strategies’ expect the AUD$ to be sold on rallies (0.9540).

Crude is lower O/N ($141.34 down -3c). Crude prices eased yesterday on the back of Iran’s foreign minister expressing confidence in the ‘on going’ talks about their country’s nuclear program and the USD$ finding traction ahead of a potential G8 currency announcement. As an analyst put it, ‘black gold’ is acting positive to ‘happy talks’ about the greenback. Geo-political concerns and last weeks stock inventory data had kept oil prices better bid on pull backs. But, in the first session of the week, traders have been happy to book speculative profits. US growth issues and depreciating disposable incomes most likely have kept the ‘regular holiday travel’ closer to home, which will of course weigh on gas prices. Technical traders anticipate oil to move lower as it breaks below its recent trading range Last weeks EIA report revealed an unexpected fall in stocks, which provided support for prices and bearish for refined products. Cooler heads over geo-political tensions remain the biggest factor impeding higher prices at the moment. Year to date, crude has climbed nearly 50% aided by a weaker greenback, but, recent Trichet comments and an anticipated G8 statement has reversed course for now. Gold prices is little change so far this morning ($931) despite as the USD$ loosing ground vs. the EUR. If this scenario continues, expect investors to seek the ‘yellow metals’ as an alternative investment.

The Nikkei closed at 13,101 down -326. The DAX index in Europe was at 6,249 down -145; the FTSE (UK) currently is 5,381 down -131. The early call for the open of key US indices is lower. Yields of the US 10-year bond eased 3bp yesterday (3.91%) and another 3bp O/N (3.88%). With global equities continue to take a whipping despite commodity prices easing aggressively, investors are taking sanctuary in the FI asset class. The front end of the US yield curve continues to be the area of choice, which has steepened even further (148).

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