Is this month over yet? Forex is Hard!

Everyone’s surprised by the US earnings and how strong they’ve been so far. The questions of course are they sustainable given that they are largely a result of cost cutting. One gets the feeling that US equities are just treading water and marking time while other bourses like the emerging markets lose traction. When commodities puke and the USD rally’s it’s a surprise to see US equities floundering in ‘never-land’. Yes, historically this is the height of the silly season for markets. The time when most participants take holidays and desks are understaffed with juniors who’s decision making process is limited for various reasons. But, this day over day theme of the recession is on, now it’s off again is like having root canal without anesthetic! Volatility is wonderful. It gives us all the opportunity to make money. But, lack of liquidity and nonsensical moves is detriment to anyone’s health. Get us out of this month and back to some normalcy. Oh no, August, Europe’s on holiday!

The US$ is mixed in the O/N trading session. Currently it is higher against 8 of the 16 most actively traded currencies in a ‘subdued’ O/N session.

The headline was a bit of a mess for US Durable goods yesterday (-2.5% vs. +1.3%), but the core managed to beat expectations (+1.1% vs. +0.8%). In reality durables are so volatile that anything within a 1-2% should be considered as spot on. The market will however focus on the ‘core’ announcement. As per usual the auto plant shutdowns and aircraft orders deeply affect the headline print. Analysts believe that the negative variables will reverse in the 3rd Q as factories once again start up production. Digging deeper (but be aware of volatility), and a pleasant surprise was the inventory-to-shipment (IS) ratio declining. Despite it being an upbeat component, historically, it tends to record large revisions month over month, and low volumes can exaggerate the results (its worth noting that Apr. and May’s IS readings were revised down). The issue of excess capacity remains a concern across different business segments, perhaps we should interpret that it’s foreign orders (like China restocking during the ‘slump’) and not domestic demand that’s been driving the recent strength. Some of the noted break-down: Transportation fell -12.8%, m/m, on the back of a -1% decline in autos and parts orders, Non-defense aircraft orders fell -38.5%, computers (-2.5%). On the plus side we had seen gains for electrical equipment (+0.9%), machinery (+4.4%) and primary metals (+8.9%).

The USD$ currently is lower against the EUR +0.10%, GBP +0.66% and higher against the CHF -0.00% and JPY -0.02%. The commodity currencies are stronger this morning, CAD +0.36% and AUD +0.63%. Same story board, just a different day. The loonie has underperformed in the last 2-sessions and I am sure BOC is ‘perversely’ happy. After printing a 9-month high this week, the currency has managed to do a U-turn (similar to other G10 currencies) and give up 2-cents to its largest trading partner. The loonie fell for the 2nd consecutive day on the back of global indices falling, especially emerging markets and on commodity prices tumbling. Investors have once again gone into risk adverse trading mode as we approach month-end. Currency liquidity actually sucks with dealers desks half manned by junior traders with limited risk tolerance. Despite the currency being the best performer vs. the greenback this month (+6.6%), investors are willing to take some profit off the table. The currency had been getting ahead of its fundamentals. Tomorrow we have GDP numbers, investors have had little data to feed off this week. If the currency manages a weekly close above the 1.0925 level, it will want us to explore the 1.1200 handle again.

RBNZ kept O/N lending rates on hold for a 2nd consecutive month (2.25%). However, Governor Bollard said he may cut borrowing costs further as a rising currency threatens a recovery from the worst recession in 3-decades. The NZD managed to fall the most in 3-weeks after his comments. Signs that this global recession is ending is again encouraging risk taking in the market. Fundamental data out of Australia continues to impress. Last night the AUD managed to pare some of this week’s losses on the back of building permits which increased +9.3%, m/m. Traders are now beginning to bet that Governor Stevens will be the 1st CBanker to hike rates (0.8229).

Crude is lower in the O/N session ($63.27 down -8c). Wow! Bulls get out of the way. We will see you down at the $60 a barrel soon. Oil collapsed yesterday, the most in 3-months after a staggering surprise in the weekly EIA inventory numbers. They reported a whopping +5.1m barrel increase to +347.2m, w/w. The market had anticipated an average decline of -1.2m barrels. Refiners cut operations by -1.2% to +84.6%, relative to capacity, while imports climbed +8.9% to +10m barrels a day last week (the highest since Jan.). The US durable good headline print added to crude price pressures, as well as the Chinese indices managing to retreat the most in 8-months coupled with a stronger green back. Healthy demand destruction is viral so it seems. Month end profit taking and risk adverse trading is undermined investor’s need to use commodities as an inflation hedge. Earlier this week, crude managed to print its highest level in over a month and looked set to break through the $70 resistance level. Commodities had been advancing on future expectations and not on fundamentals. The CFTC has started its debate on speculation in the commodity markets, which they believe has contributed to the ‘asset bubble’. Some dealers think that any attempts to curb speculation may be ‘disruptive’ to markets, and it is this factor which is contributing the most to ‘spook investors to push the market lower’. Demand destruction cannot and will not support higher fuel prices! Gold prices fell close to a 2nd consecutive -2% decline yesterday, as the USD index advanced on risk adverse trading, thus eroding the demand for the ‘yellow metal’ as an alternative investment ($927).

The Nikkei closed at 10,165 up +52. The DAX index in Europe was at 5,296 up +26; the FTSE (UK) currently is 4,582 +35. The early call for the open of key US indices is higher. The 10-year Treasury’s backed up 3bp yesterday (3.69%) and is little changed in the O/N session. The plethora of US product this week, a record $150b, have managed to push shorter yields higher and in doing so increased borrowing costs for the US government as it pays for its economic rescue package. Similar to the 2-year auction, direct demand was weak for yesterday’s 5-year offering (36.2% vs. 62.6%-conspiracy theorists will say that the Chinese did not get involved on purpose). This does not bode well for today’s final $28b 7-year auction.

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