China does not want the dollar?

The question of ‘fair value’ will be the next ‘hot’ topic of conversation. Is the one-way directional play in US equities leading us to fair value? Or are we ‘over’ valued? Are we witnessing EUR strength or a USD weakness? Applying the ‘lemming’ trade is difficult to ignore, as being the contrarian is rather costly! Again the dollar has come under pressure as reports suggest that China should increase its holdings of EUR and JPY in its foreign reserves. Be weary, higher yields in the US should provide support for the ‘greenback’ ahead of the Fed meeting next week.

The US$ is weaker in the O/N trading session. Currently it is lower against 14 of the 16 most actively traded currencies in a ‘subdued’ trading range.

Data wise Friday was a quiet day to finish the week off with. We had sales of existing US homes, which was a surprise, surging to a record +9.4% last month (+5.57m units-highest in 2-years) as first-time buyers took advantage of the $8k tax credit before it expires next month. Digging deeper, it’s worth noting that the median price fell at the slowest pace in over a year as inventories fell. Perhaps this is evidence that the market is stabilizing somewhat as demand improves. The number of distressed sales was 29% in Sept. compared to 31% the previous month. Psychologically, any improvement in house prices will obviously contribute to an increase in housing wealth. This may convince the consumer to commence spending again once they overcome the credit issues and unemployment fears!

The USD$ is currently lower against the EUR +0.32%, GBP +0.09%, CHF +0.30% and JPY +0.07%. The commodity currencies are stronger this morning, CAD +0.03% and AUD +0.47%. On Friday, the loonie traded in a narrow, but a weaker range as the USD rebounded and softer commodity prices gave the currency little support. With fundamental data somewhat supportive of the currency last week, it was the threat of intervention from Governor Carney at the BOC that has put the brakes on the loonie climb. Last week’s BOC MPR was moderately positive for the loonie. However, the BOC believe that a stronger currency will curtail future growth prospects. Basically Carney is trying to talk the currency value down. Will he succeed without having to resort to quantitative easing methods? With commodities on solid ground and risk appetite alive, despite Friday’s equity decline, should favor the CAD in the medium term. The market wants parity, we don’t need parity, but the market will want to test the loonies’ highs again. Futures have priced in a 62% that we will have reached parity by year end. Dealers continue to look for better levels to own CAD.

Yield, yield, yield! With Asian equities advancing has boosted the demand for higher yielding assets like the AUD. The RBA keeps providing the ammo to lift the currency towards parity. They are expected to remain hawkish as Cbank officials make a number of speeches and economic forecasts over the coming weeks. Governor Stevens said it was ‘possibly imprudent’ to keep borrowing costs at a 50-year low in the minutes of its Oct. meeting. The currency remains better bid on pullbacks (0.9243).

Crude is lower in the O/N session ($80.02 -48c). Crude fell from its one-year high last week as the dollar rebounded from its 14-month lows, thus diminishing the appeal of commodities to investors. Oil prices have been pushed to this lofty height after last week’s EIA report showed a bigger than forecasted decline in supplies of gas. Gas inventories fell -2.2m barrels to +207m vs. an expected drop of only -850k. On the flip side crude stocks rose +1.3m barrels to +339.1m vs. the forecasted climb of +1.5m barrels. Despite OPEC Secretary-General El-Badri saying that ‘prices above $80 would hamper economic growth’ the market remains speculative bid. Technically, prices have been aggressively mobile on pure ‘speculation’ in the face of positive overall supply fundamentals. Year-to-date crude has advanced +11%, the weekly inventory report is not bearish and can only give speculators ammo to keep prices elevated. Only when floating storage is eliminated then demand destruction will end!

On Friday, the ‘yellow metal’ fell as the USD rebounded from its 14-month lows vs. the EUR which eroded the appeal of the precious metal as an alternative investment. However, expect the commodity to remain well supported on deeper pullbacks as long term inflation worries continue to be a concern ($1,056).

The Nikkei closed at 10,363 up +80. The DAX index in Europe was at 5,783 up +44; the FTSE (UK) currently is 5,264 up +22. The early call for the open of key US indices is higher. The 10-year bonds backed up 5bp on Friday (3.47%) and another 3bp (3.50%) in the O/N session. Rally definitely over! For a third consecutive week, bonds managed to lose ground as dealers continue to pressurize prices with the announcement of a record $123b worth of US debt to be auctioned off this week. The market also believes that the Fed will begin to signal a hike in interest rates from their 50-year low. Analysts foresee 4% 10-yr notes before the year-end and 4.5% by middle of next year!

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