Forex reprieve before the ‘onslaught’?

Capital markets caught a break and paused from its global meltdown scenario yesterday. With elevated commodity prices softening, it provided the temporary spark and reprieve for the greenback and equity prices. But, Bernanke and co. perched on a ‘white picket fence’ will eventually realize that they cannot be savior to all US ills in the short term.

The USD$ is weaker in the O/N trading session. Currently it is lower against 10 of the 16 most actively traded currencies in a ‘subdued’ trading range ahead of this morning US housing starts.

Yesterday, US data showed that CPI spiked on the headline, +1.1% m/m (+5.0% y/y), but the core remains consistent, +0.3% (+2.4% y/y). This provides further evidence that inflation is narrowly concentrated in food and energy, emphasizing that the ‘pass on’ into core-prices remains disjointed. The report backs Bernanke’s monetary policy testimony to the Senate this week. Analysts conclude that the elevated energy costs will force the consumer and businesses to pare spending even further. The trickledown effect should hurt the US economy and make it less likely that Bernanke and Co. will hike interest rates (2.00%) to curtail even bigger price increases in the medium term. Other data showed that US Industrial production jumped more than estimated last month (+0.5% vs. -0.2%), partly due to a jump in production of autos after the end of a supplier strike. Production in the auto sector was up by +5.4%, m/m, but the underlying weaknesses in the sector will surely dampen any further increases in the coming months (ex-auto manufacturing production fell for the 3rd straight, down -0.1% m/m). Bernanke’s comments seem to have solidified a stagnant economy for the remainder of the year, as consumers deal with a financial and housing debacle that has eroded their personal wealth and disposable income.

The US $ currently is lower against the EUR +0.35%, GBP +0.07%, CHF +0.13% and higher against JPY -0.13%. The commodity currencies are stronger this morning, CAD +0.04% and AUD +0.26%. The loonie remains range bound and floundering in ‘no man’s land’ despite weaker commodity prices. With the USD$ finding strength across the board yesterday, the CAD$ was not immune. Canadian data showed that manufacturing shipments remains on a firm footing. Higher petroleum prices supported the +2.7% surge vs. an expected +2.1%. But, removing the price effect sales still jumped +0.2%. This should continue to provide a boost to Canadian GDP for May. Commodity prices will eventually have a negative effect on the CAD$ who’s exports account for 50% of commodity products. This week the BOC left rates on hold at 3.00% and governor Carney indicated that economic risks are ‘balanced’ between inflation and economic growth. They expect higher than expected headline inflation over the next year, but also noted that core-inflation to remain ‘well contained’. Futures traders continue to price in no rate changes for the remainder of the year.

The AUD$ remained under pressure for a second day (0.9786) and retreated from it 25-year high as traders pare positions believing that the RBA will cut interest rates in the coming months. Governor Stevens this week already indicated that rates were high enough to curb inflation (7.25%).

Crude is lower O/N ($134.38 down -22c). Crude oil continues its downward spiral after yesterdays surprising EIA report. Inventories jumped +2.95m barrels to 296.9m last week vs. an estimated -2.2m (conspirators would say the US government is releasing emergency supplies). With Bernanke saying that risks to US expansion and inflation have risen can only aid in crudes short term softening. Geo-political insurance premium have also eased with rumors of US diplomats to broker nuclear negotiations with Iran and Israel. This has tempered trader’s speculations that Israel may attack OPEC’s second biggest oil producer. Gas inventories rose +2.47m barrels to 214.2m vs. an expected decline of -800k w/w. Inventories of distillate fuel (including heating oil and diesel), gained +3.19m barrels to 125.7m. The overall report should continue to be very bearish at least until next week. Gas consumption averaged 9.3m barrels a day over the period, down -2.1%, y/y. The market is starting to factor a ‘deeper recession’ taking a firm grip and by default unsettling future demand. Let’s hope this report is not a one week phenomena. Markets, traders and investors need a break. Gold eased yesterday ($964) as equity markets found some traction with the ‘black gold’ falling despite higher US CPI data that should have boosted the appeal of the ‘yellow metal’ as a hedge against inflation.

The Nikkei closed at 12,887 up +127. The DAX index in Europe was at 6,215 up +60; the FTSE (UK) currently is 5,222 up +71. The early call for the open of key US indices is lower. Yields of the US 10-year bond backed up 10bp yesterday (3.92%) and are little changed O/N. Treasury prices fell after yesterdays US CPI data, inflation jumped much higher than anticipated. The curve continued to steepen (152) due to the immediate uncertainty that surrounds financial institutions and the fact that traders are betting with the Fed’s hands tied they will not be hiking borrowing costs anytime soon.

This morning it was announced that the European Parliament is set to advise the ECB to change its current inflation target of ‘close to, but below 2%’ given the changing global situation of rising commodity and energy prices, according to a draft report. The parliament ‘considers that the ECB’s definition of price stability should be examined in the context of a new age of globalization characterized by rising energy’. This is surely to take some pressure of some CBankers.

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