Bank’s see red! Where is USD$?

FX markets remain poised on a knife edge while investors digest falling German business confidence, retreating US house data and spiraling commodity prices. All week investors have been swayed by hawkish USD$ policy rhetoric. But, the main fear of financials being adequately capitalized for future losses continues to trump most concerns. The USD$ strength may be soon compromised yet again.

The USD$ is weaker in the O/N trading session. Currently it is lower against 12 of the 16 most actively traded currencies in a ‘whippy’ trading range ahead of this morning US new home data and consumer sentiment numbers.

Yesterday, we received more compelling evidence that the slowing US economy is hurting the labor market. Next weeks NFP could be an eye popping headline (consensus thus far is -20k to -125k). The number of Americans filing 1st time claims for unemployment assistance jumped w/w to its highest level in over 3-months (filings advanced +34k to +406k-yearly average has been +364k). Usual reasons continue to impede the labor market, surging fuel costs, the US housing recession and a crisis in the credit markets. The knock on effect is expected to persist with consumers curbing their spending and companies reducing their future investments, which bodes for further weakness over the coming months. Historically, there tends to be a disclaimer in July numbers, as the auto industry ‘temporarily’ cuts employment as they prepare for new car models (the auto industry is in a down-sizing mode). 37-states registered a filings increase, thus emphasizing that the issue is wide spread. US housing data continues to be hurt financials, and was the main drag on US equities yesterday. Sales of previously owned homes (85% of the market) fell again last month to its lowest level in a decade and proof that house prices and consumer confidence are hurting demand. Re-sales fell -2.6% to 4.86m vs. 4.99m unit’s m/m. More importantly, obviously not enough, the median home price dropped -6.1%, y/y, and evidence of deteriorating consumer wealth yet again. Inventory levels remain high, at current prices, there is now an 11-month supply worth.

The US $ currently is lower against the EUR +0.20%, GBP +0.08%, CHF +0.31% and JPY +0.33%. The commodity currencies are mixed this morning, CAD +0.01% and AUD -0.14%. Commodity prices are starting to turn the screws on the CAD$. With the USD$ currently been driven by bullish sentiment, the loonie has wilted due its strong correlation to oil, gold and grains. This weeks CPI report added little value to the currency. Despite the higher headline, the BOC has been very transparent in their elevated inflation predictions. The headline print pushed above +3% for the first time in 3-years, while core-CPI remained at +1.5% for the 3rd consecutive month (+0.1%, m/m). This provides us with stronger evidence that current inflation fears are ‘overblown’ and that there is room for the BOC to reduce rates (3.00%) if need be. The headline inflation will eventually lag into core-inflation, but, expect a weakening Canadian economy to continue to offset these pressures. Traders continue to be better buyers of USD/CAD on pull backs.

The AUD has printed a two week low (0.9565) after Australia’s largest bank set aside more funds for US credit losses (NAB -$800 loss declared). Investors fear that the subprime-mortgage crisis is adversely affecting their banking sector will temporarily put a lid on any AUD$ advances.

Crude is higher O/N ($126.15 up +44c). Technical’s temporarily gained the upper hand yesterday as crude prices climbed from their 2-months low. Traders believed that the fall was over zealous and were content in buying back some of their profitable trades. But, the ‘bears’ remain in control as oil price are anticipated to test the $120 level some time soon. A stronger USD$ has contributed to the rapid decline, but future demand perception remains the markets major concern. The US consumers is quickly changing their consumption and spending habits as their total wealth has been eroded mainly due to leveraged house prices. The short term top of $147 was too expensive for the markets to digest, that’s not to say that these levels will not be revisited. Once the two week wait for Iran’s final decision on their nuclear program ends (a positive response is not anticipated as Iran is expected to continue its nuclear enrichment program) may create another bid. This weeks EIA report showed that inventories of gas and distillate fuels (include heating oil and diesel) rose, further bearish evidence. Stocks increased +2.85m barrels to 217.1m (largest increase in 3-months). Distillate fuel stockpiles climbed +2.42m to 128.1m. Concluding that demand is been effected by the higher prices of late as consumers change spending habits. Crude inventories dropped -1.5m barrels to 295.3 million. The rate at which refineries operated also declined to 87.1%, down -2.4%, w/w. Gold is tentatively trying to climb ($929) in this morning session as traders fear that the USD$ will come under renewed pressure as global equities pare back some of this weeks gains. Bearish momentum still favors the ‘yellow’ metal to test the $900 level.

The Nikkei closed at 13,334 down -268. The DAX index in Europe was at 6,373 down -67; the FTSE (UK) currently is 5,335 down -26. The early call for the open of key US indices is mixed. Yields of the US 10-year bond eased 10bp yesterday (4.00%) and another 2bp O/N (3.98%). Now that all new issues are out of the way and the market was able to cheapen the curve adequately, demand has heightened in the FI market. Euro-bonds initially dragged their counterparty higher when business confidence slipped in Germany. With US home sales falling to the lowest level in over a decade yesterday, has also provided an excuse to own the asset class and force equities to pare back some of this week’s gains. With commodities falling, traders continue to reduce their bets of the Fed hiking any time soon.

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