Forex embrace Bush, Bernanke and Paulson!

The ‘three amigos’ (Bush, Bernanke and Paulson) continue to try and shore up confidence in the US capital market system. This is to be done by helping distressed homeowners and extending liquidity to financial institutions. An optimistic investor will embrace this, but, the jaded wealth depleted consumer may just need a job by day’s end!

The US$ is weaker in the O/N trading session. Currently it is lower against 11 of the 16 most actively traded currencies in a ‘subdued’ trading range ahead of the US GDP data this morning.

Yesterday, ADP unexpectedly added an estimated +9k jobs this month. The increase followed a revised drop of -77k vs. -79k for June. Historically, ADP has been a very poor barometer for NFP lately, although it has been poor in the same direction – it has been stronger than the first reported private payroll print for seven consecutive months (81k on average). Analysts do not foresee it as an indicator of strength for this Fridays NFP (consensus remains at -75k). The current trend remains on track for further lower job numbers. Analysts still predict further contraction both in construction and manufacturing jobs, but to be offset to some extent by the services sector and the government sectors. Consensus believes that the ADP continues to overestimate the government’s figures. It has become the norm of late for employers to be cautious about expanding their current payrolls. In fact, news headlines give the perception that job cuts are heightening, as consumer and company investments are pared back, due in part to higher energy costs and credit concerns. The tax rebates have fizzled out and by default so will consumer spending, creating a trickle down effect throughout the US economy. Do not expect too many traders to bet the farm on this Friday’s headline. Positions will be kept close to home while the markets digest the data.

Bernanke and his policy makers will continue to remain at ‘home plate’ until January at least. They have extended their emergency lending programs to Wall Street players (TSLF and PSCF), as they believe that the financial markets are still too weak to go it alone. They want to boost investor confidence and portray stability in the US financial system. Their object is to continue to give dealers access to any one of their loan programs if need be, to the end of each Q (when it’s most likely to be used). They have also extended the length of borrowing time for commercial lenders (TAF) and enhanced its swap line with the ECB. They cannot do anything else, but, be there to add liquidity into the system.

President Bush also signed a housing bill that helps 400k homeowners facing foreclosure and extends a lifeline for GSE’s (Freddie and Fannie). He is hoping that it will improve confidence and stability in the markets. Its objective is to curtail foreclosures and slow down spiraling housing prices. But, will it restore confidence in Freddie and Fannie? They finance almost 50% of the $12t of US mortgages, I assume we will have to expect treasury to inject capital eventually into these institutions.

The US$ currently is lower against the EUR +0.25%, CHF +0.15% and higher against GBP -0.02% and JPY -0.03%. The commodity currencies are stronger this morning, CAD +0.17% and AUD +0.19%. The loonie has extended its recent decline after government reports yesterday showed that manufacturers’ prices rose less than raw-material costs in June. One can conclude that companies are not passing on all of the costs in energy expenses to consumers just yet. As already highlighted by the BOC, inflation remains well contained for now. But, analysts agree that the economy will remain weak for the remainder of the year. Falling commodity prices have signaled that economic growth is slowing. The raw materials price index rose +4.4% vs. an expected +3.5% (led by a +8.4% gain in fuel costs). Investors remain concerned that weaker commodities may translate into slower economic growth for Canada (commodities account for about 50% of Canada’s exports). The perception that the US is entrenched in their ‘slowdown’, and that other economies are only starting theirs, coupled with the idea that the US economy could recover in the 1st half of ’09 will only favor the greenback vs. its major trading partners. Expect the CAD$ to remain under pressure, because of its ‘proximity and association’ with its southern neighbor. Traders continue to be better buyers of USD/CAD on pull backs.

The AUD$ fell to a six- week low (0.9467) after government reports showed that retail sales dropped the most in 6- years (-1.0% vs. +0.9%), convincing traders that the economy is slowing.

Crude is lower O/N ($126.03 down -74c). Yesterday’s EIA report has surprised the market yet again and reported an unexpected decline in gas stocks, which has provided a temporary bid to the market. Supplies of the fuel fell -3.53m barrels to 213.6m vs. an expected rise of +350k barrels. With Crude inventories falling less than forecasted (-0.1m vs. -1.4m), the gas component is the only bullish sentiment of the report. Analysts note that the end of the summer driving season is near its conclusion and there is still enough supply as consumption has weakened over the past month (consumption has averaged 20.2m barrels a day, down -2.4% y/y). Falling Nigerian output continues to lend support. The country is now producing less than 1m barrels of crude a day due to the militant attacks orchestrated by MEND. Nigeria to date remains the US’s 4th largest source of oil imports. Geo-political concerns over Iran are coming to a head once again. Ahead of the official deadline that was imposed by the UN 2 weeks ago. Their supreme leader, Ali Khamenei said his country will push forward with its nuclear program. He said that ‘Iran will pursue its peaceful nuclear energy and no one can undermine the nation’s attempt to progress’. Iran has said it may blockade the ‘Strait of Hormuz’, the shipping lane for a 5th of the world’s crude. This stoic stance will only heighten insurance premium pricing of oil in the medium term once again. Goldman infamous for predicting $100 oil last year has set oil to top out at this year high again by year end! Gold plummeted yesterday ($920) as a stronger greenback has reduced the appeal of the ‘yellow metal’ as an alternative investment.

The Nikkei closed at 13,376 up +9. The DAX index in Europe was at 6,458 down -2; the FTSE (UK) currently is 5,416 down -5. The early call for the open of key US indices is lower. Yields of the US 10-year bond backed up 1bp yesterday (4.05%) and are little changed O/N. Treasuries prices eased after the US government indicated that it is to consider increasing the frequency of long-term debt sales (30-yr bond), as the economy slows and the budget deficit is projected to widen to a new record. Treasury announced that they will auction $10b 30-year bonds (most in two years) and $17b 10-year notes next week. One should keep an eye on month end extension in Europe. It is the largest since 1999, 91b in 7/09 exiting the index, plus 16b in coupon payments. This might push US Treasury prices higher over the short term (opportunity for traders to position themselves ahead of the auction).

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