US$ in line for Gold!

With world leaders enjoying their brief hiatus at the Beijing Olympics, the USD$ continues to dominate world currency markets. With a vengeance the currency has solidified its resurgence against all its major trading partners. Currently US$ bulls remain in control and any pull back provide investors the opportunity to enter or add to their US$ longs.

The US$ is stronger in the O/N trading session. Currently it is higher against 14 of the 16 most actively traded currencies in another ‘whippy’ trading range.

Cbanks messages were generally perceived as somewhat ‘dovish’ last week, allowing bond market to post a solid ‘bull steepening’ bias and equity markets to rally. The Fed produced some subtle changes to their communiqué. Bernanke and Co. indicated that risks for growth have not diminished, but, that ‘the upside risks to inflation are of significant concern to them’. Ever since then, the market has ruled out a potential rate hike being delivered any time soon. With no US data out yesterday, for the remainder of the week Capital Markets will focus on inflation and retail sales numbers. CPI is likely to creep higher last month, due to the residual effects of higher energy prices. However, CPI is not expected to reach its peak, due to some benign whole sale data (which of course will please the Fed) and analysts expect some further moderation in the numbers going forward. Unfortunately, the same cannot be said for the Euro-zone (no wonder the US$ bulls are celebrating as the rest of the world catches up), economic data has been rater dismal and the risks of a modest recession have already heightened. During last weeks ECB news conferences, Trichet and Co. seem to have finally realized that their economies are not as resilient as previously thought. Although the ECB maintained its firm tone on inflation, the threat of higher rates have almost disappeared (4.25%). The UK situation is a mess, and policy makers have very little options open to them at the moment. Inflation is expected to edge up to +4.4%. With the new BOE projections (higher inflation and lower growth), the market anticipates that governor King will confirm that policymakers will have to be patient, as it will take a while before inflation reaches its +2% target.

The US$ currently is higher against the EUR -0.28%%, GBP -0.68%, CHF-0.49% and JPY -0.16%. The commodity currencies are stronger this morning, CAD -0.25% and AUD -0.93%. The loonie has received no love for an 8th straight day. Further weak economic data yesterday combined with ailing commodity prices continues to contribute to the CAD$ threatening to take out its yearly highs convincingly. Since oil peaked at its record highs, the loonie has managed to shave nearly 6% of its value vs. its largest trading partner south of its border (50% of total exports are commodity based). On Friday, the employment report showed that the country lost -55.2k jobs vs. and anticipated gain of +5k (albeit mostly part-time). But, this is a second straight month of job losses and has heightened speculation that the BOC may cut borrowing costs (3.00%). After gaining 17% last year vs. the greenback, the loonie has quietly given up nearly 50% of that so far this year. Its proximity and association with its largest trading partner south of its boarders who’s economy has slowed is finally been filtered through to Canadian economic data. One can expect the CAD$ to remain under pressure in the short term, as investors continue to be better buyers on pull backs.

The AUD$ continues to trade under pressure (0.8760) and has fallen for an 11th straight trading session vs. the US$, after commodity prices spiral and as traders added to bets that the RBA will cut interest rates (7.25%) as governor Stevens indicated last week. Since commodities printed their highs in June, AUD$ has lost 10% vs. the greenback!

Crude is lower O/N ($112.65 down 180c). Crude prices tried to crawl back from its 3-month lows yesterday after its excessive drop last week. Concern that the Russia/Georgia conflict may disrupt crude supplies from the Caspian Sea temporarily contributed to the ‘black stuff’ strength during the early trading session. Further clashes in Georgia are expected to threaten the alternative export routes from Azerbaijan (its worth noting that Georgia is a key link in a US-backed southern energy corridor). The fire on the Turkish stretch was extinguished yesterday following an explosion last week by Kurdish separatist group (It will take a day to access the true damage). Traders had also been happy in booking profitable trades after last weeks 8% decline in oil prices. Currently crude prices are been dictated by geo-political issues competing against global growth concerns. Over the past few months, growth has won the battle, but the bulls continue to seek some technical temporary support from insurgent upheaval. Oil analysts are concerned about a physical disruption to European supplies, if this occurs it will filter throughout the whole market and send the ‘black gold’ much higher. What could be a temporary blessing will be the European refinery maintenance season is about to commence, so demand for crude may also drop. The rock solid US$ continues to have a negative impact on energy prices. Over the last year specifically, crude has been used as a safe haven at a time of declining stocks and a declining US$, and now with the greenback finding traction investors are less interested in a safe haven. Last week’s EIA crude stocks rose +1.61m barrels to 296.9m, w/w, vs. an anticipated fall of -200k barrels. Demand numbers remain weak in the US due to elevated gas prices. Some investors are speculating that high prices and slower US economic growth will further reduce demand in the US in the medium term. Gold like most commodities remains under pressure ($812), investors continue to speculate that the US$ strength vs. the EUR will reduce demand for the ‘yellow metal.

The Nikkei closed at 13,303 down -127. The DAX index in Europe was at 6,597 down -12; the FTSE (UK) currently is 5,523 down -18. The early call for the open of key US indices is lower. Yields of the US 10-year notes backed up 6bp yesterday (3.98%) and are little changed O/N. Treasuries prices fell and managed to pare some of the ‘surety premium’ that was priced in, due to global geo-political concerns. With Russia agreeing not to move further into Georgia have investors reducing their FI portfolio, while dealers digest the excess supply of government debt issued last week.

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