A passive ‘greenback’?

Despite the US$ reigning supreme of late, heightened geo-political concerns from Russia has temporarily diverted Heads of State’s attention from their domestic problems. Over the w/d the western world reprimanded Russia. The rest of us wait for a potential fallout from the now strained EU-Russian relationship. Will this add further strength for the ‘greenback’?

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

Friday’s session revealed no surprises. The US$ like Michael Phelps remains’ dominant and the ‘flavor du jour’. Stronger than anticipated data one again provided leverage for the ‘US$ bulls’. The US Michigan consumer sentiment index rose this month, the first back-to-back gain in 2-years as lower energy prices helped lift sentiment from a three decade low (+61.7 vs. +61.2). Despite the stronger headline, consumers on the whole remain pessimistic; the higher number can probably be solely attributed to energy prices. The worsening housing crisis combined with a softer labor market has consumers changing their spending habits as their disposable incomes become eroded due to liquidity constraints. Consumers expect the inflation rate to remain consistent with last month’s figure of +4.8% over the next 12-months. Other data showed that US industrial production rose last month, boosted by gains in cars, metals and machinery (+0.2% vs. +0.0%). Currently there is nothing to suggest that the US$ cannot maintain its momentum in the short term. Euro-land has finally woken up and is playing catch up to the ‘slower growth’ scenario that the US has experienced since Jan. of this year. Economic data out of the UK Spain and Ireland has been dismal of late. Currently Governor King at the BOE is under immense pressure to ease rates accordingly (a month ago they were potentially hiking). In the midst of a UK recession, CBL is experiencing its longest decline vs. the dollar in four decades.

The US$ currently is lower against the EUR +0.41%, GBP +0.13%, CHF +0.18% and JPY +0.29%. The commodity currencies are mixed this morning, CAD -0.01% and AUD +0.56%. Despite commodity prices falling out of bed, the loonie has managed to hold it own vs. all its major trading partners. Last Friday’s stronger than expected economic data provided some overdue support for the CAD$. Couple this with stronger than anticipated trade data earlier in the week, had the currency printing its largest gain in over a week during Friday’s trading session. Rumors of M&A activity lent a hand as well. The sense that Canada would be hurt by the US economic downturn may have eased somewhat. Factory shipments rose +2.1%, after a revised +2.2% gain last month. Canadian fundamentals remain the strongest amongst the G8 members, but, its strong correlation with commodity prices will eventually hinder its advance if commodities remain under pressure. It’s worth noting that the BOC have also announced another pre-interest meeting on Aug. 26th. With traders reducing their bets that the Fed will be easing any time soon (2.00%), can only be US$ positive. The pessimist would believe that the drop in commodity prices will put Canada’s domestic economic vulnerabilities back onto the radar screen (over 50% of its exports are commodity based). For now, expect a trader to trade gingerly after last Friday’s volatile trading session.

The AUD$ found traction O/N as traders speculated that the Fed will not be hiking rates (2.00%) any time soon, thus maintaining the yield spread advantage that the Aussi has experienced for sometime. Commodity prices have also lent a helping hand in the o/n session (0.8717).

Crude is higher O/N ($113.92 up +15c). On Friday, crude continued its downward spiral as a strengthening US$ curbed the appeal of commodities as a hedge against inflation. In just over a month, the ‘black stuff’ has pared 23% from its historical highs. Traders continue to speculate that fuel consumption declines in the US will spread to other global economies as growth stalls. Data released last week showed that US gas demand was down -2.1% last month, as record prices and slower economic growth cut consumer spending. Euro-land data yesterday indicates that Europe is starting to suffer from the same US symptoms. Despite a bullish EIA report last week, black gold has not been able to maintain its gains as growth consumption trumps all other concerns. The strength of the ‘big dollar’ continues to have a negative impact on prices. Gas inventories dropped -6.39m barrels to 202.8m, w/w (the biggest decline since Oct. 2002). Consumer demand is having a negative impact on imports and refinery runs. The US consumer has radically changed their consumption patter this summer, which is having a negative impact on the driving season (historically ends around US Labor Day). Refineries are operating at +85.9% of capacity, down -1.1%, w/w. Over the past few months, growth concerns have won the battle. One should expect Russia’s planned withdrawal today from Georgia to also weigh heavily on the market. The ‘yellow metal’ retreated on Friday on the back of a stronger US$ and lower energy prices which had diminished the appeal of the metal as a hedge against inflation and as an alternative investment. This morning the metal has found some traction as the ‘greenback’ traded heavily vs. the EUR ($802).

The Nikkei closed at 13,165 up +146. The DAX index in Europe was at 6,393 down -53; the FTSE (UK) currently is 5,435 down -19. The early call for the open of key US indices is lower. Yields of the US 10-year notes eased 6bp on Friday (3.83%) and are little changed O/N. Treasury prices ended higher on the week, printing monthly yield lows, as spiraling commodities prices reduced trader’s speculation that the Fed would hike interest rates again this year (2.00%).

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