Buy US$, wear diamonds?

The current geo-political and global economic woes must be a ‘pessimist’s utopia’. Traders are finding it difficult to navigate through these turbulent times. Record trading ranges and volatile swings over the last 2-weeks had investors paring profitable positions ahead of today’s US data.

The US$ is stronger in the O/N trading session. Currently it is higher against 10 of the 16 most actively traded currencies in ‘subdued’ trading range.

The market waits for this morning’s US housing data, where traders will take their cue. It’s widely anticipated to be weaker, but, how much weaker? Bernanke has his hands full, capital markets continue to speculate that the government will be forced to bail out Freddie and Fannie and by default wiping out common stockholders. Theses entities need Treasury’s help as there is little chance of them raising capital (year-to-date they have lost nearly 85% of equity value). Collectively they ‘own or guarantee’ 42% of the $12 trillion in US home loans outstanding. Record delinquencies continue to be the biggest threat as the housing debacle continues to look for ‘a bottom’. With Russian President Medvedev stating that Georgia’s action ‘must not go unpunished’ and the US saying Russia must leave Georgia ‘without delay’, caused investors to seek shelter yesterday. They sold US equities and purchased FI product. Heightened geo-political concerns continue to trump global domestic issues for now (Capital markets seem to be asleep on this issue at the moment).

No surprises in Japan O/N, Governor Shirakawa and his colleagues at the BOJ kept O/N lending rates on hold at +0.5%. In their following communiqué, they stated that they were more pessimistic about the economy (during the 2nd Q it shrank -2.4%), ‘economic growth has been sluggish against the backdrop of high energy and materials prices and weaker growth in exports’. Market participants will now focus on how long this will last; analysts expect no rate movement for another year. According to the BOJ ‘world financial market instability, the US and global slowdown, and rising commodity prices all pose further risks for Japan’.

The US$ currently is higher against the EUR -0.21%, GBP -0.34%, CHF -0.09% and lower against JPY +0.16%. The commodity currencies are mixed this morning, CAD +0.03% and AUD -0.31%. Following the loonie yesterday was like watching a pedestrian jog. I am surprised traders did not fall asleep at the switch. Neither commodities nor economic data were able to provide much impetus to buy or sell the CAD$ ahead of this morning US housing numbers (it remains very much range bound ahead of CAD wholesale data). Despite commodity prices falling out of bed last week and nearly touching yearly lows yesterday, the loonie has managed to hold it own vs. all its major trading partners. Stronger economic data of late has provided some support for the CAD$. Canadian fundamentals remain the strongest amongst the G8 members, but, its strong correlation with commodity prices will eventually hinder its advance if commodities remain under pressure. The pessimist would believe that the drop in commodity prices will put Canada’s domestic economic vulnerabilities back onto the radar screen (over 50% of its exports are commodity based). For now, expect traders to be better sellers of the loonie on US$ pull backs until proven wrong.

The RBA said that they may cut rates for the first time in 7-years to avoid a ‘deeper and more persistent’ economic slowdown (7.25%). Softening commodity prices continue to impede the AUD$ (0.8658). Expect better selling on AUD rallies for now.

Crude is lower O/N ($111.96 down -91c). Crude prices remained close to home yesterday as the US$ chopped around vs. the EUR due to the lack of US economic data which encouraged a range trading day. Initially, Tropical Storm Fay helped push prices higher, but, it looks like it will now miss the entire oil and gas infrastructure in the Gulf (to the west of its intended landing). OPEC meets in Vienna in a couple of weeks. One can expect increased rhetoric from member states to prevail in the short term. Iran’s governor insists that the current market is oversupplied by +1m bpd, and the only option open to them is to decrease production. OPEC sees global oil demand averaging +89.9m bpd and demand next year rising to +87.8m. It seems that the world is potentially awash with the ‘black stuff’. The drop in demand can be attributed to slowing global demand growth and oil coming into the market from newly developed fields from non-OPEC member nations. Turkey also announced yesterday that the ‘Baku-Tbilisi-Ceyhan’ pipeline is to open in a few days after repairs (this will add another +1m production capacity to be back on line). In just over a month crude prices have pared 23% of its value from its historical highs. Traders continue to speculate that fuel consumption declines in the US will spread to other global economies as growth stalls. The ‘yellow metal’ yesterday temporally found a bid after last weeks nearly 9% drop. But, in the London session the strength of the US$ has dissuaded investors to own the metal as an alternative investment ($793).

The Nikkei closed at 12,865 down -300. The DAX index in Europe was at 6,354 down -78; the FTSE (UK) currently is 5,390 down -60. The early call for the open of key US indices is lower. Yields of the US 10-year notes eased 3bp yesterday (3.80%) and are little changed O/N. Treasury prices remain better bid for now as traders speculate that the Fed will remain on the sidelines as economic growth concerns prevail coupled with lessening inflation issues will not persuade Bernanke and Co. to raise interest rates by year end (2.00%). Today’s US housing numbers could provide stronger evidence to own FI product.

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