Forex cannot keep the USD down!

Now that Russia has ended its military cooperation with NATO as tensions worsen over Georgia and the US missile shield plan for Poland, what will Capital markets want to do? Their initial reaction has been to push the CRB index towards its largest weekly gain in 3-decades. The ‘big dollar’ has retraced nicely from its monthly highs, but, with Euro-lands dependence on Russian energy exports they cannot afford to drag out this ‘spat’, their economies are already in trouble. Bring back the financial write down concerns; they are much easier to interpret!

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.

Yesterday’s US data was not a surprise to the market, if anything it solidified markets view that the 2nd half of the year will ‘bare no fruit’. The index of leading indicators fell -0.7% vs. -0.2% last month (more than 3-times the anticipated drop). Emphatic evidence the US slowdown will deepen as housing continues to slump and unemployment rises. The Philly Fed index came in at -12.7 this month vs. -16.3 in July. The slight increase in the index is broadly in line with the positive step registered by the NY Fed Empire index (-2.8 % vs. -4.9 in July). But, consensus believes that the US manufacturing activity remains very weak and a sharp recovery is not expected in the foreseeable future. The positive spike may be contributed to the sharp decline in oil prices over the past month. In the sub-components, the prices paid sub-index fell more than -18 points to 57.5 (lowest level in 5-month). All the other main components (new orders, delivery times, inventories etc) were somewhat stable. Despite the Index rising to its highest level since last Dec., it still is more than -20pts lower than the 5-year average, which should be interpreted that activity is still stagnating. Finally, US unemployment claims fell for a 2nd straight week (-13k to 432k from Aug. 2 high 457k). It’s worth noting that the fallout from the EUC (Emergency Unemployment Compensation) program continues to effect claims, although the impact has not been quantified. Analysts believe that the past 5-week’s worth of claims north of +400k does not bode well for Aug.’s NFP report. We can expect to see another move up in the unemployment rate (+5.7%) on Sept. 5th.

Softer O/N data out of the UK has once again rekindled the selling pressure of Sterling (1.8593). GDP was unchanged from the 1st Q (stagnated at +0.0% vs. +0.1%). This has ended the longest growth expansion for that country in a century. The data will once again put pressure on Governor King at the BOE to forgo inflation concerns and ease monetary policy (+5.00%). But, recent CPI data was +4.4%, that double the Bank’s desired target level. The UK is commencing its own tough recession.

The US$ currently is higher against the EUR -0.41%, GBP -1.01%, CHF -0.59% and JPY -0.69%. The commodity currencies are weaker this morning, CAD -0.13% and AUD -0.73%. USD/CAD got shot with both barrels yesterday. The loonie had its largest gain in 6-weeks, as commodities advanced and the greenback weakened against most of its major trading partners. Yesterday’s Canadian economic data did little to influence governor Carney current monetary policy (3.00%). Consumer prices rose +3.4%, y/y, while prices rose +0.3% from June (less than the anticipated +0.4%). Rumors of on going M&A activity (Shell/Duvernay acquisition) may have also contributed to some of the loonies’ strength. But, most of the focus has been on CRB commodity index, which is heading for its biggest weekly gain in 33-years. Traders have been caught offside with this volatile move, which is demonstrated by the ‘dead cat bounce’ scenario. Despite weaker Canadian fundamentals of late, investors will continue to closely monitor commodities direction for investment guidance. For now in this current climate expect traders to sell US$ rallies.

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%). Stronger commodity prices are temporarily lending support despite growth concerns prevailing (0.8747). Expect better selling on AUD rallies for now.

Crude is lower O/N ($120.59 down -59c). Crude prices rocketed yesterday; playing catch up with the heightened tension between the US and Russia and how it may disrupt the flow of oil in the region. The general malaise of the US$ also boosted the appeal of commodities across the board. Russia continues to be one of the worlds biggest oil producers. Russian invasion of Georgia has cut off some export routes for Caspian Sea crude. The stoic verbal rhetoric from the Russian Foreign ministry to the US/Polish shield agreement has commodity bears temporarily running for cover. The overdue technical pull back of the greenback has speculators vying to own the black-stuff as an alternative investment. This weeks EIA report got the ball rolling despite the bullish inventory headline print. The highest weekly increase in 7-years in crude oil inventories (+9.4m barrels w/w) reported was offset by the -6.2m barrel drop in gas. The US is awash with the ‘black stuff’ at least for this week. US fuel demand averaged +20.2m barrels a day over the past month, that’s down -3% from a year earlier (higher energy prices have influenced the consumers needs). Gas consumption averaged +9.46m barrels a day, down -1.6%, y/y and refineries are operating at +85.7% of capacity, down -0.2% w/w. 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. European investors are now concerned that their supplies will now be in jeopardy. For instance BP (who has a 50% stake in TNK-who currently have management issue) relies on the region for almost 25% of its output. Gold printed weekly highs yesterday as the greenback dropped vs. the EUR and boosted the demand for the ‘yellow metal’ as an alternative investment. In this morning session, the strength of the greenback has gold paring some of yesterday’s gains ($836).

The Nikkei closed at 12,666 down -86. The DAX index in Europe was at 6,270 up +33; the FTSE (UK) currently is 5,419 up +45. The early call for the open of key US indices is higher. Yields of the US 10-year notes backed up 4bp yesterday (3.84%) and are little changed O/N. Treasuries came under pressure after a US report showed that unemployment benefits fell and traders speculated that the US treasury will bail out the GSE’s (Freddie and Fannie).

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