Fed commitment to remain vigilant boosts USD bulls

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. During Friday’s session, the US$ regained its new found strength and advanced vs. the EUR. With commodities retreating (the negative correlation remaining intact) and Bernanke saying that the Fed will remain vigilant against inflation had the USD bull’s believers once again.

Bernanke said the ‘financial storm’ in the US ‘has not yet subsided, and its effects on the broader economy are becoming apparent in the form of softening economic activity and rising unemployment’ (next month NFP should be an eye opener). The inflation outlook is uncertain but will probably moderate due to the softening of commodities (most CBankers are relying on this-geo-political issues remain their biggest threat). On the face of it, no matter how bad things look in the US economically, other countries look a lot worse (GBP, Spain, Italy for now). Currently there is no fundamental reason for the Fed to move rates any time soon (2.00%); this can not be said for Europe, as some large member states head towards a recession. The Fed has already been aggressive in their easing policies and despite the negativity towards the greenback over the year; investors are once again finding comfort in owning it.

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%. The ‘market giveth and the market taketh’. The loonie lost ground on Friday after earlier printing weekly highs on account of the greenbacks advance against most of its major trading partners, coupled with commodity prices handsomely retreating. Inflation numbers last week will have done very 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 be the reason why the CAD$ did not reverse the previous days advance. 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 be better buys of US$ on pullbacks.

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 (0.8665). Expect better selling on AUD rallies for now.

Crude is lower O/N ($115.58 down -59c). During Friday’s session, crude prices gave up all of the previous days’ gains and then some. This was due to the greenback halting it recent slide coupled with BP restoring shipments on the Caspian Sea pipeline through Turkey. The Baku-Tbilisi-Ceyhan pipeline (Azerbaijan through Georgia to Turkey) resumed normal flows after a fire shut it earlier in the month. This has provided a ‘sigh of relief’ for the market, as more high quality of crude becomes available. Of late, geo-political concerns combined with the overdue technical bounce against the US$ have driven the markets. The Russian/Georgia conflict continues to be played out, but, tempers and tension have eased (still some ways to go on the political front). Russia continues to be one of the worlds biggest oil producers. Russian invasion of Georgia had temporarily cut off some export routes for Caspian Sea crude. Last weeks EIA report provided a bullish inventory headline print. It was the highest weekly increase in 7-years for oil inventories (+9.4m barrels w/w) and it was offset by the -6.2m barrel drop in gas. The US is awash with the ‘black stuff’, fuel demand averaged +20.2m barrels a day over the past month (down -3% y/y-consumer needs and consumption patterns have changed). 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. Gold fell ($ 829) as the US$ rebounded vs. the EUR, thus eroding the appeal of the ‘yellow metal’ as an alternative investment.

The Nikkei closed at 12,666 up 212. The DAX index in Europe was at 6,270 down -18; the FTSE (UK) currently is 5,505 up +135. The early call for the open of key US indices is higher. Yields of the US 10-year notes backed up 5bp on Friday (3.88%) and are little changed O/N. Treasuries prices renewed their downward spiral after Bernanke reiterated that the Fed, who expects inflation to ease, would act should prices gains not moderate. Also, the announcement that KDB may invest in Lehman was a contributing factor, easing trader’s concerns about the fallout from credit market losses.

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