The US dollar finds love again… but, for how long?

Pep talks by Bush and strong recommendations by Bernanke have encouraged investors to shy away from the safe heaven asset classes. Despite equity prices being overextended, fundamental data points towards a ‘deep’ global recession. Now that lending rates are easing, where will investors seek shelter? Expect OPEC to temporarily put a spanner in the works!

The US$ is stronger in the O/N trading session. Currently it is higher against 11 of the 16 most actively traded currencies, in another ‘whippy’ trading range.

Bernanke speaks and the world takes note. Finally his authority seems to be having a positive impact on the market somewhere. With funding rates easing for the first time since July, investors are beginning to shy away from the safe heaven assets and seeking solace again in the mighty ‘greenback’. Mind you, certain companies beating analyst’s expectation for their quarterly reports also helped global equities. The miracle of Omaha took a stand last week which basically begged investors to follow. The Fed will be endorsing additional fiscal stimulus packages. They believe the credit crunch is ‘hitting home’ as US consumers find it harder to get loans, threatening a prolonged economic slump. I guess the fear of increased savings will also be a negative on the US economy. Yesterday, during his testimony in congress, he seeks lawmakers to ‘consider including measures to help improve access to credit by consumers, homebuyers, businesses and other borrowers’. The objective will be to promote economic growth and job creation. Following employment claims last week, analysts believe that the numbers are consistent for further 6 digit negative payroll releases. Bernanke’s pleading has now convinced the White House to look at his recommendation. This can only bode well for investor psyche, while Bush’s recent ‘pep’ talks continue to be a bonus for equities.

The US$ currently is higher against the EUR -0.82%, GBP -0.57%, CHF -0.37% and lower against JPY +0.66%. The commodity currencies are weaker this morning, CAD -0.61% and AUD -2.68%. The loonie weakened for a 2nd day yesterday after reports showed that wholesale sales in Aug. fell for the 1st time since the beginning of the year and foreigners decreased their holdings of Canadian securities for a 2nd straight month. People are pulling out of Canadian assets and there is not much economic activity from overseas or from down south. The loonie also faltered, retracing towards its weakest point achieved 10-days ago after Bernanke gave the ‘big dollar’ a lift across the board. What had been a Canadian growth bright spot may be weakening although the report is not as bad as the headline suggests. Canadian wholesale trade fell more than expected in Aug. (-1.5% m/m), but all of the weakness was on the back of a substantial decline in car sales (ex-autos rose +0.5% m/m). Foreign interest for Canadian goods, especially from the US (their largest trading partner) diminished. Nonetheless, volumes (sales ex- price changes) fell even further during the month, down -3.3% (the largest decline since 2003). Analysts believe we will see an even weaker real-GDP result in Aug. than previously expected. Traders were aggressively covering their long cad positions ahead of this morning BOC announcement, where it’s expected that Governor Carney will ease rates at least by 25bp to 2.50%. There is a 75% chance that the cut will be deeper (50bp). US recession like data certainly does not help the loonies’ short term outlook. It has now deprecated 14% vs. the greenback since oil registered its record highs at the beginning of the summer. Currently one cannot rule out the market revisiting this months CAD$ lows north of 1.21 again. All eyes will be down for the 9am EST announcement.

The RBA continue to paint a bleak picture, which has caused the currency to trade under pressure. Last night, the AUD fell after the RBA said risks to the economy had made a ‘strong economic case’ for its 1% point rate cut earlier in the month (0.6891). Traders continue to be better sellers on rallies for now.

Crude is lower O/N ($73.39 down -86c). Crude continues its march higher ahead of the OPEC meeting this Friday, where it is expected to cut output to halt the 50% slide in prices since the beginning of the summer. Last week with oil penetrating the $70 a barrel level briefly had OPEC bring forward its extraordinary meeting to be held in Vienna. It is anticipated that they may pare production by 1m to 2m barrels a day in stages to stabilize prices. Both traders and investors have been getting ahead of this over the past two trading sessions. OPEC is panicking as commodity prices have tumbled on growth concerns, retreating from the highs archived in July ($147.27). They still produce over 40% of the world’s oil. Last weeks bearish DOE report showed that crude and gas stockpiles increased more than twice as much as forecasted. Crude inventories rose +5.6m barrels to 308.2m w/w. Inventories were expected to rise by +2.6m barrels. Over all, oil has remained under pressure on doubts that the bank rescue plan will boost global economic growth and increase fuel usage. Analysts continue to aggressively pare their future price estimates, down from $90 to a year end price of $60. Sluggish demand continues to be the catalyst for rising inventories. US fuel demand averaged about +18.6m barrels a day over the past month, that is the lowest reported in nearly 10-years. Last week OPEC cut its world demand forecast for 2009, because of ‘dramatically worsening’ conditions in the financial markets, the adjusted levels were cut for next year by -450k barrels or -0.5% to 87.21m barrels a day. The IEA has also indicated that it foresees growth advancing at its slowest pace in 15-years as global economies slip into a recession. OPEC President Chakib Khelil said that the ‘ideal’ price for crude is between $70 and $90 a barrel. Gas stockpiles climbed +6.97m barrels to +193.8m w/w, vs. an estimated rise of +3m barrels. Growth and recession will continue to be apart of the demand equation despite the economic stimulus package. Equity markets yesterday seem to be buying into the rescue plan. Gold remains better bid after the lowest prices in a month attracted investors ($780). The yellow metal managed to fall nearly 9% last week.

The Nikkei closed at 9,306 up +300. The DAX index in Europe was at 4,855 up +20; the FTSE (UK) currently is 4,278 down -5. The early call for the open of key US indices is lower. The 10-year Treasury yields eased 9bp yesterday (3.84%) and are little changed in the O/N session. With lending rates continuing to ease, the front end of the yield curve has aggressively back up as investors shy away from the safer heaven asset classes. The back end continues to be better bid, thus flattening the yield curve by 10bp (222) as mortgage buyers drive down mortgage yields down, which has forced traders to buy the longer dated FI securities. Record cash infusion by governments and larger future debt issuances being tabled has investors ‘only tentatively’ buying the front end of the yield curve at the moment. Futures contracts continue to show a 96% chance that the Fed will cut its O/N 1.5% target rate by 25bp at the Oct. 29th meeting.

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