A somber day, a somber USD?

The Recession word is being thrown about as liberally as bailout monies for companies like AIG. Imagine a 1/5th of what the Chinese is proposing to stimulate its economy is being earmarked for one insurance company. Headline losses are staggering and continue to mount. No regulation or accountability procedures, amazing. The data this week is expected to be on the softer side, anything else will be a surprise. Now that the G20 finance ministers will have prepped their leaders, will we get what’s warranted to sidestep a ‘deeper recession’ in Washington?

The US$ is weaker in the O/N trading session. Currently it is lower against 12 of the 16 most actively traded currencies, in a ‘subdued’ trading range.

With no US data yesterday, the market got to chew on the w/d stimulus package proposed by China to promote growth. Global equities got a boost, but North America was incapable of holding onto any gains as profit warnings (Goldman’s) and bankruptcy talks (Circuit city) managed to grab the headlines. Deutsche analysts put a sell recommendation on GM stock, believing that with their cash problems, the stock is worth ‘zero’. Obama will have his hands full with the Motor City. By default once again the ‘big dollar’ found some traction as investors sought the safer heaven asset. Today is a bank holiday in North America for Remembrance Day.

The US$ currently is lower against the EUR +0.04%, GBP +0.01%, CHF +0.35% and JPY+0.23%. The commodity currencies are mixed this morning, CAD +0.21% and AUD -0.39%. Canadian housing starts fell less than anticipated last month (+212k vs. +219k units) and despite commodities getting a boost from China’s future cash injection, the loonie floundered as equities retreated from their opening highs. As per usual, the heard mentality heads towards the USD under times of stress. The market managed to give up all of the w/d gains. The loonie looks very vulnerable as oil is finding it rather difficult to advance from its 19-month lows. Price action around option expiries yesterday certainly caught the market by surprise and has managed to catch traders offside. There are reported large corporate orders to sell the CAD$ around 1.1650. Analysts believe that the loonie is out of line with commodity prices and other commodity currencies. A school of thought believes that the currency will retrace it steps towards its 4-year low (1.3017) print last month. Despite some positive economic data of late, the pressure remains on the BOC to ease borrowing costs one more time before year end, all this despite the IMF predicting that all of the G7 economies will contract next year except Canada’s. Governor Carney at the w/d hinted that the Canadian economy may slip into its first recession in 16-years. Next year he is predicting very ‘marginal growth’, that is the equivalent of no growth or negative growth. Re-enforcing the comment he made last month that ‘further stimulus is required’. Traders are not as aggressive CAD buyers on rallies, many corporate positions were executed on Friday in haste. Expect the Loonie to remain range bound 1.1600-1.2300 (yes they are wide ranges, but in this climate very attainable).

The AUD$ retreated in the O/N session after an industry report showed Australian business confidence plunged to a record low last month (-29 vs. -8). Combine this with global equities slumping and a ‘worsening outlook for company earnings’ has convinced investors to pare the carry trade once again. Traders remain better sellers on rallies for now (0.6668).

Crude is lower O/N ($60.82 down -181c). The rest of the world once again is relying on China. They are the world’s second largest oil consumer and their announcement over the w/d of a $500b+ stimulus package to promote economic growth and by default increase consumption of raw materials had commodities better bid. They plan to spend the money over the next 2-years on housing and infrastructure. The market had been questioning China’s future appetite for commodities as 3rd Q growth only grew 9%, the slowest pace in 5-years. The market breathed a sigh of relief yesterday, but for how long is this sustainable? Other factors had given the black-stuff a leg up. Saudi Aramco, the world’s biggest state oil company, according to officials will cut crude oil supplies next month to customers in Japan by about 5% ‘below’ levels already agreed to in annual contracts. According to analysts the news that Saudi Arabia is cutting shipments to Asia enforces OPEC’s stance and gives credibility to the promised cutback (The Saudis are the largest producer within OPEC). Year to date the commodity has lost 34% and 56% from the historic highs witnessed in early summer. The erosion of future demand continues to be a large question mark for other global economies. Weaker US fundamental data and last weeks unexpected EIA report was bearish for crude prices before China’s committed cash injection. The IEA believes that ‘oil-import prices will rebound to an average of $100 a barrel between 2008 and 2015 and that the threat of a supply crunch’ remains. Last week’s EIA report showed that US gas supplies rose, while crude rose +54k barrels to 311.9m. Recent global rate cuts have so far failed to inspire confidence that a ‘deeper’ recession can be avoided. Investors wait for the G20 fall out this coming w/d in Washington. With China promising to spend vast sums to promote growth has boosted the appeal of the yellow metal as an alternative investment ($743), while the greenback flounders.

The Nikkei closed 8,809 down -272. The DAX index in Europe was at 4,914 down -111; the FTSE (UK) currently is 4,303 down -100. The early call for the open of key US indices is lower. The 10-year Treasury yields eased 4bp yesterday (3.75%) and are little changed O/N. Treasuries prices initially eased as global equities and commodities found some traction after China announced a half a trillion stimulus package and the US government began its $55b debt-sale program (the largest in 4-years). Traders have increased their bets that Bernanke and Co. will cut borrowing costs again below the psychological 1% to boost consumer confidence and revive growth. But, treasuries managed to erase the earlier losses after the 3-year US government auction ($25b) drew stronger than expected demand.

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