Geithner’s prodding of ‘Panda’ irritates China

Where do we go from here? It’s the ‘same old, same old’ at the Fed. With no price pressures filtering through their economy will probably take policy makers out of the frame until Sept. or Nov. The Fed’s dovish tone is keeping the EUR alive at the moment. Are we relying on Geithner to ignite ‘the’ flame with other G20 members? His objective would be a Yuan revaluation debate to keep us intrigued for a macro FX play before we are forced to put some of the excess cash into a rabid-equity market. Geithner is itching to prod China and he is tactfully calling out the G20 ahead of the upcoming meeting in Washington in a fortnight. It’s ‘the best avenue for advancing US interests’. Brown, Merkel and Sarkozy have their own domestic dinner plates full for various reasons. Mainland Europe has Papandreou to contend with, a lose cannon on the Capital Markets front, while Gordon Brown is in the midst of a UK election. Of late, we have had the best of global data somewhat priced in, it’s the unknown variable that will push us to work capital innovatively, albeit good or bad for this sustainable growth theory. The ECB meeting tomorrow will be a challenge. What will they say on the change of collateral rules? Any ‘weakening’ of those rules could trigger additional EUR weakness. Let’s hope something happens soon as the ‘paint on traders walls are dry’.

The US$ is stronger in the O/N trading session. Currently it is higher against 14 of the 16 most actively traded currencies in a ‘whippy’ trading range.

Yesterday’s FOMC minutes raised few eyebrows and had little impact on the asset classes. Bernanke and his fellow policy makers saw signs of a ‘strengthening recovery that could be hobbled by high unemployment and tight credit’. Some members warned of raising interest rates too soon. ‘While recent data pointed to a noticeable pickup in the pace of consumer spending during the first quarter, participants agreed that household spending going forward was likely to remain constrained by weak labor market conditions, lower housing wealth, tight credit, and modest income growth’. Inflation trends remained very weak. ‘Participants referred to a wide array of evidence as indicating that underlying inflation trends remained subdued. The latest readings on core inflation (which exclude the relatively volatile prices of food and energy), were generally lower than they had anticipated, and with petroleum prices having leveled out, headline inflation was likely to come down to a rate close to that of core inflation over coming months’. Wage increases were likely to be ‘small or non-existent’. There does not seem to be any price pressures pending. The minutes do not explicitly report much dissatisfaction with the extended period language. The ‘committee’s expectation for policy was explicitly contingent on the evolution of the economy rather than on the passage of any fixed amount of calendar time’. Bernanke will get to ‘air’ some timing issues over the next week publicly. Futures continue to calculate a 50% chance of a hike in Sept. and a 90% chance in Nov.

The USD$ is higher against the EUR -0.17%, GBP -0.16%, CHF -0.16 % and JPY -0.16%. The commodity currencies are mixed this morning, CAD +0.27% and AUD -0.14%. Forget infinity, forget parity, Canada is staring at a ‘premium’ to its southern neighbor. Yesterday it managed to trade at parity for the first time in two years. Commodities, equities and every piece of economic data cannot trip up the currency’s momentum presently. Year-to-date the loonie has appreciated just over +5% vs. the greenback, making it the second strongest currency move after the MXN. It seems that NAFTA currencies rule. Everything the global economies want, Canada has it. This Friday we get Canada’s employment report and analysts expect a third-consecutive monthly gain. Domestic data continue to surpass all expectations. Growth rates are coming in much stronger than Governor Carney and his policy makers expected. In Jan. they pegged 1st Q growth at +3.5%, the market is looking for something in the range of +5.5%. It’s taken nearly two years for Canada to perhaps finally adjust to living with parity. To date the USD rallies have been shallow and are met with strong resistance. The trend remains your friend.

It was not surprising to see the AUD print an 18-month high vs. the JPY after the BOJ kept rates on hold last night, emphasizing the yield advantage between the two nations. With the RBA hiking rates another 25bp earlier this week has given the AUD a boost to trade near a two-month top vs. the greenback. A higher AUD will find no fault with higher commodity prices. The RBA said borrowing costs need to be ‘closer to average’ among an expanding domestic economy and growth in Asia. Analysts expect the Cbank to raise their policy rate up to +5.0% in the 1stQ of next year, while the BOJ will stand pat on borrowing costs. This will only further boost the currency’s reputation as it seems to be breaking out on the upside, supported by talks of more interest-rate hikes. Governor Stevens said that ‘it was a further step in returning yields to average levels’. In reality the RBA is getting ahead of the curve, as the move indicates policy makers have concerns that ‘inflation and house-price increases will surge without greater monetary restraint, even after retail sales and home construction dropped last month’. Last week, Governor Stevens said that Australian house prices are ‘getting too high’, signaling that he wants to minimize the ‘danger of a housing boom and bust in the aftermath of the US example’. ‘Interest rates to most borrowers nonetheless have been somewhat lower than average,’ the governor said in following communiqué. ‘With growth likely to be around trend and inflation close to target over the coming year, it is appropriate for interest rates to be closer to average’. The market should expect the AUD to remain better bid on any pull backs (0.9262).

Crude is lower in the O/N session ($86.56 down -28c). Similar to most commodity prices yesterday, crude was little changed, piggy-backing its 17-month high ahead of this mornings inventory report. The market expects a report revealing that crude supplies rose while gas inventories fell. Month-to-date, there seems to be nothing stopping this commodity, not even a bearish headline print from the EIA report last week. There are many economic reasons that have kept crude prices afloat these past two weeks. Most global fundamentals reports have beaten market expectations, which always favor commodities. Last week’s EIA report revealed that crude stocks rose by +2.9m, while the market had been expecting an increase of +2.4m. The surprising factor in the report was that gas inventories recorded a modest gain, unlike the previous couple of weeks. Stocks increased +313k vs. a forecasted decline of -1.85m barrels. Other reports showed that OPEC’s crude-oil production slipped from a 14-month high last month. Technical analysts have their eye on $90 by year end.

The yellow metal remained close to home despite some speculative interest to book profits at the one month highs. There is nothing like stronger fundamentals to give commodities a boost. Global equities are expected to push higher as economic reports exceed most analysts’ expectations. So far this month, speculators are taking more cash off the side lines and wanting to put it to work. As expected, Greece remains the unknown variable and by default it has been able to keep the EUR under pressure. It’s anticipated that the commodity could find stronger traction as investors seek an alternative to an ‘on going weakening’ of the EUR and low interest rates. Commodities prices remain contained despite the strength of the dollar. It is firm in terms of the EUR, GBP and JPY. However, over time the dollar’s direction will be the strongest indicator to wanting the metal or not ($1,135).

The Nikkei closed at 11,292 up +11. The DAX index in Europe was at 6,237 down -14; the FTSE (UK) currently is 5,764 down -16. The early call for the open of key US indices is lower. The US 10-year eased 5bp yesterday (3.94%) and is little changed in the O/N session. Treasury yields rose to the highest level in 10-months earlier this week as reports on US service industries and pending home sales added to signs their economic recovery is gaining traction. However, prices advanced when yields threatened the psychological 4% print first time around and also on the back of the Greek’s potentially bypassing the IMF for help. All economic data of late have increased expectations that ‘the’ recovery is sustainable and will make it interesting for the remaining $35b of new issues in the US this week. Expect supply to continue to dominate trading as traders prepare to make room to take down the remaining auctions (Today’s 10’s-21b and Thursday long-bond-13b). Yesterday’s 3-year note auction was a success at 1.776%. The auction was three times oversubscribed with a bid-to-cover ratio of 3.10, above the four auction average of 2.98. Ten-year yields are now technically eyeing 4.25%. However, the 4.00% psychological level needs to be firmly broken first!

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