Trichet and Co. to be more aggressive next week!

The ECB is set to slash borrowing costs next week. But, how much will Trichet and Co. cut to make a market impact. After this morning inflation numbers (+2.1% vs. +3.2%, m/m), 50bp will do very little for the market. Will they have the nerve to be 100bp aggressive? The markets needs it, consumers need, global psychic needs it.

The US$ is weaker in the O/N trading session. Currently it is lower against 13 of the 16 most actively traded currencies, in ‘subdued’ trading range.

With most trading desks taking an extended thanksgiving holiday, liquidity will be a major factor during today’s session. There is very little data to guide traders with a directional play. The market is relying on ‘rumors and innuendos’. With this being month end, do not be surprised to see large ‘fixes’ and gyrations of market prices as traders balance their portfolios.

The US$ currently is lower against the EUR +0.20%, GBP +0.16%, CHF +0.22% and JPY +0.13%. The commodity currencies are mixed this morning, CAD -0.13% and AUD +0.20%. The loonie despite a winning week remained under pressure in the O/N session. Due, to the holiday that’s in it, the trading range has been very narrow and most currencies had failed to take the lead with the USD on semi hiatus. The loonie has remained under attack from a couple of fronts, firstly commodity prices lacking upward conviction and secondly, the imminent collapses of the BCE/Ontario Teachers deal. Accountants warned this week that the proposed $55b takeover in this environment and under the stated conditions may force the company to be insolvent. The transaction is ’unlikely to proceed’ if KPMG cannot deliver a favorable opinion by Dec. 11. In all intense purposes the deal is dead, wiping 35% off share values. With this week’s positive sales data, the relief rally has been short lived. Investors continue to eye commodity prices for direction. The black stuffs prices continue to trade close to its 20-month low. Crude accounts for approximately 10% of all of Canada’s export revenues. Governor Carney last week said ‘that the risks to the country’s economy from a global credit crisis and recession have increased in the last month and will probably lead to a further reduction in interest rates’. Over the weekend PM Harper has already indicated that the government would run a ‘short term’ deficit to stimulate the economy. Traders have priced in another 50bp ease next month, this will push borrowing costs below the psychological 2% mark as further monetary stimulus will be required to achieve the banks 2% inflation target over the medium term (2.25%).

Despite the $800b Fed bail announced this week and Citigroup’s package, risk aversion strategies continue, as uncertainty and fear dominate. For now traders continue to be better sellers on rallies (0.6573).

Crude is lower O/N ($53.09 down-135c). China comes to the rescue earlier in the week; Crude got a lift after PBOC cut interest rates by the most in 11-years to boost economic growth. Combine this with the European economic stimulus package and capital markets ‘thumbs up’ for Obama’s choice of economic advisors has global equities better bid and by default commodities as well. Not surprising the weekly EIA report showed that crude supplies rose +7.28m barrels to 320.8m last week. It is the 9th straight increase (the longest stretch in 3-years). But, analysts expect crude demand to climb as refineries boost processing. Refineries have increased operating rates by +1.3% to 86.2% of capacity (the highest levels in 3-months). Gas inventories rose +1.84m barrels, or +0.9%, to 200.5m barrels. OPEC remains concerned that oil prices continue to flounder around the 20-month low. Reports show that OPEC members are adhering to quotas that were agreed on last month. The members will meet in Cairo this weekend; last month they set quotas to 30.98m barrels a day for this month compared with 32.2m a day in Oct. But, they remain worried by the direction of future prices. They are not sure if there is too much product on the market or that liquidity is drying up. According to Venezuela’s oil minister, Ramirez earlier this week, deterioration in global demand has left a surplus of about 1m barrels a day ‘over supply’ that needs to be removed by year end. It is very much a given that OPEC will cut output again, the announcement of the timing is the issue. Fear is destroying future demand at the moment. Speculation that the recession will further curb demand will push prices lower. Gold pared some of its recent gains as the greenback rallied and discouraged investors from using the yellow metal as an alternative investment ($814).

The Nikkei closed 8,512 +138. The DAX index in Europe was at 4,624 down -40; the FTSE (UK) currently is 4,223 down -2. The early call for the open of key US indices is lower. The 10-year Treasury yields eased 14bp on Wednesday (2.97%) and are little changed O/N. Weaker US economic data this week has pushed US Treasury prices higher. The 10-year note managed to print a new record low, as US durable goods orders fell coupled with the consumer spending dropping the most in nearly a decade, convincing investors that the current recession is deepening. Can we shout deflation loud enough!

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