Dean’s FX May 28th | Perfect storm brewing?

The USD$ is weaker in the O/N trading session. Currently it is lower against 9 of the 16 most actively traded currencies in another ‘subdued’ trading range as risk aversion one is considered appears.

Despite what is happening in the market, and if one excludes the ‘lack of’ noise, it feels like the perfect storm is ahead (….the simultaneous occurrence of events which, taken individually, would be far less powerful than the result of their chance combination…..). Equity volumes have been pared back, FX and FI are range trading; we are experiencing large gyration of asset class prices with low participation. This only adds to the theory that that astute investors are waiting nervously to see if the bigger picture breaks down. Risk aversion trades will once again become the order of the day, interest rate decisions by Cbanks will once again focus on stagflation and global recession. Yes, this is looking at the glass half full, and yes CBankers have diligently dealt with the sub-prime debacle and corralled most of the major issues. But, economically we are no better off and it can only get worse before getting better. Because of this we can expect the summer doldrums not to exist this year.

Yesterday, US house prices continued to decline at a rapid pace. Y/Y, prices are now off 14.1% according to the Case-Shiller index. In fact, outside of major metropolitan areas prices now look to be declining more quickly than they were previously, catching up with the major cities. A surprise, US new-home sales unexpectedly rose for April. But, readings for the prior month were revised down (by -17k), signaling a worsening housing slump is still a threat to the economy. Sales figures increased +3.3% to an annual pace of +526k vs. +509k. More importantly, the vast majority of home sales (90% in April) are in the resale market where inventories keep getting worse as foreclosures pile up. In other words, an inventory overhang in the resale market may well mean further pain lies ahead for new home construction and builder sales and employment. Finally, adding the last nail in the coffin for yesterday, the US consumer confidence report revealed that the consumer remains depressed. Consumer Confidence fell to the lowest in nearly 16 years (57.2 vs. 62.8). Both components were down, the present situation lowest since Oct. 2003; while expectations lowest since Dec 1973 (expectations index tracks consumer spending over time-looks like a very bleak horizon).

The US $ currently is lower against the EUR +0.15%, GBP +0.14%, CHF +0.20% and higher against JPY -0.03%. The commodity currencies are mixed this morning, CAD -0.07% and AUD +0.03%. The loonie have finally broken out of its recent tight trading range and given back some of its recent gains as commodity prices falter after their recent record prints. The CAD$ has underperformed against most of its major trading partners. Commodities such as gold and crude oil account for 54% of Canadian exports. With the similar global theme, traders are starting to speculate that rising inflation will keep the BOC from cutting interest rates (3.00%) further any time soon. Despite growth slowing the BOC governor appears to be in a bind after last week’s Canadian inflation numbers. The data came in stronger than anticipated (core-CPI +0.3% vs. +0.2%). Traders continue to look at better levels to sell the currency vs. both JPY and CHF as a ‘risk aversion’ trade. Supreme Court applications and appeals in respect to BCE should continue to underpin the currency in the short term as it remains a national portfolio concern. The AUD$ advance vs. the USD$ has temporarily come to a halt as gold prices tumbled over the last two trading sessions ($0.9575). The market is bracing itself for further pull backs.

Crude is lower O/N ($126.96 down -218c). Oil has risen over 16% this month and it was inevitable that this one way movement was not going to persist. Crude oil fell more than $3 a barrel yesterday and continued similar momentum in London this morning, on signs that US fuel consumption is dropping because of a slowing economy and record energy prices. Yesterday’s US economic data provided no support for the black stuff in the short term. Growth concerns and the potential of the consumer unwillingness to spend their way out of trouble had speculators booking some well deserved gains. The appreciation of the greenback vs. the EUR also took some of the luster off commodity prices. A concern about further militant attacks in Nigeria that may disrupt supplies has once again provided a strong under current bid. But, some analysts believe that the recent run up in prices is not justified by stockpiles and demand. The market technically has found it strong resistance point at $135 a barrel, the line has been drawn. According to the EIA reports last week consumption averaged 20.3m barrels a day over the past month, that’s down 1.3% y/y. The fundamentals justify a much lower price for the commodity ($80-$100), the premium portion can be attributed to institutional investors coming into speculate the market. The peak US gas consumption period lasts from last weekend’s Memorial Day holiday until Labor Day in early Sept. as Americans take to the highways for vacations. Gold prices fell the most in a month yesterday and were replicated this morning as energy prices tumbled ($898) thus reducing demand for a hedge against inflation.

The Nikkei closed at 13,709 down -183. The DAX index in Europe was at 6,985 up +27; the FTSE (UK) currently is 6,064 up +7. The early call for the open of key US indices is higher. Yields of the US 10-year bond backed up 7bp yesterday (3.92%) and are little changed O/N. Treasuries declined yesterday as the US government prepared to sell close to $50b of new product (2-yr and 5-yr’s) later this week. Investors seem to be concerned about inflation as oil prices remain elevated and by default will be bearish of FI products.

SNB President Roth said yesterday that inflation threats have increased and the bank will take them seriously when it meets to decide on interest rates next month (2.75%). The bank was surprised that oil prices rose further since its last monetary policy assessment and is concerned about inflation as are all CBankers. They next meet on June 19th.
Also yesterday, providing further evidence of the ‘Fed on hold’ San Francisco Fed Pres Yellen said that the current levels of rates are appropriate (2.00%). She said that she thinks commodity price rises are based more on fundamentals rather than a speculative bubble.

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