Dean’s FX May 22nd | Fed cuts growth forecast

The USD$ 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. Despite the lack of data out of the US yesterday, the markets remained very active across all asset classes.

The greenback remains under extreme pressure against most of its major trading partners. Paranoia and scarcity of energy resources coupled with potential technology errors (what ever happened to pen and paper?) at Moody’s Investors Service, which may result in bond downgrades and lower earnings at banks had equities experiencing another day of red. Fed minutes were a bit more hawkish than expected as it was revealed that the decision to cut rates was a ‘close call’. The Fed cut their growth forecast and upped their inflation forecast. They stated that even if the economy was ‘contracting slightly in the near term’, it would not warrant additional easing, but that policy would be determined by the outlook.

The US $ currently is higher against the EUR -0.22%, CHF -0.18%, JPY -0.23% and lower against GBP +0.16%. The commodity currencies are weaker this morning, CAD -0.19% and AUD -0.40%. BOC governor appears to be in a bind after yesterday’s Canadian inflation numbers. The data came in stronger than anticipated (core-CPI +0.3% vs. +0.2%) and coupled with commodity prices has caused the loonie to appreciate 4% vs. its southern neighbor in the past 10 days. One should expect higher inflation to slow the pace of monetary easing by the BOC (3.00%). The loonie remains on target to achieve the 0.9700c print that was suggested late last week by some analysts. If one took commodity prices out of the equation then economic data of late remains soft especially the manufacturing base. Sept. Bax’s yields backed up 9bp to 2.75% after the release (historically they settle 16bp over O/N rates). This morning we have Canadian retail sales. Will it provide further support or again disillusion investors? The AUD$ rose to its highest level in a quarter of a century (0.9606) this week, after the RBA said policy makers spent a ‘considerable time’ at their last meeting discussing an interest-rate hike (7.25%). Commodity prices continue to give it a boost and technical analysts believe that parity is only a matter of time away.

Crude is higher O/N ($134.96 up +10c). Same story, but it is a new day. Crude oil remains elevated after yesterdays EIA data showed that weekly inventories dropped and banks raised price forecasts in the past week on expectations supply constraints and demand growth would persist. Supplies fell -5.32m barrels to 320.4m last week, the biggest drop in four months vs. an expected +300k gain. The one variable that is capable of derailing recent price movements is ‘is demand destruction’. OPEC officials remain vocal that crude oil markets are well supplied and that they have no intention to meet before its next scheduled conference in Sept. to review production. OPEC currently pumps more than 40% of the world’s oil. Some analysts disapprove with OPEC’s actions; they believe that some sort of gesture similar to the Saudi’s last week would be needed to curtail prices. With the USD$ weakening vs. the EUR, has traders buying commodities as a hedge against the currency’s further decline. European inflation data this week was higher than expected and has convinced the market that Trichet will keep rates elevated, which should prove problematic for the greenback. The market is also concerned that Chinese diesel purchases would strain global supplies after the earthquakes in central provinces. Gold is little changed ($928) as traders speculate that further depreciation of the USD$ and rising commodity prices will spur inflation, reviving demand for the yellow metal as a hedge.

The Nikkei closed at 13,978 up + 52. The DAX index in Europe was at 7,005 down -35; the FTSE (UK) currently is 6,212 up +14. The early call for the open of key US indices is higher. Yields of the US 10-year bond eased 3bp yesterday (3.80%) and are little changed O/N. Treasuries remain better bid as renewed concerns by investors that credit market losses will deepen pushed stocks down, thus increasing demand for the safety of the FI asset class for now.

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