Japan threatens intervention. Will we see verbal intervention from Trichet and the Swiss?

How ironic that a crisis which began presumably because we were collectively taking too much risk now reaches the point where the Fed is actively encouraging risk taking. The Fed has implemented a plan, but, I have never heard of an exit strategy for their ‘balance sheet’. It will be this that eventually keeps the greenback under pressure, with no historical effective monetary tools in place, the Fed has to rely on transparency and communication………or fear a tarnished and ‘faithless’ relationship with the investor!

The US$ is mixed in the O/N trading session. Currently it is higher against 8 of the 16 most actively traded currencies, in another ‘whippy’ trading range.

Yesterday, the US current-account deficit narrowed more than estimated in the 3rd Q to -$174.1b, this reflected gains in exports and a decrease in foreign earnings on US assets. The recent slump in oil prices should help the value of imported goods to drop in coming months, signaling the deficit is likely to keep shrinking. What about the value of the greenback? That is sure to put pressure on the deficit. The US government needs to attract $1.9b a day from abroad or risk a drop in the value of the greenback and other Treasury securities. And we have not even taken into account the Obama government, who will clearly run a massive budget deficit. He is said to be weighing a stimulus spending plan exceeding $850b! The Fed’s bigger than expected reduction in interest rates this week and a clear statement of intent to expand the balance sheet further makes their currency extremely vulnerable over coming months. The dollar yields less than the Yen and even the Japanese finance minister Nakagawa said this morning that they are ready to intervene in the currency market to stall Yen’s rise. The country has a huge current account deficit and a central bank that is printing money. The credibility of the Fed will put their currency under more pressure over time…

The US$ currently is lower against the EUR +0.59% and CHF +1.02% and higher against GBP -0.66% and JPY -0.46%. The commodity currencies are stronger this morning, CAD +0.12% and AUD +0.32%. Yesterday, Canadian wholesales surprised the market. A -5.4% m/m (14% y/y) drop in auto and truck sales led to an unexpected -1.8% decline in nominal wholesale trade in Oct. completely offsetting the revised down +1.1% gains in Sept. Even more disturbing, was to see volumes plunging -3.6%, the largest decline in over 5-years. All of this will significantly weigh on the Oct. GDP print next week. Its worth noting that some of the weakness was due to the depreciation of the loonie, export demand was also down. The loonie pared some of this weeks gain, as investors believed that the +3.8% appreciation vs. its southern neighbor over the past 2-trading sessions was unsustainable. This has been only temporary. It’s not necessarily the genuine strength of the loonie but the demise of the greenback that has given the CAD$ another lift. Year-to-date the currency has shaved 16% off its value against its largest trading partner as a global recession reduces demand for commodities, which generate about 50% of the country’s export revenue. On a cross related basis the loonie has faltered and traders continue to want to sell the CAD$ on strength. With liquidity issues becoming more pronounced, one should expect violent trading ranges to remain until the New Year. It will not be long before the loonie once again comes under pressure against the greenback.

The AUD dollar rose to a 2-month high after the Fed cut its target interest rate to as ‘low as zero’, encouraging investors to purchase the nations ‘higher-yielding assets’. With the yellow metal remaining in positive territory coupled with robust commodity prices has traders remaining better buyers on pull backs for the moment and shying away from the greenback as a safe heaven asset class (0.7084).

Crude is little changed O/N ($40.01 down -1c). Crude prices fell yesterday and traded below the $40 mark, as investors now believe that the announced OPEC cut will do little to elevate prices that have dropped 75% from their record highs during the summer. Yesterday the group collectively announced that they would trim production by -2.2m barrels a day starting in the New Year. Russia has also indicated its willingness to reduce production. This deep recession has had a profound effect on global consumption. Since the last imposed cut in Oct. of -1.5b, the rate of compliance by members has been more than 85%. The weekly EIA inventories report climbing for an 11th consecutive week has not helped to boost prices. Inventories rose +525k barrels to 321.3m last week. It is believed that inventories have gained because the oil market is in ‘contango’ (crude for future delivery is more expensive than near-month), this has let to increased stockpiles and greater demand for oil tankers to store the inventory. Gold prices have rallied to a new 2-month high on the back of a weaker greenback; by default it has temporarily increased the appeal of the ‘yellow metal’ as an alternative investment ($874).

The Nikkei closed 8,667 up +55. The DAX index in Europe was at 4,760 up +32; the FTSE (UK) currently is 4,345 up +21. The early call for the open of key US indices is higher. The 10-year Treasury yields eased another 10bp yesterday (2.13%) and are little changed in the O/N session. Treasuries prices rose, pushing yields to record lows after the Fed slashed funding costs to a range of ‘zero to +0.25%’and enforced that they ‘will do whatever is necessary to ease the longest recession in 25-years. Investors are concerned that the Fed’s actions are added proof that this ‘ongoing’ credit crisis is far from over, this has convinced investors to seek the safety of government debt. The Fed announcement has once again flattened the curve (2-10’s 151bp).

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