Another Day another Year, but, same old problems!

Market gyrations have intensified as this holiday week has gone on. Lack of participation has created only pockets of liquidity. Fundamental data has provided no guidance, normality will occur next week when dealing desks are fully occupied. It’s either a fool or an individual with strong convictions and deep pockets who is willing to partake in these markets. Stay ahead of the curve and fight another day!

The US$ is stronger in the O/N trading session. Currently it is higher against 11 of the 16 most actively traded currencies, in another ‘whippy’ illiquid trading range.

New Years Eve showed that US Initial jobless claims fell to +492k for last week. The data was skewed by the holiday season which created a shortened workweek. Unfortunately one-day holidays (US) generally skew the data, suggesting next week’s data will also be skewed given that New Year’s Day also fell during the week. Digging deeper, the eye-popping part of the report revealed that continuing claims surged above the +4.5m mark, the highest level in 26-years. Back then the unemployment rate was also climbing and hit +10.8%. Analysts foresee the US unemployment rate advancing towards 10% by the end of this year. It currently stands at +6.7% and the 1st Q is expected to deliver some eye popping NFP data after this dismal retail holiday season. Manufacturing data (3.9 vs. 34.5) out of Europe this morning has their currency on the back foot. The report concludes that the recession is deepening in the region and perhaps providing further evidence that warrants Trichet cutting Euro-land borrowing costs from its 2.5% level. In reality, the region is playing catch up with North American problems of 6-8 months ago. Their growth outlook is significantly weaker than in the US and that will ultimately weigh on the EUR going forward.

The US$ currently is higher against the EUR -0.16%, GBP -0.02%, JPY -0.42% and lower against CHF +0.50% The commodity currencies are weaker this morning, CAD -0.15% and AUD -0.62%. Last year the loonie posted its biggest annual decline on record as crude oil plunged and investors sought refuge in other currencies from the deepening global recession. At the beginning of the year the currency was trading at or close to parity with its southern neighbor. Since crude has pared 55% this year the loonie has depreciated 18% vs. the greenback and 33% vs. JPY. With investors seeking sanctuary due to the global economy faltering had traders seeking the relative safety of the USD. The loonie remains on course to continue its demise and may extend its decline as tumbling oil prices dissuade foreign investment in Canada’s oil patch. Thus, the Loonie remains guilty by association and proximity to its largest trading partner south of its boarder. This is a deceptive trading week as liquidity and participation remains at an all year low due to the holiday season. With no data to support the currency, depending on how commodity prices behave, expect investors to remain on the side lines while dealers fulfill their necessary requirements. The currency remains vulnerable to the USD topside for now.

The AUD$ remains better bid on pull backs despite the tentative weakness of global equities questioning investors about holding higher yielding currencies. Traders are speculating that global interest-rate cuts will revive investors’ risk appetite. Despite commodities paring excessive gains achieved on NY’s Eve, the AUD is heading for its longest winning streak in nearly 6-months this week (0.6943).

Crude is lower O/N ($41.11 down -345c). After Wednesday’s excessive illiquid rally, the black stuff has pared some of its abnormal gains. Crude has rallied 14% this week on the back of Middle East and European concerns. Crude prices are battling with global demand deterioration and tensions in the Middle East escalating. Last weeks weekly EIA report showed that inventories had gained less than anticipated allowing the non-holidaying dealers to push the illiquid market aggressively. US fuel consumption for 4-weeks on a y/y basis has fallen -3.7%. It was not fundamentals that push the black-stuff prices aggressively higher this week, but the lack of dealer participation, hence this mornings somewhat ‘liquid’ pull back. The repeat of an energy standoff between Russia and Ukraine threatened fuel shipments. But, Russia is now prepared to sit down with Ukraine and discuss their dispute over the price of natural gas after cutting supplies to its western neighbor this week. Analysts expect crude futures to remain better bid through next week as OPEC implements its record announced productions cuts. The Middle East tensions has provided support on deeper pull backs, as there remains concerns that supply from the world’s largest producing region may be disrupted. Hamas is backed by Iran and are considered a terrorist organization by the US. Iran physically holds the 2nd largest oil reserves and any involvement by Iran will send the black-stuff prices much higher. China this week has publicly stated that they will supplement their ‘emergency’ oil reserves while prices remain close to these low levels. This stockpiling mentality will surely impede some of the ‘demand destruction’ that we have witnessed from this global economic meltdown. But, this shortened trading week and liquidity constraints is probably doing a disservice to the natural weakness of crude, prices have been incorporating an insurance premium. OPEC’s cohesive support should provide further traction for commodities in this short term. Already OPEC is hinting that they may meet again next month to discuss further production cuts. Thin trading markets had investors booking gold holiday profits as falling crude prices and a stronger greenback reduced demand for the ‘yellow metal’ as a hedge against inflation ($872). Expect heighten tensions in the Middle East to provide support on deeper pullbacks.

The Nikkei closed 8,859 up +112. The DAX index in Europe was at 4,888 up +78; the FTSE (UK) currently is 4,466 +33. The early call for the open of key US indices is higher. The 10-year Treasury yields backed up 6bp from Wednesday (2.14%) as investors become concerned about the influx of new issues to finance the growing US budget deficit. Ongoing falling house prices and record low consumer confidence provided no support for the FI asset class as investors now turn their focus towards supply. However, the short end of the Yield curve advanced as investors sought the safety of US government debt amid escalating tensions in the Middle East. Data this morning will probably show that US manufacturing continues to contract at its fastest pace in 3- decades. This shortened trading week continues to provide liquidity constraints.

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