Dean’s FX 3rd June|Financial downgrade fallout!

The USD$ is weaker in the O/N trading session. Currently it is lower against 14 of the 16 most actively traded currencies in another ‘volatile’ trading range.

Analyzing US economic data of late is like watching tennis, back and forth from a potential deep to mild recession. Yesterday, US manufacturing ISM came in at +49.6 for May vs. +48.6 m/m. Market consensus was expecting the index to drift lower and print +48.5 (so a mild surprise). But, despite the positive news, it is still the fourth consecutive month of an under-50 reading for the index (which confirms the bleak outlook for manufacturing activity), while still contracting, the downtrend is less pronounced than market had anticipated. Analysts expect further losses by the manufacturing sector down the road as a slowdown in civilian aircraft orders and the production cutbacks in auto sector start to take a bite out of economy recovery. Digging deeper, the report showed a modest upswing in the production sub-index (rose to +51.2 vs. +49.1 m/m), while new-orders also improved (up to +49.7 vs. +46.5). But, the employment index, the outlook remains very sluggish, with the components at +45.5 vs. +45.4, indicating some weakness in manufacturing payrolls last month. Some traders are now looking for a -40k print for this Fridays NFP. The weaker greenback has provided much need support for overseas demand in the past, but if traders continue to price in potential rate hikes by year end then any potential growth no matter how big it is will surely be cut off at the knees before learning to walk. Some analysts believe that the Fed is not in a holding pattern with rates and expect further cuts to 1.25% by year end. In late afternoon yesterday, S&P cut the ratings of various US brokers and banks and put various on negative watch. They have acted so on prospects of continued investment banking weakness; citing reassessment vulnerabilities to wholesale funding model and see the potential of further write offs. This has led to FI frenzy demand.

The US $ currently is lower against the EUR +0.57%, GBP +0.06%, CHF +).88% and JPY +0.43%. The commodity currencies are stronger this morning, CAD +0.32% and AUD +0.43%. No surprise to see that the loonie trades under pressure due to its strong correlation to commodity prices and investors new found love of ‘risk aversion trades’. The currency declined for a second day yesterday as oil prices wavered, coupled with traders adding to their bets that the BOC will ease O/N rates by 25bp at their June 10th meeting (3.00%). Positive economic data is definitely commodity export related, if one excludes this variable from the growth equation then we have an underperforming manufacturing weakened environment that requires some sort of stimulus to revive it. Due to its proximity and association with its southern neighbor, future growth in the medium term will remain questionable. Interest-rate futures suggest traders are increasing their bets that the BOC will cut borrowing costs next week. In hindsight the loonie has been driven by commodities and global inflation concerns, this week we will get to see the strength of the economy with the employment report. The AUD$ declined on speculation that interest rates may have peaked down under. The RBA said previous rate increases had caused a ‘moderation in demand’ as it left borrowing costs unchanged this morning (7.25%). They have now commenced a holding pattern for now. Expect the currency to be sold in the short term (0.9607).

Crude is lower O/N ($127.61 down -15c). Crude oil prices found new legs again yesterday, following natural gas higher, on signs that competition for the fuel will increase as the weather warms. According to the US National weather center, above average temperatures are expected over the next fortnight which is bound to provide support for the black-stuff by default as demand heats up for air condition usage etc. So far this year the black-stuff has appreciated close to 35%. Last week ‘soft’ EIA weekly report said that the biggest drop in US oil inventories in more than 3-years was caused by ‘temporary delays’ in unloading oil tankers on the Gulf Coast. The ‘Anti-investment Anti-speculation’ focus of the US Govt. continues to remain front and center. Traders will not be surprised to see other large price gyrations in the short time. The head of the Senate Energy Committee in the US wrote an open letter demanding that the CFTC answer sensitive questions about speculations in US energy markets by June 10 (the market expects further liquidation of long positions before then). Yesterday saw gold rebound as traders seemed to be technically anticipating increased future short term strong demand by investors after last weeks spiraling price action. With the greenback underperforming vs. the EUR yesterday, once again provided investors an excuse to own the ‘yellow metal’ as an alternative investment ($ 899).

The Nikkei closed at 14,209 down -230. The DAX index in Europe was at 6,981 down -27; the FTSE (UK) currently is 6,016 up +8. The early call for the open of key US indices is lower. Yields of the US 10-year bond 9bp eased yesterday (3.95%) and are little changed O/N. Treasuries have reversed their recent losses and climbed on the back of reports that showed that US manufacturing contracted last month for the 4th consecutive time, thus keeping alive the belief that a slowdown in the world’s largest economy is deepening. Further losses disclosed by financials on either side of the ‘pond’ continue to boost trader’s appetite for the FI class for now.

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