Dean’s FX 5th June|ECB and BOE countdown.

The USD$ is stronger in the O/N trading session. Currently it is higher against 13 of the 16 most actively traded currencies in another ‘subdued’ trading range ahead of rate decisions by the BOE and ECB.

Some surprising data yesterday out of the US. The market seems to be experiencing the calm before the ‘second’ storm. An eerie unsettling feeling has appeared across all asset classes as credit market and financial disclosures rear they head again. The ADP employment report showed more private sector growth than was anticipated (+40k vs. an expected loss of around -30k). Analysts also noted that if one mechanically adding in the +30k government jobs (the typical gain), this would imply an increase of around +70k in the payroll employment report (wishful thinking!). But remember over the last several months, the ADP report has consistently been optimistic about employment relative to the government figures (reason the birth death model). The market will most likely take this data lightly once again.

The US service sector continued to expand in May albeit at a slightly slower pace than in April, as higher energy prices continue to weigh heavily on the US economy. This is in contrast to a continued contraction in the manufacturing sector (earlier this week), suggesting that any growth we see in 2nd Q will be from the ‘services’ sector. The ISM non-manufacturing index fell -0.3 to +51.7 last month. This was on the back of a decline in employment, which fell -2.1 to +48.7 (contraction territory). Strength came from the business activity and new orders components which both pushed higher above +50, while new export orders (boosted by a weaker greenback) also helped support growth in the services sector. Inventories bounced back in May after falling m/m, suggesting that economic activity is somewhat still positive.

Yesterday afternoon, Bernanke stayed the course and said that an increase in indicators that the public expects prices to rise is a ‘significant concern’ for policy makers. He provided hawkish statements once again that could put the nail in the coffin for dovish analyst’s predictions for the 4th Q.

The main event will be this morning’s BOE (5.00%) and ECB (4.00%) rate decision and Monsieur Trichet press conference. The market expects him to be as hawkish as ever, so EUR will stay strong, despite Bernanke’s recent comments, which have given the green light to the USD$ of late.

The US $ currently is higher against the EUR -0.06%, GBP -0.36%, CHF -0.44% and JPY -0.67%. The commodity currencies are weaker this morning, CAD -0.10% and AUD -0.22%. Gentle Ben and the greenback continue to rain down on the loonies’ advances of late, as it prints new monthly lows. As predicted earlier this week, the potential of further interest rate slashing by the BOC next week has driven investors to pare some of their positions by selling the CAD$. Besides it is not a 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’ as global equities become more concerned about increased credit and financial risks again. Canadian positive economic data is definitely commodity export related and if one excludes this variable from the growth equation then we have an underperforming manufacturing weakened economy that requires some sort of stimulus to revive it. Traders continue to look for better levels to sell the currency as many missed out on the initial USD/CAD rise this week. This Friday, like our southern neighbor we will employment data to tackle. With the RBA saying that previous rate increases had caused a ‘moderation in demand’ and decided to leave borrowing cost unchanged this week (7.25%), has attracted investors who seek higher yields, despite the softening of commodity prices which tend to hurt the currency. AUD is out performing on the crosses (0.9586).

Crude is higher O/N ($122.82 up +52c). Crude oil continued to remain under pressure yesterday after the EIA report reveled larger than expected US fuel supply gains and traders speculating that demand will drop because of increasing prices. Gas stocks rose +2.94m barrels to 209.1m last week, while inventories of distillate fuel (includes heating oil and diesel), rose +2.28m barrels to 111.7 million. But, fuel demand continues to remain down y/y. Refineries are making fuel, but no one wants to buy it. Analysts now believe that demand will be weaker than initially anticipated. Fuel consumption is averaging +20.4m barrels a day over the past month, that is down -1.1% y/y. Clearly consumers are responding to higher prices and traders foresee support at $120 to come under attack sooner rather than later, as demand wanes. For instance the airline industry is aggressively paring back routes and eliminating jobs to cope with higher prices. This week, Bernanke alluded that the US will stop cutting interest rates (2.00%) to bolster the USD$ when he said that he was ‘attentive” to the impact of the weak currency’. To date the weaker dollar has helped lead commodities to print new records this year. The Fed seems to be publicly admitting that the weak dollar is a problem. By default, if steps are taken to strengthen it (interest rates) we should see further weakening. So far this year the black-stuff has appreciated close to 35%. Gold remains under pressure ($875) after Bernanke signaled that the Fed may be finished slashing interest rates earlier this week, thus boosting the greenback and eroding the appeal of the yellow metal as an alternative investments.

The Nikkei closed at 14,341 down -94. The DAX index in Europe was at 6,986 up +20; the FTSE (UK) currently is 5,977 up +7. The early call for the open of key US indices is higher. Yields of the US 10-year bond eventually backed up 8bp despite hitting monthly lows yesterday (3.98%). They are little changed O/N. With US equities gaining some ground, investors tended to shy away from the FI asset class for surety reasons. Traders will wait for the employment numbers or any other financial disclosures for guidance.

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