Bernankes lemming one direction short dollar bet

The market is patiently waiting for helicopter Ben to put us out of our misery. Have we priced in too much QE? That’s the vulnerable side of the trade ahead of his speech this morning. Even a Medley report that the Fed will abandon QE in exchange of Yuan revaluation could not hold the dollar steady. That’s been left up to this morning’s surprisingly disappointing Euro-zone trade deficit (-1.4b). The ‘new norm’ will have strengthening currencies become a drag on their trade. A global chorus of ‘Yuan revaluation quicker’ will be the new world anthem.

The US$ is weaker in the O/N trading session. Currently it is lower against 13of the 16 most actively traded currencies in another ‘volatile’ trading range.

US data yesterday only provides more of an incentive to not own the dollar. Jobless claims came in higher than expected (+462k vs. +449k), dashing the markets hopes that the US jobs situation was finally on the up. We are not getting any closer to that psychological +400k print. The trend is again making an assault on the medium term high watermark. The previous weeks initial claims was also revised ‘modestly higher’ (+449k vs. +445k), as too was continuing claims (+4.511m vs. +4.462m reported). In fact, continuing claims contracted by -112k to +4.399m, their second-week of declines in the past three-weeks.  They have been floating around the +4.5m mark throughout much of the summer, partly as claims push further into extended (+907k) and emergency categories (+3.88m). It was certainly a soft report supporting last weeks NFP release.

A weaker dollar has a long way to go to aid the US trade balance. Yesterday’s release ballooned again in Aug., up +8.8% to -$46.35b from -$42.85b. It was mostly inflated by a record setting deficit with its largest trading partner, China (+$28.04b vs. +$25.92b), and most likely eating into the third quarter US GDP growth. Yuan manipulation or what? One should expect more political pressure to be plied at the upcoming G20 meeting. Digging deeper, we had imports advancing +2.1% to $200b while exports rose marginally to +$154b. Economics 101 will tell you that an expanding trade gap, a weak economy, high unemployment and may I say deflation will give us very little growth in the third quarter.

Perhaps there is light at the end of the tunnel for the Fed inflation concerns. Yesterday’s US wholesale prices rose in Sept., for the third consecutive month, mostly on the back of volatile food prices. US PPI advanced a seasonally adjusted +0.4% last month, however, core-PPI (ex-food and energy) crept +0.1% higher. The Sept. year-over-year print was +4.0%, up from the previous months +3.1%. In reality, US inflation has been below the Fed’s ‘informal’ target of +2%, y/y. No one wants a Japanese’s style deflation issue. The market expects the Fed to step up to the plate and announce their QE intentions at their next meeting on Nov. 2-3.

The USD$ is lower against the EUR +0.12%, GBP +0.22%, JPY +0.30% and higher against CHF -0.17%. The commodity currencies are mixed this morning, CAD -0.12% and AUD +0.16%. Even with the Canadian trade deficit narrowing to -$1.34b in Aug., from a revised -$2.55b in July, the loonie only spent a brief period above parity vs. the dollar yesterday. The currency found favor on the back of the MAS actions earlier in the week as the market shies away from wanting to own dollars. In reality, for the quarter as a whole, trade is expected to be ‘a drag on the Canadian economy’ because of the strengthening currency. Exports rose +3.1% to $34b, while imports fell -0.5% to $35.3b. Big picture, because of the softer Canadian data of late and because of the strong economic ties with the US there is already much QE priced into the market. Investors and speculators alike are all partaking in the lemming one-directional short-dollar trade. On this basis we may have already seen CAD’s highs ahead of the BOC rate decision next week. Year-to-date, the CAD has appreciated +4.2% vs. its largest trading partner south of the border. Traders and investors are trimming their bets that the BOC will increase interest rates again on Oct. 19th.

The AUD lost the battle of reaching parity first, that honor goes again to the loonie. However, the currency has managed to record a 30-year high vs. the greenback as regional bourses indicate the strength of the global economic resilience. This scenario will always favor growth and interest rate economies. The currency is on the verge of completing a two-month bull run as the market psyche again shifts to embrace risk. Earlier this week, a rebound in Australian consumer confidence (+3.3% vs. -5%) and an unexpected increase in Japanese machinery orders (+10.1% vs. -3.7%) boosted optimism in the region’s economy. A stronger employment report down-under this month is also supporting the currency to print new highs vs. the greenback. Australia’s employers added +49.5k workers and the unemployment rate held at +5.1% in Sept. Month-to-date, the AUD has climbed +8.7% vs. the buck as data fueled bets that the RBA will raise interest rates before the year ends. Futures traders now see a 42% chance that the RBA will increase its target rate next month, down from 66% last week. Investors are better buyers on deeper pullbacks as the interest rate differential continues to be of appeal for alternative investments (0.9958).

Crude is higher in the O/N session ($82.95 +26c). Oil climbed for a second consecutive day yesterday, on the back of growing speculation that the Fed will give the US economy a boost, by default pushing commodity prices higher. Also aiding the black-stuff was the Saudi oil minister stating that overall demand is ‘very healthy’. Since the release of the FOMC minutes showing policy makers are prepared to buy more government debt, debase their currency, crude has climbed +2.7%. Last week’s inventory report also revealed a small drawdown on stocks. Crude inventories fell by -416k barrels to +360.5m, compared with the estimated increase of +1.2m barrels. Crude analysts note ‘this is currently a shoulder season for product demand ahead of the winter heating season’. Technically, we should expect inventories to gravitate towards their highs. Not to be left in the cold, gas inventories fell -1.8m barrels to +218.2m, just above the weekly estimate of a -1.4m drawdown. Distillate stocks (heating oil and diesel), fell by -255k barrels to +172.21m. Finally, the refining capacity fell by -1.2% to 81.9%. The black stuff has also got a helping hand from a weaker dollar. It seems that the drop in refinery runs has probably caused the drop in fuel supplies. The market remains wary that the underlying fundamentals have not changed despite prices heading higher aided by the floundering dollar.

Gold is maintaining its upward momentum this morning as a weaker dollar boosted the demand for an alternative investment. There is a distrust of currencies and gold seems to be the only solution as investors use it as a proxy for the ‘third reservable currency’. With market confidence wavering in currency prices, and with free money, it’s making commodities attractive on any pull backs. Any time that governments are in the business of printing money then the commodity is bound to do well. To date, gold has outperformed global equities and treasuries (+26%), prompting record investment in gold-backed exchange-traded products. The debasing issues of the dollar, coupled with the sustainable growth issues of the US economy have investors seeking protection in an asset with a ‘store of value’. With the Fed on the verge of implementing further QE programs ‘tend to be supportive of asset prices and is fueling concerns about the potential longer-term inflationary affect of such measures’. The opportunity costs of holding gold are low due to low interest rates. There seems to be bids everywhere in the market ($1,378 +$1.30c).

The Nikkei closed at 9,500 down -83. The DAX index in Europe was at 6,480 up +25; the FTSE (UK) currently is 5,723 -4. The early call for the open of key US indices is higher. The US 10-year backed up 4bp yesterday (2.48%) and is little changed in the O/N session. The market had expected to see some Japanese interest in the long bond issue yesterday. For a brief moment and only brief, longer maturities were wanted on speculation that a rally in the JPY would attract Japanese demand for the final week’s tranche of $13b bonds. In fact, the long bond auction was very soft with a whopping 3.2bp tail at 3.852%. The indirect and direct interest was light, taking down 41.5% of the issue. The auction saw the smallest bid-to-cover ratio in eight-months. This month’s bond rally seems to have overshot the upside, and sellers seem to be dominating the longer end of the curve.

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