Chinese and US ‘hot’ dollars all the same

It’s no wonder the Chinese are worried about ‘hot’ money after the announcement of their second largest trade surplus this year (+$27.2b). They do not want our cash dollars mixed with theirs, we will never know who owns what. Their record trade surplus will certainly dampen the US’s proposal to curb current account imbalances in Seoul as Geithner will find it difficult to gain support from other major countries. So far this week, higher US yields has allowed the dollar to find broader support ahead of the G20. Lack of data yesterday promoted profit taking and offered less risk as investors continue to readjust their positions for potential event risk. The Euro-zone debt issues will be expected to weigh on their currency until after the release of the Irish budget in early Dec.

The US$ is mixed in the O/N trading session. Currently it is lower against 9 of the 16 most actively traded currencies in a ‘subdued’ trading range.

Today is a data laden day, unlike yesterday, where the market had little to chew on. Investors had to be content with Euro-sovereign concerns and record profit taking ahead of the holiday shortened trading week. US wholesale inventories posted its ninth consecutive monthly gain (+1.5% in Sept), after a positive Aug rise to +1.2% from +0.8%. Digging deeper, the inventory print was supported by both durable gains (+0.7%) and nondurables (+2.8%-largest increase in a year). Analysts expect this positive spike to contribute to US 3rd Q GDP revisions. It worth noting that wholesale sales advanced (+0.4%), pushing the inventory-to-sales ratio higher to 1.18, its highest reading in a year.

The USD$ is lower against the EUR +0.18%, GBP +0.04% and higher against CHF -0.07% and JPY -0.11%. The commodity currencies are stronger this morning, CAD +0.01% and AUD +0.01%. Yesterday’s Canadian new home prices headline print was misleading from a CPI perspective (+0.2% vs. +0.1%). The rise was fed by the land component (+0.5%), while the house-only component was flat. It’s the house-only component that flows through to core-CPI and that flat reading would suggest absent price pressures. This has not prevented the loonie from trading at or above parity for a third consecutive day. The higher yielding growth sensitive currency continues to be supported by higher commodity prices and stronger appreciation for risk appetite. However, corporate bids are playing a part in keeping the greenback from moving much lower against its largest trading partner. For a commodity supportive currency, the loonie has only appreciated +1.5%, y/d, underperforming other growth currencies such as the AUD and NOK. Canada’s natural close ties with its largest trading partner will prevent the currency from ‘running away’. The contrarian to a dollar evaluation will look to sell the CAD above parity for ‘the flip’.

The AUD traded briefly below parity for the first time in a week, but happened to regain composure in the O/N session amid signs that the nation’s labor and housing markets remain strong. This evening we get the Australian employment report. Last night’s data showed that Australian home-loans approvals expanded (+1.3% vs. +1.1%). The sudden jump in risk aversion over European periphery debt issues and a larger than expected Chinese monthly trade balance will again reduce the risk appetite of investors. The Chinese surplus is the second biggest this year. With Chinese authorities demanding higher bank reserves, again will restrict the flow of ‘hot’ money, indirectly and negatively affecting regional bourses and growth currencies. To date, the AUD has been this quarter’s best-performing major currency vs. its US counterpart. Interest rate differentials have been a big plus for the currency. Governor Stevens is expected to increase rates further even as the US and Japan leave borrowing costs near zero. Policy makers at the RBA said that economic growth will accelerate next year and ‘the Aussie’s advance will help slow inflation’. With the Australian economy continuing to grow ‘at or above trend and inflation remaining in the upper part of the band’ provides support for further monetary-policy tightening from the RBA. For now the currency remains in demand on pull backs as carry look attractive to investors (1.0040).

Crude is higher in the O/N session ($86.82 +10c). Oil prices remain close to home despite the whiplash trading activity of the dollar during yesterday’s session ahead of a Muslim holiday. At one point during the session the commodity happened to print a new two-year high as the dollar index temporarily fell, curbing the demand for crude as an alternative investment. Dealers expect prices to inch along as the dollar remains suspect. On the flip side, analysts suspect that this mornings weekly inventories may have increased to the highest level in 18-months, which will threaten this price rally, as refineries idled units because of a lower crack spread. Technically, the lack of physical tightness will leave the market vulnerable to another downdraft. Last week’s EIA report showed that fuel supplies plummeted when refineries reduced operating rates to the lowest level in seven-months. Crude stocks rose +1.95m barrels to +368.2m vs. an expected +1.5m barrel climb. Offsetting all of these gains was the gas inventories headline print. It fell -2.69m barrels to +212.3m, the lowest level in twelvemonths. Distillate supplies (heating oil and diesel) decreased -3.57m to +164.9m, providing the biggest drop in over two-years. OPEC is happy with prices between $70 and $85, although an increase to $90 would not impede economic growth. The market remains wary that the underlying fundamentals have not changed. The ‘big’ dollars value continues to influence prices despite fundamentals.

The one directional gold play came to a mid session halt yesterday afternoon. Earlier, the commodity advanced to another intraday record on speculation that European governments may struggle to pay debt, boosting demand for the precious metal as an alternative to currencies, firmly establishing itself as ‘new’ reserve currency. With Capital Markets shifting their focus toward sovereign debt issues and away from QE2 debates will continue to provide strong support for this asset class on medium term pull backs. Year-to-date, the metal is up + 28.2% and is poised to record its 10th consecutive annual gain. Precious metals have outperformed global equities and treasuries as Cbanks try to maintain their low interest rates to boost economic growth. Covertly, US policy makers are trying to drive the greenback lower, which by default would boost the demand for precious metals as alternative investment. The commodity has posted nineteen record highs in little more than five weeks. Last week, it managed to rise more than +2.9%. The metal should remain in demand on speculation that steps to support growth through QE and low interest rates will boost demand for the commodity as an alternative to some currencies, the store of value theme. Any pullbacks will continue to be bought. For most of this year speculators have sought an alternative investment strategy to the historical reserve currency and have been using the commodity as a proxy for a ‘third reservable currency’, hence the reason for the record highs. The debasing fears of the dollar should have investors seeking protection in an asset with a ‘store of value’, but there are better levels to want to enter the market ($1,406 -$3.40).

The Nikkei closed at 9,830 up +136. The DAX index in Europe was at 6,765 down -22; the FTSE (UK) currently is 5,859 -16. The early call for the open of key US indices is higher. The US 10-years backed 15bp yesterday (2.67%) and are little changed in the O/N session. As expected, dealers lent on treasuries ahead of yesterday’s $24b auction to cheapen up the curve and on anticipation of today’s Fed announcement of how much debt it will buy during the next few weeks. Fundamentally, it’s a sell off signal in sympathy with supply. Supply is the overriding factor in the market place and with little room for value in the front end it will be interesting to see if investors are comfortable moving out the yield curve to pick up return in today’s long bond auction. Yesterday’s 10-year auction was initially well received, probably on the Fed’s QE2 help, but prices plummeted by end of day as the dollar became sought after. The $24b notes yielded 2.636% vs. the 2.647% WI’s. The bid-to-cover was 2.80 compared to the four auction average of 2.87.

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