Dean’s FX 10th June|Bernanke is the USD$ backstop!

The USD$ is stronger in the O/N trading session. Currently it is higher against 13 of the 16 most actively traded currencies in a ‘whippy’ trading range that has been dominated by CBankers pledging their fight against inflation.

Yesterday in the US, a private report showed that the number of Americans signing contracts to buy existing homes unexpectedly gained in April as a decline in prices lured buyers back into the market. The index rose +6.3% to 88.8 (the highest level in half a year). Is the housing market finding a bottom? Do not believe the hype; one positive return does not create a trend. This data had little effect on the greenback. All the action was to be had in the FI markets were short term yields violently backed up flattening the US curve in anticipation of higher rates by Cbanks. Their objective being to strangle inflation and by default it would also stifle growth. The noises coming out of the Fed seem to be increasingly hawkish and of course this is getting discounted in the market this morning, hence, another large move in the FI market O/N. Bernanke said that they would ‘strongly resist’ an erosion in the inflation expectation and re-iterated need for anchoring of inflation expectations. He further said that risk of a substantial downturn in the economy has diminished over the past month and believes that economic headwinds for the rest of the year will be offset by the rate cuts and stimulus package. Now all we need is the general masses to buy into his scenario. If the market is right then the Cbanks are about to kill growth, and investors can expect ‘risk strategies’ to do nothing else other than suffer in this environment and presumably that is likely to challenge the bull market in commodities (expect further slippage from NZD, AUS and CAD in the short term).

The US $ currently is higher against the EUR -0.67%, GBP -0.81%, CHF -0.73% and JPY -0.28%. The commodity currencies are weaker this morning, CAD -0.61% and AUD -23%. The market is betting that Governor Carney from the BOC will go alone and cut borrowing costs again this morning by 25bp to 2.75%, to avoid a recession in the world’s 8th largest economy. With softer economic data of late, the loonie looks to maintain its weakening bias against all its major trading partners, despite record setting commodity prices. Other CBankers are touting rapid inflation concerns over growth and currently leaning towards hiking rates rather than stimulating growth. Last weeks Canadian employment gain was the smallest so far this year (+8.4k vs. +10k). The trend in employment has slowed with the slowing in the economy. The unemployment rate (6.1%) matched the highest in about a year, and the below-trend economic growth could lead to further increases in the rate in coming months. Despite oils prices maintaining their ‘rabid’ pace, the loonie has temporarily de-coupled its self from the usually strong correlation. Expect traders to look for better levels to sell the currency. Bernanke and Paulson are working in tandem promoting the USD$ against all its counter parties, and higher yielding assets like the AUD$ continue to underperform because of commodities and hawkish rhetoric. The AUD$ O/N fell the most in 3-months on the back of US Treasury Paulson comments that he would ‘never’ rule out currency intervention. This is a USD$ story and all currencies are being clipped for now (0.9481).

Crude is lower O/N ($133.84 down -51c). What goes up must come down. As highlighted here for awhile, the rabid increase in the ‘black-stuffs’ prices of late has more to do with the weakness of the USD$ and not due to supply or demand issues of the commodity. Speculators have been using it as a hedge against the demise of the greenback. After Friday’s record setting day, speculators have been paring positions and booking profits because of technicals and not fundamentals. Saudi Arabia’s oil minister, al-Naimi has called for a meeting of oil producing and consuming nations to discuss how to deal with record prices. He insists that these record prices are not fundamentally justified. One can expect another volatile week with the bulls and bears clashing amidst a heat wave that’s gripped most of the eastern sea board in North America. OPEC and G8 finger pointing has commenced, while CBankers are blaming others for the spiraling prices of late. Subsidizes, supply issues and geo-political concerns have all been blamed in the not to distant past. But, it’s the greed factor by investors that may push the world economy into a global recession. Global Economies are feeling the pinch. Traders will be betting that tomorrows EIA data will remain consistent with the m/m trend. Gold fell for a second consecutive day this morning ($887) as the USD$ strengthened and oil declined, thus diminishing the yellow metal’s appeal as a hedge against a drop in the greenback and inflation.

The Nikkei closed at 14,021 down -160. The DAX index in Europe was at 6,740 down -75; the FTSE (UK) currently is 5,833 down -45. The early call for the open of key US indices is lower. Yields of the US 10-year bond backed up 10bp yesterday (4.00%) and a further 5bp O.N (4.05%). Treasuries fell (especially in the short end) giving up nearly all of Fridays gains after European securities had the biggest decline in 6-months on growing speculation European policy makers will increase interest rates next month (4.00%). Bernanke tipped the balance with further hawkish rhetoric O/N. Global equities had crawled back into the black has encouraged investors to pare some of the FI asset class for now.

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