Resurrecting the dollar?

Since Geithner took office, the USD is weaker by 10% vs. six of its largest trading partners. President Obama business plan of ‘spending ones way out of this recession is undermining the currency causing a record commodity rally in hard assets’. Economics 101 informs us that a record budget deficit combined with low interest rates and nearly non-existent growth will not be providing support any time soon! The G7 was not worried a few weeks ago. Cbank verbal intervention is having little effect, even the physical intervention by policy makers in Asian seems only to be a quick fix. Who is worried? On the flip side, it makes equities rather cheap to foreign investors!

The US$ is stronger in the O/N trading session. Currently it is higher against 12 of the 16 most actively traded currencies in another ‘whippy’ trading range.

Now that the long weekend is over we can get down to more USD bashing it seems. Yes, the dollar is off from its lows in the O/N session. However it’s lonely out there when it’s near to impossible to find a greenback supporter! This week focus remains on US earnings reports with JPM, Goldman, Citi-group, BOF and Intel being the key earnings. Its next to impossible not to report a strong quarter, but will it be cuts or revenue induced? Already this morning German confidence numbers unexpectedly declined for the 1st-time in 3-months (56 vs. 57.7) as concerns that the pace of the European recovery remains fragile.

The USD$ is currently higher against the EUR -0.08%, GBP -0.32%, CHF -0.09% and JPY -0.29%. The commodity currencies are weaker this morning, CAD -0.11% and AUD -0.26%. The loonie is back on course and accelerating towards that psychological parity level vs. its largest trading partner. Speculators believe that the pace of a global recovery may quicken. This has risk takers coveting commodity and high yielding currencies on pull backs. Canadian policy makers have been vocal of late expressing their reservations about a strong loonie and its implications on medium term growth. Last weeks Canadian employment numbers again blew all economic expectations out of the water (+31k and 8.4% unemployment rate). Year-to-date, the loonie has gained +18% vs. its southern partner and incidentally was the best-performing of G7 currencies against the greenback over the last few weeks. Combing stronger commodity prices and a weak USD sentiment, achieving parity before Christmas is within speculators grasp!

Australian business confidence slipped last month, down 4 ticks to 14, for the 1st-time in 5-months as sentiment among manufactures and retailers eased. This can be attributed to the 29% appreciation of the AUD. A stronger business confidence print this year was one of the reasons why Governor Stevens at the RBA remains a firm hawk. Will the RBA be ‘gradual’ in its monetary cycle or show rapid normalization of interest rates? (0.9075)

Crude is higher in the O/N session ($73.74 up +42c). Crude oil rose for a 3rd consecutive day yesterday on speculation that demand will increase amid signs that the global economy is emerging from this recession. Prices managed to print a new monthly high after the Asian region raised its 2009 economic forecast. All this despite last week’s EIA report, while reporting a decline in crude, more importantly was a confirmation of still weak oil product demand in industrial fuels. It seems that the market is not relying on fundamentals to price the black-stuff. The EIA report should have been bearish for the commodity. The data showed that inventories of gas and distillate fuel (includes heating oil and diesel) increased. Gas inventories rose +2.94m barrels to +214.4m, w/w. That was a threefold increase, way more than market consensus. Distillate stocks advanced +679k barrels to +171.8m (the highest print in 26-years!). The gain in gas supplies has left inventories +6.9% higher than the 5-year average. Not to be outdone, distillate inventories are +30% higher for the same time period. Refineries are operating at +85% of capacity, +0.4% w/w. In contrast, crude inventories declined -978k barrels to +337.4m. The market had expected a +2m gain. Despite this, stockpiles remain +10% above the five-year average. Strong evidence that demand destruction is alive and kicking. Global output remains healthy. Russia increased its production last month and has now surpassed Saudi Arabia as the largest produce. They have just added to the global glut of the black-stuff. With energy fundamentals remaining unconvincing, it would be a safe bet that crude should be confined to its $10 range of $65-$75.

Store of value, store of value! Gold, like an unpredictable thoroughbred, has charged forward and managed to print new record highs this week. It’s the debate of deflation and inflation that spurring the ‘yellow metal’ higher as investors are concerned that an economic recovery will promote inflation ($1,065).

The Nikkei closed at 9,832 up +32. The DAX index in Europe was at 5,754 down -29; the FTSE (UK) currently is 5,194 down -15. The early call for the open of key US indices is lower. The 10-year bonds backed up 2bp on Friday (3.33%) and are little changed in the O/N session. Treasuries managed to print a weekly loss last week on the back of Bernanke stating that the Fed is prepared to hike rates when the economic outlook ‘has improved sufficiently’. The decline in US jobless claims data is stronger evidence that the the US economic recovery is strengthening. Most analysts still believe that the Fed will hold off raising interest rates until mid- 2010 as the recovery is likely ‘to be too weak to lift employment and incomes to inflationary levels’. Now that the long holiday w/d is over lets see if there is demand at these lofty yields!

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