No dollar crisis here!

John Berry in the Washington Post yesterday commented on the ‘dollars reality’. Its continuous decline against its major trading partners over the past 6-years has ‘helped to cut in half the huge US deficit in trade and financial transactions with the rest of the world’. That deficit peaked 3-years ago at $800b, almost 6% of GDP. Any time you hear a policy maker talking about the USD they are addressing domestic issues. They try to appease their own constituents. Trichet rants may sound global, and the best he can achieve is an acknowledgment from Geithner and Co. who covertly relies on a weaker dollar for their own competitiveness. Policy makers do understand that neither Treasury nor the Fed is about to take any steps to support the greenback. They will not raise interest rates, and certainly not going to intervene in the currency market! However, the real problem is China. They have been protecting their enormous trade surplus by freezing the value of the Yuan vs. the USD. By keeping it Yuan rate frozen (middle of last year), in effect with the dollar’s decline, the Yuan also declined against most other currencies. How is the rest of the world going to change this policy for the good?

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

Not surprising, and with little data to go on yesterday, the USD showed signs of weakness in part from higher commodity prices and positive earnings post market close (Intel Corp announced stronger than expected 3rd Q earnings- 0.34 vs. cons. 0.276) and higher revenues at $9.39b vs. an estimated of $9.05b. One should expect the electronics sector to outperform today! Lets hold our breath for the US retail sales, impact most likely be minimal, as we commodity and stock watch again!

The USD$ is currently lower against the EUR +0.46%, GBP +0.51%, CHF +0.44% and JPY +0.62%. The commodity currencies are stronger this morning, CAD +0.80% and AUD +1.02%. The loonie is back on course and accelerating towards that psychological parity level vs. its largest trading partner. Over the last 5-trading sessions the currency has managed to appreciate 2.5% vs. its southern neighbor. Despite stronger than expected Canadian fundamentals (employment report last week where +31k new jobs were created) the demand for commodities continues to give the currency a leg up. The negative dollar perception will allow the loonie to once again reach parity (last time was in June 2008), but not in a neat straight line, as this extension is somewhat technically overdone. Option traders are pricing in a 62% chance that this will be achieved by year end. More bullish analysts believe it could be by the end of this month! Technically and fundamentally there is no support for the ‘big dollar’. 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. Combing stronger commodity prices and a weak USD sentiment, achieving parity before Christmas is within speculators grasp!

Australian continues to rely on the Chinese wealth factor. The AUD managed to print new 14-month highs in the O/N session after reports showed China’s imports of iron-ore jumped to a record last month while copper shipments gained unexpectedly. Commodities that Australian is in abundant! Demand for higher yielding currencies all rose after Intel’s surprising results yesterday which will push global bourses higher on the open this morning. 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? (0.9150)

Crude is higher in the O/N session ($74.92 up +77c). Encore, encore! Crude oil managed to print 7-week highs yesterday as the greenback buckled in any attempt to gravitate from its yearly lows of its largest trading partners. Dealers continue to speculate that demand will increase amid signs that the global economy is emerging from this recession. Prices remained robust after the Asian region raised its 2009 economic forecast. With that and following suit, OPEC revised its target objectives for 2010 on the back of these Asia revisions. No matter what, the black stuff continues to get ahead of its own fundamentals. Speculators are treating the commodity as an ‘investment asset rather than a consumption asset’. Demand destruction remains, last weeks EIA report, while reporting a decline in crude, more importantly was a confirmation of still weak oil product demand in industrial fuels. 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, but this does depend on the USD however!

Store of value, store of value! Gold, like an unpredictable thoroughbred, has charged forward and managed to print new record highs yesterday. 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. Mind you a plummeting dollar is driving investors towards the yellow metal as alternative investment ($1,067).

The Nikkei closed at 10,060 down -16. The DAX index in Europe was at 5,792 up +72; the FTSE (UK) currently is 5,222 up +68. The early call for the open of key US indices is higher. The 10-year bonds eased 3bp yesterday (3.31%) and managed to back up 6bp in the O/N session (3.37%). After printing a weekly loss last week (the largest in 2-months), dealers and speculators came to their senses during yesterday’s session. Believing that some of the back up in yield was somewhat over extended, Treasuries prices managed to end the day on a high note. With the greenback remaining under constant pressure, investing in various US asset classes looks cheap from a foreigner’s perspective. With both inflation and US economic growth staying below the Fed’s objectives for ‘quite some time’, analysts expect interest rates to remain on hold well into the New Year. The longer end of the US yield curve and their lofty yield continue to look attractive on pull backs. This we certainly got this morning with global bourses advancing!

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