Dean’s FX|Lisbon, Osaka and the EUR!

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 ‘subdued’ trading range.

Yesterday the US Retail Sales report showed a +1% jump in the headline, while the less volatile ex-auto sub-index posted a +1.2% last month. The report was much stronger than anticipated (the market had anticipated half of what was reported).The results are at odd’s with consumer confidence figures over the last Q. They printed ‘new historical lows’ since the tech bubble burst. These stronger than anticipated results may be somewhat directly related to the early tax rebates. Bernanke and co. will surely be happy to some extent seeing that household consumption is reacting positively to the combination of lower rates and a ‘looser’ fiscal policy. With a portion of the monthly increase due directly to rising prices at gas stations, the overall consensus is that the main components look strong. Ex-gas station sales, retail sales were up by +0.8% vs. +0.4% m/m. The end result should put a positive spin on 2nd Q GDP as household consumption seems to have held up (despite higher oil prices, higher unemployment and lower disposable income). One should now expect further hawkish comments by Fed’s members to continue to ‘build up market expectations’ for an early rate hike to increase (2.00%). The markets awaits some hints or signs on FX ahead of this weekends G8 meeting in Osaka, one thing that is certain is that Trichet will be hawkish and that Bernanke is following in line. Lisbon treaty voting results expected in a few hours. If positive expect the EUR to be better bid.

The US $ currently is higher against the EUR -0.33%, GBP -0.04%, CHF -0.50% and JPY -0.13%. The commodity currencies are mixed this morning, CAD -0.12% and AUD +0.09%. With no Canadian economic data yesterday to lend a helping hand, the loonie succumbed to USD$ strength and fell the most in over a week. With a stronger US retail sales print, traders are increasing their bets that the Fed will hike rates sooner than anticipated to combat inflation. The greenback has strengthened against most of its major trading partners due to interest rate differentials. This week BOC governor Carney followed suit after the BOE and halted its easing cycle to ensure inflation remains contained (3.00%- despite the market anticipating a 25bp cut). Traders are speculating that surging energy and food costs will prompt the BOC to do a u-turn and raise rates by years end. Canada’s annual inflation unexpectedly accelerated in April on higher fuel and mortgage costs (+1.7% y/y-BOC target is 2% band). Most analysts believe that core inflation will remain below Carneys target right through to next year, which ponders the question why should the BOC change policies mid stream while economic data remains soft? With commodities remaining under pressure, the loonie should be able to trade back towards monthly lows north of 1.0300. Traders continue to look for better levels to sell the currency. Softer data this week has pushed the AUD$ to its quarterly lows, combine this with the Fed potentially hiking, and then the currency has more slippage to achieve (0.9350).

Crude is lower O/N ($136.72 down -2c). With a robust USD$ reducing the appeal of commodities as an inflation hedge, crude oil has pared some of this weeks gains. Stronger than anticipated US retail sales numbers yesterday has the market once again experiencing an inverse relationship between the greenback and commodities. But an underlying bid tone will remain due to this weeks EIA report, which showed that US stocks declined more than expected, increasing investor concerns that inventory may come under increased pressure during the US summer driving season. Stocks fell -4.56m barrels to 302.2m last week. China have indicated that their oil imports had increased 25% last month as the country recovers from the earthquake, and geo-political tensions have heightened between Iran and the US over uranium enrichment issues (OPEC’s second-largest oil producer). To date m/m, US crude stockpiles have fallen nearly 8%. The IEA lowered its estimate for non-OPEC output this year by -300k barrels a day to +50.04m. The Saudis have called for a meeting between producers, consumers and financial institutions to discuss the increase in oil prices, which they call ‘unjustified’. Meetings will be held on June 22nd. Gold remains under extreme pressure ($871) as the stronger USD$ dollar has eroded the appeal of the yellow metal as an alternative investment.

The Nikkei closed at 13,973 up +85. The DAX index in Europe was at 6,663 down -53; the FTSE (UK) currently is 5,737 down -53. The early call for the open of key US indices is higher. Yields of the US 10-year bond backed up 16bp yesterday (4.21%) and a further 2bp O/N (4.23%). Treasuries fell aggressively pushing yields to their highest level this year after the US retail sales print was much larger than anticipated. This has increased trader speculation that the Fed could hike rates sooner than anticipated. Cbanks continue to provide ‘sign posts’ that lead to higher rates!!

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