Dean’s FX| USD$ Bears are bullish!

The USD$ is mixed in the O/N trading session. Currently it is lower against 8 of the 16 most actively traded currencies in a ‘subdued’ trading range ahead of the US housing Starts numbers.

The greenback got no help yesterday from the weaker than expected Empire manufacturing data. New York manufacturing fell this month at a much quicker pace than forecasted (-8.7 vs. -3.2-< O is contraction). It was led by the declines in orders and sales. The report underlines the similar ongoing theme of the year to date so far. Manufacturers are curtailing production and investments decisions due to the housing debacle, a surge in raw material costs and a slowdown in consumer spending which continue to hurt the bottom line. Digging deeper, the one bright spark has been the export numbers, which of course has been buoyed by a weaker dollar. But, analysts expect the weaker trend to continue going forward. An article appearing in the WSJ has Bernanke almost certain to leave interest rates unchanged (2.00%) at next weeks meeting. The article goes on to say that there is no compelling case to hike rates before the fall unless the inflation outlook deteriorates considerably. Futures traders have shifted their bets from next week to Aug. to raise rates because of mounting inflation worries. Between now and then, we are introduced to a host of economic data, including two employment reports and several ‘gauges of inflation’ (and we thought it was going to be a lazy summer). The US $ currently is weaker against the EUR +0.13%, CHF +0.18%, JPY +0.12% and higher against GBP -0.12%. The commodity currencies are stronger this morning, CAD +0.35% and AUD +0.05%. As to be expected with the rise in commodity prices (50% of Canadian exports are commodity based) the loonie by default appreciated against all its major trading partners. It was the largest move in four weeks (it had managed to pare some of that strength by day’s end). In the bigger picture the CAD$, it is trading within a well defined range for now. Even bearish Canadian economic data could not slip up the loonie. More evidence of a weakening Canadian consumer sector emerged via auto sales figures for the month of April. Not only are Canadian auto production and employment figures getting side swiped by the weakening US consumer, domestic sales are also retreating. Sales have come off sharply since the high Jan. print despite price reductions and incentives. Car and truck sales unexpectedly posted their 3rd consecutive monthly retreat. Inflation and growth remains policy maker’s main concerns. Last week BOC governor Carney followed suit with the BOE and halted its easing cycle to ensure inflation remains contained (3.00%- despite the market anticipating a 25bp cut). Traders are speculating that surging energy and food costs will prompt the BOC to do a u-turn and raise rates by years end. Canada's annual inflation unexpectedly accelerated in April on higher fuel and mortgage costs (+1.7% y/y-BOC target is 2% band). Most analysts believe that core inflation will remain below Carneys target right through to next year, which ponders the question why should the BOC change policies mid stream while economic data remains soft? With very little volume going through, traders will look to sell some CAD$ near support levels once again. The AUD$ continues to pare recent gains after the RBA said in the minutes of its last meeting that the 2 interest rate hikes this year will slow growth and may be enough to cool inflation (0.9804). Crude is lower O/N ($133.84 down -77c). Commodity prices remain relentless in their desire to print new record highs day over day. Yesterdays record print came on the back of the USD$ declining against the EUR (boosting the appeal of commodities as a hedge against further dollar depreciation) and a fire in the North Sea hurting future output (StatoilHydro +150k barrel a day). The market of late has been very nervous any time supply issues are mentioned. Combine this with a weakening dollar and the market runs violently scared. It is anticipated that the Saudis (OPEC’s largest exporter) will announce on June 22nd an increase in production of an extra +200k barrels a day or +0.2% of world supply. Saudi oil minister al-Naimi last week described the surge in the commodity as ‘unjustified’ and called the Jeddah meeting of producers and major industrial nations to help stabilize prices. Capital market can expect an underline bid tone until we get to digest this weeks EIA numbers. Last weeks report 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. 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. Gold had its biggest advance in 5 days yesterday ($887) as the greenback stumbled, thus boosting the appeal of the yellow metal as an alternative investment. The Nikkei closed at 14,348 down -6. The DAX index in Europe was at 6,809 up +79; the FTSE (UK) currently is 5,861 up +66. The early call for the open of key US indices is mixed. Yields of the US 10-year bond eased 4bp yesterday (4.21%) and are little changed O/N. Treasury prices rose after yesterdays weaker than anticipated June Empire manufacturing report, convincing some traders that the US economy is too weak for the Fed to raise borrowing costs in the next few months (2.00%). Futures traders continue to pare their bets. Higher commodity prices have contributed to economic growth fears, thus the FI asset class continues to be better bid on pull backs. This morning German investor confidence fell to its lowest level in 15 years this month as surging inflation dimmed the outlook for growth in Europe's largest economy (-52.4 vs. -41.4). While inflation rates rose in the UK to the highest level in 10 years (+3.3% y/y) and putting pressure on the BOE to hike interest rates (5.00%) as the economy heads toward a recession.

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