Dean’s FX|SNB and BOE surprise the markets.

The USD$ is mixed in the O/N trading session. Currently it is higher against 9 of the 16 most actively traded currencies in a ‘subdued’ trading range after the SNB rate decision announcement.

With no economic data out in the US yesterday, traders had little fat to chew on. Instead they feasted on Financials reporting further write downs, slashing dividends and threats of further ‘insurmountable’ future losses (some analysts believe we are only a 1/3rd through a $1.3 trillion write-down). Companies are becoming more vocal about the cost of fuel hurting their bottom line. The manufacturing sector and airlines industry are starting to make deeper and deeper cuts. Even police forces in the US are contemplating adding a fuel surcharge for speedsters to cover the pursuit! It will be the summer of discontent as global equities remain in unknown territory, while Cbanks with conflicting monetary policy will combat their interpretation of stagflation and a weakening USD$. All this could speed up the US heading to a recession as falling home prices and fuel costs weigh on consumer spending. Most analysts believe that the 2nd half of this year will be worse than the 1st, as the economic slowdown continues well into next year. Anyone fortunate enough to ‘sell in May and go away’ could very well be the winners by year end as we close in on the half way point.

The US $ currently is stronger against the EUR -0.23%, CHF -0.62% and lower against GBP +0.43% and JPY +0.06%. The commodity currencies are weaker this morning, CAD -0.05%% and AUD -0.14%. Yesterday, Canada’s index of leading economic indicators rose +0.2% m/m (the first increase in four months) led by housing and stock market gains. This has done very little to the loonies’ value, as it trades in a tight range ahead of this mornings CPI numbers. Commodity prices currently do not provide any sort of crutch for the currency (50% of Canadian exports are commodity based). Earlier this week the CAD$ appreciated after the foreign securities purchases data. Investors abroad bought a net $9.57b of Canadian securities (the most since Nov. 2006). In the bigger picture, the CAD$ is trading within a well defined range for now (1.0150-1.0323). 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). Most analysts remain upset with the BOC not being transparent enough and Governor Carney has received some criticism early in his first tenure. 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 (0.9464). If the Fed remains on hold, look for both AUD and NZD to gain from interest rate differentials.

Crude is higher O/N ($136.85 up +17c). Increased bearish rhetoric combined with the weekly EIA report showing that inventories declined less than forecasted w/w weighed on crude oil prices not awhile yesterday. Of late, any changes of supply issue has caused large pricing gyrations, but yesterdays data just took out a larger risk of surprise and nothing more so far. Oil stockpiles fell -1.24m barrels to 301m vs. an estimated drop of -1.75m w/w. But, on the other hand, gas supplies fell -1.18m barrels to 208.9m compared to an expected positive number of +850k. A number of variables continue to weigh on oil prices. Analysts from JPMorgan believe that the ‘bull’ run may be over and expect prices to correct themselves over the next few months. They anticipate that the price of crude will average out to $90 a barrel for this year. The Kuwaitis have sided with the Saudis saying that prices are too high. Lately commodity prices have remained relentless in their pursuit of new records. The Kuwaiti oil minister believes that $100 a barrel is more reasonable. 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. The IEA said it seeks an immediate increase in oil output at the meeting to ‘calm markets’. But investors remain concerned that inventories may come under increased pressure during the US summer driving season (May-Sept.). Gold remains better bid this morning ($892) as the greenback falters after weaker economic data this week, boosting the appeal of the yellow metal as a haven from inflation and slower economic growth.

The Nikkei closed at 14,130 down -322. The DAX index in Europe was at 6,711 down -17; the FTSE (UK) currently is 5,769 up +12. The early call for the open of key US indices is higher. Yields of the US 10-year bond eased 6bp yesterday (4.14%) and are little changed O/N. Treasury prices rose steepening the 2/10’s yield curve (135) as traders favor short term debt believing that the Fed will remain on hold next week (2.00%). Investors continue to battle the stagflation scenario as they watch global equities take it on the chin. Futures traders continue to pare their bets of an imminent hike by Bernanke. They see an 88% chance that the Fed will remain on hold on June 25th.

This morning UK retail sales stunned the market and rose by the most in over 20 years as consumers bought more seasonal food and clothing during the warmest May ever (+3.5% vs. -0.3% m/m). Analysts believe that the numbers suggests that rising food and energy costs and falling house prices have yet to impede consumer spending. BOE Governor King said yesterday ‘that policy makers will not budge in their fight against accelerating inflation, which will require British living standards to slip and economic growth to weaken’.

The SNB kept its main lending rate at a 6-year high today (2.75%) as it weighs the threat of faster inflation against the risk of slowing economic growth. Governor Roth said that ‘faltering growth has limited the SNB’s room to raise borrowing costs and counter the fastest inflation in 15 years’. The SNB predicts inflation will slow to +1.7% in 2009 and +1.3% in 2010 from this years +2.7%.

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