North Korea is not on Holiday!

It’s Memorial Day in the US and North Korea pouts and struts as the world watches. With the country supposedly launching its 1st-nuclear test in 3-years has investors seeking sanctuary in the US dollar. With markets closed, expect the dealers to play catch up this evening!

The US$ is mixed in the O/N trading session. Currently it is higher against 10 of the 16 most actively traded currencies in a ‘subdued’ holiday trading range.

With both NY and London on holiday one can expect very little fire-works today while we watch again what North Korea is up to from the side lines. Tomorrow is D-day for GM. Will bond holders accept the debt-equity swaps? It looks unlikely that this will happen and the chance that GM will file for Chapter 11 by June 1st is odd’s on. Expect this decision to add further pressure to the US economy, as job losses and the knock on effect intensifies.

The USD$ currently is higher against the EUR -0.13%, GBP -0.17%, CHF -0.09% and JPY -0.11%. The commodity currencies are mixed this morning, CAD -0.21% and AUD +0.02%. The loonie continues to take its cue from a floundering greenback, last week it managed to print a 7-month high. It not fundamental data rather the demise of the greenback vs. its major trading partners that has been deciding the fate of the loonie of late. The recent advance has been swift and violent. The higher yielding currencies are back in vogue, with some commodities making them even more enticing. The longer term fundamentals certainly support a much stronger CAD, but perhaps global fear that the US will be lose its AAA rating has investors selling all US denominated asset classes. For the time being, the trend is your friend, look to own CAD on any USD rallies.

The AUD advanced vs. the US currency as ‘gold’, the countries 3rd most-valuable export, climbed to the highest level in over 2-months. The yellow metal has advanced 8% this month. So far, month end requirements and carry trades have dragged the currency higher. For now, investors remain happy to buy some AUD on pull backs (0.7800).

Crude is lower in the O/N session ($60.92 down -75c). With the ‘mighty greenback’ under constant pressure, commodity prices remain elevated by default. It’s no surprise that oil remains trading north of $60 a barrel despite demand destruction alive and kicking. The Fed last week said that economic recovery may ‘fail to take root’ in the US any time soon. In last week’s Fed minutes, they stated that they continue to see’ significant downside risks’. The Global demand scenario has not warranted such an aggressive run up, demand destruction remains robust. Despite all this, last week’s EIA report showed that US inventories declined more than forecasted. Stocks dropped -2.11m barrels to +368.5m last week vs. an anticipated decline of -0.4k, w/w. Even more eye popping (just ahead of US memorial holiday which is the bench-mark for the beginning of the US driving season), gas supplies plunged -4.34m barrels to +204m-this decline was 3-times more than expected! Refineries are operating at +81.8% of capacity, which is down -1.9%, w/w and is the lowest utilization rate in a month and a half. One can conclude that refineries are nervous about increasing production as global demand remains weak. The 4-week monthly demand is averaging at +18.3m barrels a day, that’s down 8% y/y. OPEC, is unlikely to reduce output at this weeks meeting in Vienna. If anything, these elevated prices will likely encourage some members to increase production once again! With the greenback under continued pressure Gold rose to its highest level in 2-months on Friday as the currency value boosted the purchase of the yellow metal as an alternative investment ($953). Some technical analysts are predicting that the commodity could breach its all time highs sooner rather than later!

The Nikkei closed 9,347 up +121. The DAX index in Europe was at 4,860 down -59; the FTSE (UK) currently is 4,365 up +19 (holiday). The early call for the open of key US indices is lower (holiday). The 10-year Treasury backed up 11bp on Friday (3.45%) and is little changed in the O/N session (US national holiday). This week’s $101b issue by the US Treasury (2’s-$40b, 5’s-$35b and 7’s-$26b) will be the main focus of attention as the US government resumes debt sales after a 2-week hiatus. Investors fear that the US will lose its AAA credit weighting is also pressurizing FI prices.

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