Both the US dollar and GM are broke!

GM will be filing for bankruptcy protection this morning and supposedly emerge with majority ownership by taxpayers and liabilities reduced by more than 50%. The ‘new’ GM is to get another $30b in aid to help it on its way. Both the Canadian and US governments become reluctant owners, it was only last year that both administrations along with company executatives said it would not require protection! Now let’s see what the trickle down job losses will do to unemployment claims over the coming weeks. Of course this week’s highlight will be the US unemployment rate breaking that 9% headline.

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

Even with US GDP slowing down less than expected in the 1st Q, coupled with an uptick in consumer confidence, has done little to aid a currency that literally has fallen out of bed over the last month. Last night was no exception, further liquidation of US assets violently occurred after China’s manufacturing data rose for a 3rd-month, with the official PMI at a seasonally adjusted 53.1 in May after registering 53.5 in Apr. Global investor confidence combined with renewed faith in the financial industry is pushing commodities higher and by default squeezing the once mighty dollar. With Geithner in Beijing to reassure China its holdings of US debt are safe even as US government borrowing soars, the dollar can be expected to experience further losses as the worldly investor turns to other regions!

The USD$ currently is lower against the EUR +0.51%, GBP +1.35%, CHF +0.39% and JPY +0.83%. The commodity currencies are stronger this morning, CAD +1.01% and AUD +1.42%. The loonie continued its strengthening bias on Friday, albeit too quickly, too soon and is now appearing on the BOC’s radar. The strengthening bias is on the back of commodities, especially crude touching 8-month high’s and enticing investors to invest in higher-yielding assets. With the USD struggling, parity talk is back on the table. Some are buying into the theory that with Canada being a small, open economy and sensitive to trade flows, if and when the global economy is doing better then Canada is expected to reap the benefits very quickly. There is no disputing this theory, it’s expected over time that the loonie will trade at a premium to its southern neighbor, but, at such an early stage in the game, the move has been too aggressive and too quick. The month of May was good for the higher yielding commodity currencies (AUD, NZD and CAD). There is nothing fundamentally supporting the currency, even the Canadian finance minister last week said that the proposed national deficit will balloon to $50b from the $34b announced in Jan. The longer term fundamentals certainly support a much stronger CAD, however investors have plenty of time to add to their positions at more favorable levels.

Australian retail sales advanced for a 2nd-month (+0.3%), new home sales gained for a 4th-month (+0.5%) and manufacturing shrank at a slower pace (+37.5), providing further evidence that the nation’s recession may be easing. Couple all that with China’s manufacturing data expanding for the 3rd-consecutaive month has pushed the AUD to 8-month highs as investor’s seek higher-yielding assets. With the country’s fundamentals remaining strong and with commodities nudging forward, one should expect buying on pull backs ((0.8120).

Crude is higher in the O/N session ($68.10 up +179c). Crude oil officially capped its biggest monthly gain this May in over 10-years, as the greenback remains under pressure against its G7 trading partners. With consumer confidence strengthening, this rally is based more on hope than fundamentals! Last week’s US GDP headline (-5.7%) for the 1st Q capped the worst 6-month performance in 50-years. For the 2nd time this year OPEC members left production quotas unchanged last week, no surprise as they are relying on demand to increase by year-end. They are responsible for 40% of the worlds supply and agreed to keep production quotas at the 24.8b level, but tread a fine line as the world currently has ample supply and the organization does not want to send out the wrong signal to struggling economies. To date members have only completed 77% of the previous cut implemented last Sept. Another variable lending support last week was that the market witnessed EIA inventories declining -5.41m barrels to +363.1m. It was an eye popping drop and the biggest in 9-months (hurricane season). Technical analysts say that with oil rising above its 200-day moving average for the 1st- time in 8-months is a signal that prices will rally even further. If OPEC ever fully completes the cut-backs then perhaps the black stuff will manage to achieve their desired target of $75 year end. Some analysts believe that with record 19-year high inventory levels combined with the contraction in activity in advanced economies, the market should expect some sort of pull back from these levels. Of course the ‘dismal dollar’ will not aid their theory. A spluttering USD has given new life to the yellow metal as it marches towards its record highs. One should expect speculators and investors to want to own the commodity on any pull back as a hedge for the greenbacks slide ($988).

The Nikkei closed 9,677 up +155. The DAX index in Europe was at 5,100 up +160; the FTSE (UK) currently is 4,488 up +71. The early call for the open of key US indices is higher. The 10-year Treasury’s eased 14bp on Friday (3.45%) and backed up 8bp in the O/N session (3.53%). Treasuries ended last week on a high note after the market witnessed the strongest 2-day rally in nearly 6-months. 2’s, 5’s and 7-year government auctions totaling $101b was well received especially foreign demand. The FI curve also received support from a hefty month end index extension. Will this weeks buy-backs keep treasuries better bid or financing requirements force yields to back up again? So far in the O/N session, equities have been capable to push yields higher.

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