Jeddah a bust?

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 after the Jeddah oil summit.

The greenback remains in troubled waters with very little to support it in the short term. Again today we have no North American data to provide guidance. The market will surely take its cue from commodities and capital markets perception of the Oil summit that was hosted by the Saudis in Jeddah this past weekend. Deeper financial write offs continues to hurt global and US equities, while analysts fear of a rapid slow down in the 2nd half of the year will keep on hurting consumer confidence. The highlight of this week will be the FOMC meeting. The market expects that Bernanke and Co. will stand pat and hold borrowing costs steady at 2.00%, but, accompany this with a hawkish statement that should provide some support for the currency.

This morning German business confidence fell to its lowest level in more than two years (102.3 vs. 103.5, m/m) as record oil prices and the prospect of higher interest rates by the ECB (4.00%) has dampened the outlook for growth in Euro-land. Rising prices are eroding spending power and disposable incomes, while a stronger EUR hurts exports. The greenback has gained some ground on the back of this data.

The US $ currently is higher against the EUR -0.65%, GBP -0.42%, CHF -0.81% and JPY -0.59%. The commodity currencies are mixed this morning, CAD +0.07% and AUD -0.15%. The loonie continues its course towards parity after stronger than anticipated data last week, convincing some traders that the problem of accelerating inflation will prevent the BOC from easing borrowing costs any time soon (3.00%). BOC governor Carney had strong words for the market; he said that policy makers will not be ‘complacent’ even if it means surprising investors like he did earlier in the month, when he received a lot of flak for little transparency. He has switched to inflation from growth, similar rhetoric to that of other CBankers. With commodity prices and the landmark Supreme Court decision for BCE on Friday (where Canada’s top judges gave approval for BCE to go private in a $52b deal), one can expect the loonie to outperform most of its major trading partners this morning (as long as commodity prices remain robust). The AUD$ remains little changed O/N (0.9526), traders continue to speculate that the RBA will maintain their interest rate advantage (7.25%) over the US as the Fed is expected to delay hiking borrowing costs (2.00%) this week.

Crude is higher O/N ($136.92 up +106c). Crude oil is expected to come under pressure this week because of reduced US fuel consumption and signs that crude supplies will increase after this weekend meeting in Jeddah. Saudi Arabia has suggested that it may increase production beyond the +200k barrel a day increase already planned if the markets require it. The Saudi Oil Minister seeks ‘reasonable’ prices, but, OPEC’s president believes that the Saudis solution is ‘illogical’, as refineries do not need more crude (the world is awash with the black gold). President Khelil blames record prices on speculative investors, the subprime credit crisis and geopolitical concerns (Nigeria, Iran etc) rather than a shortage of supply. OPEC is divided on the problem; Khelil himself does not anticipate prices easing any time soon. With the greenback remaining under pressure, one can expect investors buying commodities to hedge against a weakening currency. Last weeks EIA report showed that inventories declined less than forecasted, also has weighed on crude oil prices. 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. Fuel consumption has averaged +20.4m barrels a day over the past month, down -1.3%, y/y. Some analysts believe that the ‘bull’ run may be over and expect prices to correct themselves over the next few months. Gold climbed to new weekly high on Friday as traders speculated that higher costs of raw materials will boost demand for the yellow metal as a hedge against inflation ($905). Some technical analysts see strong resistance at these levels and expect renewed profit taking to take place ahead of the FOMC decision on Wednesday.

The Nikkei closed at 13,857 down -85. The DAX index in Europe was at 6,592 up +14; the FTSE (UK) currently is 5,619 down -1. The early call for the open of key US indices is higher. Yields of the US 10-year bond eased 6bp on Friday (4.14%) and are little changed O/N. Treasury prices have rallied as traders pared bets that Bernanke and Co. would raise O/N borrowing costs and keep them on hold (2.00%) amid signs that an economic slowdown will deepen in the 2nd half of the year. The curve has steepened again (132) as investors favor short term maturities.

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