The dollar sees red!

Technically nothing has changed for the USD. Still not loved, not wanted, no matter how much sugar you put on it! The Euro finance ministers meet later this morning and expect the EUR’s strength to be discussed. Remember they do not like ‘excessive volatility in exchange rates and disorderly movements’. Again we have another flurry of earnings to contend with this week. It’s like a reality show, can you believe it? or how much is made up? It’s them vs. the Fed. Is Bernanke now behind the curve? Does he need to hike rates soon?

The US$ is weaker in the O/N trading session. Currently it is lower against 13 of the 16 most actively traded currencies in another ‘whippy’ trading range.

There was mixed US data on Friday. Firstly, industrial production surprised to the upside last month (+0.7% vs. +0.2%), supported by strength in the auto industry. The 3rd Q growth lies at +1.3%, q/q, the first increase since the last Q in 2007! Analysts believe it will have a net positive effect on GDP growth as inventories start to rebuild. Interestingly, if we exclude the auto portion, production grew +0.4% or +0.2% q/q. Of course the danger remains that this headline print may be another blip on the radar as the auto industry activity winds down because of the ending of the cash-for-clunkers stimulus program the previous month. One should not discount the inventory levels as they remain high and have been the scourge of this recession! It’s worth mentioning that since the ending of the incentive program in Aug., auto sales have plunged -34%. Digging deeper, ex-autos, manufacturing production advanced +0.5%, m/m, as electronics and mining continued to increase while a -0.7% decline in utilities provided an offset. Interestingly, Capacity utilization rose to +70.5%, the strongest level in 9-months! Secondly, the University of Michigan confidence numbers disappointed, they fell to 69.3 vs. 73.6, m/m, on the back of consumers remaining somewhat apprehensive about the strength of the US economic recovery. Measures of expectations for six months ahead (67.6 vs. 73.5) and current conditions (72.1 vs. 73.4) both fell. The consumer, the Fed’s go-to variable for economic recovery, remains uneasy about the unemployment situation, which will obviously curtail their spending pattern as we enter into the holiday season shopping period. Consumers expect an inflation rate of +2.8% over the next year, compared with +2.2% in the previous survey. Overall, consensus sees the whole situation as being rather anemic!

The USD$ is currently lower against the EUR +0.22%, CHF +0.40%, JPY +0.36% and higher against GBP -0.28%. The commodity currencies are stronger this morning, CAD +0.20% and AUD +0.74%. Canadian inflation remains well behaved. If one adjusts Fridays Canadian inflation numbers for seasonal variances, both headline and core inflation climbed a modest +0.1%, m/m vs. unadjusted gains in core-CPI of +0.3%. With the loonie on its way to parity, combined with high inventory levels, analysts expect the core-CPI to remain ‘well-behaved for some time’. This will surely keep Governor Carney and his policy makers on the sidelines until at least the 2nd Q of next year. The BOC expect both the core and headline CPI to return to their +2% target by 2nd Q of 2011. Do not be surprised to see a revision once again to their inflation forecasts this week after the MPR report. With the USD struggling and commodity prices remaining well supported, has option traders continuing to bet heavily that the CAD will reach parity by year end. Currently it stands at 68%. Dealers remain better sellers of USD on upticks.

The AUD managed to print new 14-month highs in the O/N session after RBA Stevens said that policy makers ‘cannot be too timid in raising its benchmark interest rate now that the threat of an economic crisis in the nation has passed’ (3.25%).A stronger business confidence print this year was one of the reasons why Governor Stevens at the RBA remains a firm hawk. I guess he now will show rapid normalization of interest rates. What about AUD at parity? (0.9216)

Crude is higher in the O/N session ($78.86 up +33cc). Crude has climbed nearly 10% over the last 7-trading sessions, on optimism that economic expansion will accelerate in the US. On Friday, the commodity managed to record its highest level in over a year once breaking resistance at $77 a barrel. Year-to-date the black-stuff prices have advanced +76%! Technically, prices have been aggressively mobile on ‘speculation’, which will lead to a ‘tightening of the supply demand balance’ going forward. Last week’s EIA report showed that inventory levels for gas unexpectedly declined as refineries idled units for maintenance. Stocks plummeted -5.23m barrels w/w, and the largest drop in over a year. Consensus expected a +1.13m barrel weekly increase. With refineries operating at 80.9% of capacity, the lowest level in 6-months, gas output declined 10%, the most in 13-months. To put that in prospective, refineries have reduced their output by -964k barrels a day to +8.45m! The decline has left inventories at +209.2m barrels. On the flip side, inventories of crude rose + 334k barrels to +337.8m vs. an estimated weekly increase of +1m barrels. Overall, the report remains bullish for products. Weekly fuel imports plummeted -13% to +2.53m barrels a day. The recent plunge in the value of the greenback has convinced speculators to purchase crude and other commodities as a hedge against inflation. Let’s see if equities can support these lofty commodity prices!

After earlier session losses on Friday, due to speculators exiting some positions as the market may have rallied too quickly, the ‘yellow metal’ has rebounded on fears that the USD will extend its slump, thus boosting the appeal of gold and commodities as an alternative investment ($1,054).

The Nikkei closed at 10,236 down -21. The DAX index in Europe was at 5,814 up +71; the FTSE (UK) currently is 5,260 up +70. The early call for the open of key US indices is higher. The 10-year bonds eased 3bp on Friday (3.44%) and are little changed in the O/N session. Despite treasuries rallying, the FI market fell for a 2nd-consecutive week on manufacturing and industrial production providing stronger evidence of an economic recovery. Positive data is curtailing the demand for higher-returning assets amid subdued inflation. The long end of the yield curve is leading the decline and 2’s/10’s have managed to widen to 247. Analysts believe that there is good technical support at 3.50% the first time around. However, looking at the big picture, Treasury buybacks are almost over. MBS buybacks have about $250b to go. The US Treasury still has to raise $1.8t per year (more pressure on the curve). Despite the USD encroaching on a 14-month low, analysts foresee 4% 10-yr notes before the year-end and 4.5% by middle of next year!

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