Trichet to pressurize the US dollar even further!

It’s only natural to see the market book some deserved profits ahead of this morning’s Cbanks rate announcements and tomorrows North American employment reports. It’s expected that the ECB, BOE and BOC will announce ‘no’ rate changes. But, Trichet has always kept Capital markets on their toes, his policy members continue to be in some disagreement. Most likely we should anticipate his communiqué to be rather technical in nature, elaborating on how the bond-buy back plan looks like. He is expected to mention how the weakening of the Maastricht stability pact will be a concern for them, but the ECB will declare a ‘vigilant and strong stance’ to tackle this. This should give the green light to buy more EUR!

The US$ is weaker in the O/N trading session. Currently it is lower against 14 of the 16 most actively traded currencies in a ‘subdued’ trading range.

Yesterday’s US ADP private payrolls showed some easing, however it continues to reveal substantial losses. There were -532k jobs lost in May, which was in line with consensus estimates of -525k. April’s jobs losses were revised down another -54k to -545k. That’s a whopping -1m lost jobs over the past 2-months. Analysts are now calling for NFP to come in around -510k given the stable reading in the employment ISM sub-index (see below). Digging deeper, the breakdown of the report shows broad-based weakness across the main sectors. Manufacturing payrolls reported losses of -149k vs. -157k m/m. Goods-producing payrolls were down by -267k vs. -268k and service-producing payrolls were down by -265k from -277k.

Other US data did not fair as well. Factory orders were much weaker than expected (+0.7% vs. +0.9%). Thank God for durable good orders! It alone dragged the headline onto the plus side. Analysts quiet rightly point out that if we combined the less than expected headline with the aggressively revised downward Mar. figures (-1.9% vs. -0.9%) has cumulated into a much weaker report. Last months revisions expose the vulnerability of the ‘green shoot’ economics theory. For instance, Mar.’s ex-transportation numbers were revised from -0.9% to -2.1%. Capital goods order had registered a -1.6% drop and is now reporting a -2.6% decline. These are huge misses! Do we now have to question the quality of the Government data? Fundamental trading is hard enough in these volatile times. The service-ISM came in less than expected (+44 vs. +45). At first glance, one notices that the improved pace of contraction was maintained last month. However it’s not in step with the manufacturing-ISM prints on two fronts. Firstly, the headline was a tad weaker and secondly, new orders in the service sector actually deteriorated m/m and are expected to weigh heavily on next month’s data. New export orders drove the drop in the overall export orders figure. Employment sentiments improved, but are still sharply contracting while prices paid continue to fall but at a significantly slower pace than the two previous months.

There are very little positives coming from Bernanke of late. Yesterday during his testimony he said the rise in FI yields seems to reflect growing concern over the large deficit. He is sticking to his guns and thinks the US economy will bottom out and rebound later this year, but, expects recovery to be slow with growth rates remaining below potential for a while. He anticipates the unemployment rate to rise well into next year and for the labor market to remain weak for some time. And to cap it all off, he stressed the need for fiscal balance saying ‘unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy economic growth’.

The USD$ currently is lower against the EUR +0.55%, GBP +0.38%, CHF +0.56% and higher against JPY -0.26%. The commodity currencies are stronger this morning, CAD +0.41% and AUD +1.07%. Is it the demise of the greenback or global green shoot fundamentals that drove the loonie to 8-month highs earlier in the week? Yesterday’s quick 2-cent depreciation of the loonie vs. its largest trading partner has given some investors ample opportunity to exit offside trades. Global equities and commodity prices have dictated the flight of the loonie over the last 24-hours. This morning’s BOC rate announcement is expected to be a non-event, however, Governor Carney will most likely comment on currency movements. With the USD maintaining its weakening bias has investors selling any upticks. The Canadian economy, like all G7 economies, on a technical basis is officially in recession. With the USD struggling, parity talk is back on the table. Because of the country’s commodity base this will happen, but, not until global growth reappears. Longer term speculators 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.

The AUD remains on course to overtake its 8-month highs printed recently after RBA governor Stevens indicated that policy makers must be cautious about lowering borrowing costs too far. At this week’s monetary policy meeting they kept rates on hold (3.00%) and capital markets interpreted the following communiqué as an opportunity to ease again as the Australian economy officially entered its 1st recession in 19-years. Traders continue to look favorable on the currency because of its yield advantage and its association with commodities. In the short term look for better buying on pullbacks as the currency marches towards 0.8500.

Crude is higher in the O/N session ($67.15 up+100c). Crude continues to trade heavy after an unexpected weekly EIA report combined with a stronger greenback warrants selling of the black stuff. Weekly inventories climbed +2.9m barrels to +366m vs. an expected loss of -1.6m. Stocks gained as imports and refineries increased their operating rates to the highest level in 6-months. They are operating at 86.3% of capacity, up +1.2%, w/w. With global equities under pressure, investors sought refuge in the ailing greenback and by default weakened commodity prices. Record high inventories and ongoing demand destruction does not justify this elevated prices of late. Perhaps now the market can get back to using fundamentals rather than relying on investor ‘green shoot’ economics! The 4-week moving average for US consumption is +18.2m barrels a day, that’s down -7.7%, y/y. Another variable that has also put the commodity under pressure was reports this week showed that both OPEC and Russia had raised production last month. OPEC’s output climbed +1.5% to an average +28.15m barrels a day while Russia’s output advanced a 3rd straight month (+0.9%). Many believe that oil prices have climbed too quickly. The rapid gain has been based on stronger equities and the weak dollar. Yesterday was the 1st day in four that saw equities and the EUR both retrace. Yesterday, Gold declined the most in almost 2-months as a resurging greenback curbed demand for the yellow metal as an alternative investment ($971). In the O/N session the USD has pared some of yesterday’s gains, by default most commodity prices have risen.

The Nikkei closed 9,668 down -73. The DAX index in Europe was at 5,091 up +38; the FTSE (UK) currently is 4,391 up +8. The early call for the open of key US indices is higher. The 10-year Treasury’s eased 2bp yesterday (3.57%) and are little changed in the O/N session. Bernankes comments on the US’s large budget deficits potentially threatening future financial stability combined with the Fed’s buy –backs yesterday ($7.5b 7-yrs) helped to keep the FI asset class better bid ahead of NFP numbers this Friday. The Fed’s buy-back is intended to keep long term yield lower. Do not be surprised to see some dealers selling the longer end of the US curve on further rallies ahead of next week’s government auctions.

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