‘We’re caught in a trap’!

The USD$ is weaker in the O/N trading session. Currently it is lower against 13 of the 16 most actively traded currencies in a ‘whippy’ trading range, as commodity prices run riot.

The market did not take long to react to the Fed sitting ‘on the fence’ stance. Bernanke is ‘caught in a trap’; inflation vs. growth or stagflation, they are walking a fine line. On one hand they are relying on the consumer to return as the prodigal son, but, commodities and the credit debacle are doing it’s very best to de-rail the situation. The greenback has reacted negatively with Bernankes ‘not’ so hawkish communiqué yesterday. The fear of credit losses ballooning has global equity markets seeing red. Investors have fled towards the safety of the FI asset class as the fear of a rate hike occurring in the US has reduced dramatically.

Yesterday, the US GDP expanded at an annual rate of 1% in the 1st Q, capping the weakest six months of growth in half a dozen years. Analysts continue to forecast a sluggish second half. Cash from tax rebates may prevent consumer spending from softening much this Q. But, we can surely rely on the US housing debacle, surging fuel prices, credit restraints and a weaker job market to consistently hurt growth for the remainder of the year. Other data showed that the help wanted index dropped to the lowest level since the survey began (1951), while unemployment claims remained unchanged at 384k w/w. surprisingly, US sales of pre-owned homes rose last month (+2%-4.99m units) from the lowest level in a decade as a slide in prices enticed buyers back to the market. But, supply or inventories remain twice as high to that of a stable market. It seems we still have a ways to go before hitting the bottom despite analysts and other agencies trying to talk it up.

The US $ currently is lower against the EUR +0.07%, CHF +0.48%, JPY +0.57 and higher against GBP -0.13%. The commodity currencies are stronger this morning, CAD +0.52 and AUD +0.69%. The loonie had remained in its tight trading range until this morning’s session despite the Fed holding rates steady and oil prices clawing back all the weeks’ losses and more. With the Fed citing somewhat diminished risk to growth this week is supposed to be a plus for the Canadian economy (over 70% of Canadian exports head south of the border). The change in US monetary policy will reduce pressure on the BOC to cut its borrowing cost after standing pat earlier in the month. With CBankers grappling with inflation concerns caused by commodity prices should provide further support for the CAD$. Currently, technical support remains intact close to 1.0050-75 levels, but corporate Canada remains better buyers of their own currency on USD$ advances. Some investors continue to seek a ‘parity print’ in the short term. At this level large profit loonie selling orders remain. Canadian fundamentals are not that ‘hot’ either. Expect commodity prices to dictate short term movements for now. The AUD$ remains better bid (0.9597) as traders continue to speculate a ‘no’ rate movement by the Fed in the short term. Record commodity prices will have traders buying on pull backs, but expect the currency to falter vs. JPY on the cross as investors pare ‘carry’ positions.

Crude is higher O/N ($141.22 up +118c). Easy come, easy go. Crude prices clawed back all of this weeks losses and more as the USD$ buckled under pressure vs. most of its major trading partners. The situation was not made any easier by Libya threatening to cut production and OPEC’s President predicting that crude prices could hit $170 a barrel by summers end. Libya is contemplating curbing production as they believe that the world is over supplied. Interesting statement when other OPEC members are ready to step up and increase production (UAE and the Saudis). President Khelil from OPEC believes that if the ECB hiked rates (similar to a Fed ease) the net result would be a surge in oil prices. With the Fed remaining on hold and causing the greenback to weaken, speculators were quick to jump back into the market as they are afraid of missing profit opportunities. This weeks EIA report surprised the market. The data showed that inventories increased for the first time in nearly two months. Stocks rose +803k barrels to 301.8m barrels last week. The market had expected a routinely decline of around -1.1m barrels. The UAE have sided with the Saudis and said that they would boost supplies to the market if needed. Currently they pump +2.65m barrels per day, but, insist that they have spare capacity. Other OPEC members believe that the market is well supplied for now, and it’s not necessarily a supply issue but a refinery process concern. Capital markets will continue to bid up commodity prices as they have little faith in the Fed to hike borrowing cost any time soon. Expect geo-political concerns in Iran, Nigeria and Libya to continue to influence the market in the short term. Gold rallied aggressively yesterday ($924-the largest one day jump in nearly half a year) as capital markets begin to loose faith in the Fed hiking rates (2.00%). This has put the USD$ under further pressure and by default boosted the ‘yellow’ metal as an alternative investment.

The Nikkei closed at 13,544 down -277. The DAX index in Europe was at 6,362 down -96; the FTSE (UK) currently is 5,493 down -24. The early call for the open of key US indices is lower. Yields of the US 10-year bond eased 10bp yesterday (4.03%) and are little changed O/N. Treasury prices advanced aggressively as investors speculate that credit market losses will ‘balloon’ even further (Citigroup and Co.) and prevent Bernanke an his policy makers from hiking borrowing cost at all this year. Not unlike the King’s Suspicious Minds -‘We’re caught in a trap’.

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