Will the G8 perform?

The USD$ is stronger in the O/N trading session. Currently it is higher against 14 of the 16 most actively traded currencies in a ‘whippy’ trading range head of the G8 meeting.

With the formalities of the US long weekend over, investors will now focus on this weeks G8 meeting in Hokkaido, Japan. Hot topics like ‘becoming an ECO-friendly world’ mixed with global growth concerns and a dash of both inflation and USD$ strength, should provide the basic menu with very little very little imagination. This figure head meeting or photo op needs to be expanded to include other more formidable world economies to strategies and coordinate a cohesive plan for ‘any’ success. A political junket of world leaders whose grip and influence of ‘their own’ domestic power weakens as the days go by (Japan US and UK for starters). Capital markets will wait for press conferences to take the lead, otherwise Bernanke and Paulson once again will have center stage as they testify on Thursday in front of the House of Representatives on Financial services.

Last week the ECB hiked rates by 25bp to 4.25% as expected. But, their tone was less hawkish than anticipated; with Trichet stating that the ECB has currently no bias (will help the Irish and the Spanish as their economies are going back wards). This week the UK steps forward, data of late depicts a quickly slumping economy, with June’s PMI pointing to zero-growth in the near term. With such an outlook for growth, stable rates seem to be a done deal at this weeks MPC meeting on Thursday (5.00%). Expect policy makers to ignore inflation for the time being.

The US $ currently is higher against the EUR -0.35%, GBP -0.55%, JPY -0.71% and CHF -0.18%. The commodity currencies are weaker this morning, CAD -0.18% and AUD -0.55%. Most traders twiddled their thumbs as their southern neighbors celebrated Independence Day. The Canadian Ivey PMI showed a pick up in activity last month on Friday (NOT-seasonally adjusted), thus the number tends to have little impact on the market. But, digging deeper, the price sub-index now sits at its highest level since inception. Conclusion, business to business passing on of higher prices is alive, while businesses to consumer pass on remains slower to date (look at CPI data). The employment sub-index remains in expansion territory (could provide support for employment data this Friday). Also, inventories jumped, which probably suggests a potential stockpiling problem given uncertainty over the economic outlook. The loonie fell on Friday, and is looking to break out of it recent tight trading range. The CAD$ continues to under-perform on a cross related basis as commodity prices ease, combined with market belief that Governor Carney will hold rates steady for the remainder of the year. The market expects the CAD$ will remain guilty by ‘proximity and association’ with its southern neighbor. Last week RBA governor Stevens left borrowing costs on hold at 7.25%. This week has started with AUD$ under pressure as traders speculate that interest rates have peaked and hence yield advantage for the currency. Job-vacancy data retreated the most in two years. Maybe, the party is coming to an end as the AUD$ backs off from a 25 year high (0.9575).

Crude is lower O/N ($143.33 down -196c). CFTC rumors of changing commodity margin requirements have kept crude very much in ‘check’. Geo-political concerns and last weeks stock inventory data had kept oil prices better bid on pull backs. The EIA report revealed an unexpected fall in stocks. Inventories fell -1.98m barrels to 299.8m, w/w, vs. an expected up-tick of +500k barrels. But, gas stocks rose +2.1m barrels to 210.9m and supplies of distillate fuel (including heating oil and diesel) increased +1.3m barrels to 120.7m. The report has provided support for crude prices and bearish for refined products. Other variables continue to provide support for the ‘black gold’ prices. The IEA indicated this week that global supplies may not keep up with demand over the next 5-years. They believe that spare OPEC capacity will shrink in this time and keep the market ‘tight’. A Mideast conflict between Iran and Israel will continue to hamper the concerns of spare capacity (Iraq is currently OPEC’s second largest producer). Year to date, crude has climbed nearly 50% aided by a weaker greenback. Gold prices eased for a 3rd day in London ($922) as the USD$ gained ground vs. the EUR thus reducing the ‘yellow metals’ as an alternative investment.

The Nikkei closed at 13,360 up +122. The DAX index in Europe was at 6,296 up +24; the FTSE (UK) currently is 5,413 up +1. The early call for the open of key US indices is higher. Yields of the US 10-year bond eased 1bp O/N. (3.96%). Short end treasury prices have remained better bid steepening the curve (145) after NFP data last week fell for a 6th consecutive month, combined with US services unexpectedly contracting, heightening traders speculation that the Fed will be slow to hike rates (2.00%).

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