2009 a ‘Year of Hope’?

Traders and investors cannot wait to see the back of this historic year. For most, 2009 does not promise to be any better. Within one year we have managed to utter the words Recession, Deep Recession and the possibility of the ‘Great Depression II’. The speed of contraction is expected to accelerate in the 1st Q of the New Year and then may taper off. The consumers will and psyche will surely be tested once again!

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

The geopolitical situation is impeding a greenback advance, the currency continues to wilt against both the EUR and JPY and performing strongly by default against GBP. Actually any currency would be a star against Sterling at this moment in time. Yesterday, the Chartered Institute of Personal Development in the UK expects to see unemployment hit the +3m mark by the end of 2009, similar levels last seen in 1991. They expect the 1st Q to take the brunt of the hit as plummeting real estate prices and ‘rabid’ retail foreclosures persist. Early indications for US holiday sales are weaker than analysts expect, this will surely fuel retail closures as well. With US housing and manufacturing reports later this week expected to show that the economy is slipping further into recession, can only provide further support for the EUR in the short term.

The US$ currently is lower against the EUR +1.88%, GBP +0.80%, CHF +0.86% and JPY +0.54%. The commodity currencies are mixed this morning, CAD -0.63% and AUD +0.95%. Geopolitical concerns are pushing the USD lower across the board and providing support for oil and gold. The Loonie remains guilty by association and proximity to its largest trading partner south of its boarder. This is a deceptive trading week as liquidity and participation remains at an all year low due to the holiday season. With no data to support the currency for most of this shortened trading week, depending on how commodity prices behave, expect investors to remain on the side lines while dealers fulfill their necessary requirements. But so far, despite oil paring last week’s 11% loss, little strength can be found favoring the currency.

The AUD$ remains better bid on pull backs despite the tentative weakness of global equities questioning investors about holding higher yielding currencies. With gold climbing to an 11-week high has helped it cause. The ‘yellow metal’ advanced after Israel bombed Hamas in the Gaza Strip. Other data this week should provide further evidence that the US is slipping into a deeper recession, thus increasing pressure on the greenback (0.6938).

Crude is lower O/N ($39.38 down -64c). With tensions in the Middle East escalating, crude remains better bid on concerns that supply from the world’s largest producing region may be disrupted. Historically Hamas is backed by Iran and considered a terrorist organization by the US. Iran physically holds the 2nd largest oil reserves and any involvement by Iran will send the black-stuff prices much higher. Other factors continue to contribute to the commodity resurgence from last week’s decline. The overall malaise of the greenback is providing support, while China has publicly stated that they will supplement their ‘emergency’ oil reserves while prices remain close to these low levels. This stockpiling mentality will surely impede some of the ‘demand destruction’ that we have witnessed from this global economic meltdown. But, this shortened trading week and liquidity constraints is probably doing a disservice to the natural weakness of crude, prices are incorporating an insurance premium. OPEC’s cohesive support should provide further traction for commodities in this short term. According to the Saudi oil-minister, OPEC is ‘determined to bring stability to the oil market’ after prices tumbled from the summers high. But, consensus believes that the crude market is in danger of reaching the psychological $25 level sooner rather than later. Even non-OPEC member Russia is signaling that it too will trim production in the New Year. But so far sustainable traction will be difficult to achieve as global ‘negativity outweighs consumption’. Year-to-date oil is down 55%. Already OPEC is hinting that they may meet again next month to discuss further production cuts. It’s expected that that they will continue to reduce output as demand falls. The world is currently awash with the ‘black-stuff’. This deep recession has had a profound effect on global consumption and a first estimate of holiday retail sales does not look at all supportive. With the greenback under renewed pressure investors are happy to once again own the ‘yellow’ metal as an alternative investment, couple this with mounting tensions in the Middle East has gold better bid on pull backs ($870).

The Nikkei closed 8,859 up +112. The DAX index in Europe was at 4,794 up +89; the FTSE (UK) currently is 4,354 +34. The early call for the open of key US indices is higher. The 10-year Treasury yields eased 5bp yesterday (2.09%) despite a record of new issues last week. The short end of the Yield curve led the advance as investors sought the safety of US government debt amid escalating tensions in the Middle East. The shortened trading week continues to provide liquidity constraints and early estimates for US holiday retail sales are weaker than analysts thought. For now better buying on pull backs remain the order of the day.

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