A Christmas to remember and forget!!!

Stop the train I want to get off! Unprecedented trading ranges are been witnessed, not for the faint of heart. Illiquid and never ending CBanker announcements (BOF cut their lending rates O/N-cut what??) coupled with ‘unexpected’ disclosures here and there has investors suffering from whiplash trying to decipher theses currency markets. It’s the general trend that will make ones day and not the intraday moves, which provide all the noise.

The US$ is mixed in the O/N trading session. Currently it is higher against 9 of the 16 most actively traded currencies, in another ‘volatile’ trading range.

Yesterday, US initial jobless claims came in as expected at +554k, solidifying another week above +500k mark (6th week in a row), this will lead to another large decline for NFP in Dec. What is even bleaker, with the auto factories temporarily shutting down a +600k plus is very much on the cards and by default will cause a ‘ripple effect’. Continuing claims came in roughly as expected at 4,384,000 (the highest level in nearly 30years), this trend will very much push the unemployment rate towards that psychological 10% level. There is no end to the recession in sight; the US economy is likely to continue to fall hard. US leading indicators fell for the 5th time in the past 7- months for Nov. The gauge for the next 3 to 6-months fell -0.4%. It’s no wonder that the Fed was so aggressive this week in slashing rates and pledging unlimited purchases of securities. With US banks restricting credit, home equity and stock values plummeting and job losses mounting, underlying a deeper recession than initially perceived.

A bold move by Trichet and his policy makers yesterday forced the liquidation of EUR positions. They will cut the rate it charges institutions to deposit money with it overnight and lifted its emergency lending rate in an effort to pressurize banks into lending more to each other. In effect, they the have decided to widen the interest-rate corridor to 200bp between the marginal lending rate and the deposit facility from 100bp. All of these new changes will take effect at the end of next month. They intend to provide ‘unlimited liquidity at a fixed rate for as long as needed’. The objective is to free up capital for consumers and companies to tackle the recession.

The US$ currently is higher against the EUR -1.04% and CHF -1.15% and lower against GBP +0.25% and JPY +0.51%. The commodity currencies are mixed this morning, CAD -2.36% and AUD +0.43%. Yesterday the Canadian retail sales data was depressing. Again, this is this is historical, Oct. data when concerns about the global economy and financial markets began to intensify. Deeper discounting is likely in Nov. and Dec. The dollar value of sales fell -0.9%, while the price-adjusted volume of sales grew by only +0.1% in Oct. The difference lies in the fact that prices took a hit, particularly via lower prices for gas, vehicles, woman’s clothing. On a year-to-date basis, the volume of sales has grown by an average of only +0.1% each month. Analysts point out that the volume of sales is experiencing ‘zero’ growth for the 2nd half of this year. In this environment with oil prices under pressure, by default this commodity base currency should be underperforming vs. its southern partner. On a cross related basis the loonie is very much struggling. With liquidity issues, do not be surprised to see the currency retrace back towards the 1.3000 level in the short term. It’s not necessarily the genuine strength of the loonie but the demise of the greenback that had given the CAD$ its lift. Year-to-date the currency has shaved 17% off its value against its largest trading partner as a global recession reduces demand for commodities, which generate about 50% of the country’s export revenue.

The AUD$ stumbled as debt rating agencies sent bourses lower yesterday and convincing investors to pair pack their recent positions of ‘higher-yielding assets’. With commodity prices under pressure traders have been better sellers on rallies for the moment (0.6828).

Crude is little changed O/N ($35.93 down -35c). The market is bigger than OPEC and Russia. Crude continues its downward spiral as investors speculate that the drop in global demand because of the deepening recession will outpace OPEC supply cuts. The US Energy department provided no support when it announced yesterday that consumption will be lower next year because of the contraction. Analysts are quickly revising their target levels and many now see the black stuff retreating towards $25 a barrel. The market technically has no confidence in OPEC’s ability to manipulate prices. OPEC has done little to elevate prices that have dropped 75% from their record highs during the summer. This deep recession has had a profound effect on global consumption. Since the last imposed cut in Oct. of -1.5b, the rate of compliance by members has been more than 85%. The weekly EIA inventories report climbing for an 11th consecutive week has not helped to boost prices. Inventories rose +525k barrels to 321.3m last week. It is believed that inventories have gained because the oil market is in ‘contango’ (crude for future delivery is more expensive than near-month), this has let to increased stockpiles and greater demand for oil tankers to store the inventory. Gold prices remain under pressure as investors are comfortable in taking profit after this weeks rally due to the weakening of the greenback ($839).

The Nikkei closed 8,588 down -88. The DAX index in Europe was at 4,688 down -68; the FTSE (UK) currently is 4,274 down -56. The early call for the open of key US indices is lower. The 10-year Treasury yields eased another 5bp yesterday (2.12%) and are little changed in the O/N session. Treasuries prices rose, pushing yields to record lows after the Fed slashed funding costs to a range of ‘zero to +0.25%’ earlier this week and enforced that they ‘will do whatever is necessary to ease the longest recession in 25-years. Investors are concerned that the Fed’s actions are added proof that this ‘ongoing’ credit crisis is far from over, this has convinced investors to seek the safety of government debt. The demand for the safety of principal continues to outweigh prospects for record debt sales by the US Treasury.

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