A herculean US$?

The summer doldrums has become a misnomer or aberration. With most of Europe historically on summer hiatus one tends to experience a pull back in both volume and volatility. These of course are unprecedented times for capital market participants. The ‘big dollar’ is experiencing new found love amongst the masses and supported indirectly by Cbanks economic outlook.

The US$ is stronger in the O/N trading session. Currently it is higher against 15 of the 16 most actively traded currencies in a ‘wild’ trading range.

Yesterday we had the European ‘big boys’ step up to the plate and deliver their rate announcements. Both decisions went according to plan. Trichet’s communiqué presented only ‘subtle’ changes from the July statement. It was a moderate or dare I say ‘dovish’ in tone, while the rest of the statement kept highlighting that inflation concerns remain the main risk. Similar to other Cbanks of late they acknowledged weaker activity, but one gets the feeling that do not seem overly concerned about the risks of a ‘modest recession’. They did not signal a rate hike for Sept. as there is no mention of ‘heightened vigilance’. Trichet sounded somewhat upbeat that that the effects of the credit crunch are limited so far. Market consensus believes that the July rate hike was just an ‘insurance’ move and it will not be followed by other hikes (4.25%) in the foreseeable future. The ECB’s has remained cagy on the development of growth, pointing out that the new outlook will be presented next month. Like a good politician, they are borrowing time before admitting that risks of a ‘technical recession’ have increased. In hindsight, the communiqué was as neutral as the Fed’s stance earlier in the week. Expect futures traders to continue to price out the risks of future hikes this year. Perhaps we should be thinking about rate cuts once the inflation bias is dropped. It’s food for thought.

Governor King, who is in a tenuous position, as expected kept O/N rates unchanged (5.00%) as inflation accelerates and the economy hovers on the brink of a recession. Of all the Cbanks, they hands are truly handcuffed. They face a horrible growth outlook coupled with a potential disastrous inflation situation. King predicts inflation will soon quicken to more than double the 2% desired upper band target. Over the next two weeks Capital Markets will get to see the BOE economic projections followed by the MPC minutes (last vote count was split 3-ways amongst 9 voters). Perhaps, it’s time that unpopular PM Brown appears with some incentives (specific Tax cuts) to boost his ailing popularity and provide some relief for consumer confidence. Expect CBL to remain under pressure for the time being.

The weekly US unemployment claims yesterday is difficult to decipher. The Labor Dept. said that claims from the 2008 Emergency Unemployment Compensation (EUC) program continued to boost initial claims, but astonishingly they still are unable to ‘quantify the impact’. Last week they implied that that ‘claims’ would be higher than anticipated for a couple of months due to the trickle down of the EUC effect. But, it is interesting to note that yesterday’s numbers were the highest in 6-years (+455 vs. +422).

Temporary relief was seen in US Pending Home Sales data, which posted an unexpected rise of +5.3% vs. an anticipated -1.0% decline m/m. Lower house prices seem to be attracting buyers into the market once again as more consumers signed contracts to purchase previously owned homes. Falling property values boosted by ever increasing foreclosure rate have helped to stabilize the market by making houses more attractive. But, with repossessions continuing to grow due to stricter lending practices will only make it harder for owners to refinance their mortgages in the medium term.

The US$ currently is higher against the EUR -1.04%, GBP -0.84%, CHF -1.00% and JPY -0.26%. The commodity currencies are weaker this morning, CAD -0.18% and AUD -1.53%. Yesterday’s Canadian Building permits fell more than anticipated -5.3% vs. -1.0%. Combining this with the perception of a weakening Canadian economy and a stronger US$, has renewed selling interest of the loonie. Other data this week showed that that Canadian businesses and government spending increased at a slower pace m/m. Despite commodities finding some traction yesterday, the loonie continues to trade under pressure due to its strong correlation with commodity prices. This morning we have Canadian unemployment data, not much of a deviation from +5k to -5k is expected. Any seasonal anomalies will only add further pressure. The market does expect strong resistance at 1.0600 prints from both corporate and option protection trades. The Canadian FI market believe the BOC will have room to ease again before year end amid concerns that widening credit-market losses will weigh on global growth and prompt governor Carney to reduce borrowing costs (3.00%). One can expect the CAD$ to remain under pressure in the short term, as investors continue to be better buyers on pull backs.

The AUD$ has fallen out of bed in the O/N session (0.8934). It continued its downward spiral in the overnight session as traders increased their bets that the RBA will reduce borrowing costs from a 12-year high (7.25%). This week Governor Stevens said there was ‘scope to move towards a less restrictive stance of monetary policy’. Better sellers remain on rallies.

Crude is lower O/N ($118.26 down -176c). Crude prices remained better bid yesterday as Turkey indicated that the pipeline carrying crude to the Mediterranean from Azerbaijan could remain closed for two weeks following an explosion earlier this week. A Kurdish separatist group has laid claim. The pipeline is capable of transporting +1m barrels of crude a day. This is the first such attack on the facility, and will only heighten geo-political concerns as it’s a long pipeline that needs to be policed. It’s interesting to note that yesterday’s unexpected jump in weekly inventory levels as reported by the EIA have not produced a stronger follow through selling signal. Most likely this highlights the underlying bid to a market that has fallen over 20% in a few weeks. This week crude stocks rose +1.61m barrels to 296.9m, w/w, vs. an anticipated fall of -200k barrels. Other variable this week have contributed to the stronger underlying bid. The US state department announced that a group of world powers would pursue further ‘punitive’ sanctions against Iran. It was a foregone conclusion that Iran would snub UN demands. They do not want to be dictated to in respect to their own nuclear uranium enrichment program. This remains a stalling tactic on their behalf, it has been reported that 2 US Aircraft carriers are making their way to the Gulf after completing specific secretive exercises. With the Olympics about to begin, it would not be savvy to force any issues at the time being (would not take that bet). Global growth issues continue to trump all other concerns. Economic data so far this week has pointed to a global slowdown, with Cbanks balancing growth with heightened inflation concerns. Demand numbers remain weak in the US due to elevated gas prices. Some investors are speculating that high prices and slower US economic growth will further reduce demand in the US in the medium term (the world’s largest consumer) and hence oil prices. Gold eased during yesterday’s session ($870) as the greenback rebounded after what the market perceived dovish sentiments by Trichet has eroded the appeal of the ‘yellow metal’ as an alternative investment.

The Nikkei closed at 13,168 up +43. The DAX index in Europe was at 6,553 up +10; the FTSE (UK) currently is 5,472 down -5. The early call for the open of key US indices is lower. Yields of the US 10-year eased 11bp yesterday (3.94%) and are little changed O/N. Treasuries prices rallied after an unexpected rise in initial jobless claims w/w, to a 6-year high. It heightened investors concerns that the US economy will continue to weaken. Naval activity in the Gulf and falling global equity prices has some traders seeking sanctuary in the FI market.

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