A USD Calm before the Storm!

This week could be ‘the’ watershed for the USD for this quarter! If nothing else, politically may be an eye opener for many of us. With Japan on holidays today, it has given us a slow start, definitely a false one, as the rest of this week is jam-packed with ingredients for some ‘excitement’! There is an interesting FOMC meeting. Will they or won’t they present some sort of exit strategy? There is the German IFO and German elections, followed closely by the G20 meetings in Pittsburgh. If nothing else, some of these events will break the monotony that we have been trading over the past week!

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 ‘whippy’ trading range.

There was nothing to guide the USD on Friday apart from suspicion and innuendo. It’s done rather well after printing yearly lows vs. most of the G10 countries. Perhaps US assets are turning the corner slightly and becoming more in ‘vogue’. That would not be a surprise, technically we have been very pedestrian and one directional that requires some sort of retracement. However, fundamentally we could be doing the exact opposite. Perhaps these ‘elevated’ levels are giving us an opportunity to unwind or establish our dislike for the anything USD denominated at the moment!

The USD$ is currently higher against the EUR -0.38%, GBP -0.46%, CHF -0.41% and JPY -0.80%. The commodity currencies are weaker this morning, CAD -0.50% and AUD -0.56%. After printing an 11-month high last week as both global equities and commodities pushed the currency to dominate its southern neighbor, it has neatly pared some of its strength ahead of the FOMC meeting this week. Investor have been speculating that the global recession is ‘over’ which boosted the appetite for higher-yielding assets including commodity-linked currencies like the CAD and AUD. Is it sustainable was the question that had pushed the greenback to new yearly lows last week. Rumors were rife that the BOC was checking rates and gave the illusion that they would enter the fray. It was exactly that, just rumors. Do not expect them to waddle in ‘Willy-nilly’! Year to-date the loonie has appreciated +15% vs. its southern trading partner, last year it depreciated -18%! Dealers continue to play the range and will take their cue from commodities and equities.

With global equities and commodities coming under pressure, higher yielding assets were bound to come under threat. After printing New Year highs early last week, the AUD managed to fall for a 3rd-day amid speculation the Fed will this week signal plans to withdraw stimulus measures, boosting the appeal of US assets (0.8615).

Crude is lower in the O/N session ($71.02 down -102c). Crude oil fell for a 2nd-consecutive day on Friday as the dollar strengthened vs. the EUR, paring investors’ demand for dollar-priced assets to hedge against inflation. Last week’s EIA report supported higher crude prices. US oil stockpiles fell much more than expected as imports continued to decrease while inventories of refined fuels increased. Crude inventories fell by -4.7m barrels w/w to +332.8m, beating analysts’ forecasts of a drop of -2.4m. Imports fell -192k barrels per day. It’s worth noting that refiners cut crude runs by -56k bpd as refinery utilization was off -0.3% to 86.9% of capacity. The market was anticipating a -0.5% fall. Inventories of distillates fuels (heating oil and diesel) were up +2.2m barrels at +167.8m, vs. forecasts for a rise of only +1.3m. On the flip side, gas supplies increased +500k barrels to +207.7m, w/w. The data would have included the Labor Day holiday, which historically marks the end of the US summer driving season. Surprisingly, the API report painted a slightly different picture. Crude stocks gained +631k barrels last week as refiners slowed run rates by -146k bpd. Inventories of distillates rose +5.2m barrels and gas inventories were up by +1.3m barrels. Stronger US fundamental and Governor Bernanke’s belief that worst of the recession is over will provide further support on pull backs in the short term. Last week, we were subjected to the ‘weak’ dollar boosting the appeal of commodities to investors as an inflation hedge, perhaps this week we will see the greenback rebound!

Gold has fallen in the O/N session, which is threatening rally that has sent prices above $1,000 an ounce this month, as a rebound by the greenback is curbing demand for the yellow metal as a hedge against inflation ($1,002). Follow the USD that will validate current metal prices. The market does feel slightly squeezed at these elevated levels!

The Nikkei closed at 10,370 down -73 (holiday). The DAX index in Europe was at 5,656 down -48; the FTSE (UK) currently is 5,143 down -30. The early call for the open of key US indices is lower. The 10-year bonds backed up 7bp on Friday (3.46%) and are little changed in the O/N session. Treasury prices managed to record their 1st-weekly loss in 6-weeks as dealers pared some of their position ahead of this weeks $112b US government bond auctions and the Fed meeting. The US will sell $43b in 2’s, $40b in 5’s and $29b in 7-years. I wonder if we will see Chinese demand again, it was rumored that they scooped the last LB auction!

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