Ben and his magic wand!

Gentle Ben takes center stage this morning. Already he has indicated ahead of his testimony that US rates must remain ‘accommodative for an extended period’. Conclusion, if the Fed is not going to remove stimulus imminently, there remains a cautious outlook on the global economy. Did we honestly believe that an exit strategy was to be tabled? Despite all the liquidity that has been pumped into global economies, the curse of wage deflation has to be tackled before consumers can drag economies off their knees. However, I like surprises!

The US$ is mixed in the O/N trading session. Currently it is higher against 10 of the 16 most actively traded currencies in a ‘whippy and illiquid’ O/N.

Yesterday we witnessed the US index for leading indicators advancing for a 3rd-consecutive month (+0.7% vs. +0.5%), reinforcing some analysts beliefs that the US economy is finally emerging from the depths and despair of the worst recession in 50-years. It’s the 1st consecutive 3-month rally in 3-years. Already we seem to be seeing a reduction in job losses. If we add to that stronger equity markets and a stable homebuilding and manufacturing sector, we can conclude that the US government efforts to stem the financial crisis and lower borrowing costs may be paying off. The flip side, with the US national jobless rate expected to breach that psychological 10% barrier and falling home prices in evidence, any expansion will be very slow as consumers spend less and save more. Digging deeper into the report, the 10-subsectors may be broken down, showing that there is disagreement between long and short term interest rates, rising stock prices, a longer factory workweek, increases in building permits and falling jobless claims. These components contributed to the gain. While money supply, orders for capital goods and consumer expectations weighed on the index. This morning we will get to see if the Fed and Bernanke will support these findings!

The USD$ currently is stronger against the EUR -0.08%, GBP -0.52% and lower against the CHF +0.03% and JPY +0.22%. The commodity currencies are weaker this morning, CAD -0.15% and AUD -0.45%. Last week the CAD managed to end a 6-week losing streak and outperform all of the G10 currencies. Yesterday it has printed its highest levels in 2-months. Investors have raised their bets on higher-yielding assets on the back of the global recession may be easing. Because of the strength of commodities last week, the loonie managed to advance +4.5% vs. the greenback. An improvement in global optimism has encouraged increased risk taking. US financial earnings have topped analyst’s estimates by as much as +15%, which continues to encourage risk taking. Today the BOC meets and is expected to keep O/N rates at the historical low of +0.25%. However, twice last month Governor Carney expressed his concern about the loonies rapid strengthening and what effect it will have on economic growth. Let’s see if makes reference to it again! The loonies’ appreciation has been violent and swift. Do not be surprised to see some sort of retracement and USD profit taking this morning, directional play comes from commodities.

The AUD is weaker in the O/N session as investors take profit in the recent run up ahead of Bernanke’s testimony later this morning. Speculators continue to speculate that the US monetary policy may need to remain accommodative ‘for an extended period’. This action warrants investors to be cautious on the immediate outlook of the global economy (0.8133).

Crude is lower in the O/N session ($63.97 down -11c). Crude managed to advance for a 4th-consecutive day yesterday on the back of global equities and Chinese refiners boosting their processing levels to a 16-month high. China (the 2nd largest oil consumer) raised their operating rates for an 8th-straight week to +85.12%. On the face of it, the Chinese economy seems to be responding positively to their economic stimulus packages. By default, oil prices could remain robust. We must remember that the rest of the world is relying on the Asian markets to drag us out of this recession. As of yesterday, the black stuff has advanced +44% this year and +6% alone last week. Green shoot economics has led to higher equities and higher oil prices. Higher risk tolerance means a weaker USD, equals higher oil prices. A fall in inventories translates into higher oil prices. Last week’s EIA and API reports showed a bigger than forecasted decline in inventories on the back of refineries increasing their operating rates. Stocks fell -2.81m barrels to +344.5m w/w, vs. an expected drop of -2.1m. Refineries operated at +87.9% of capacity, the most in 11-months. On the other hand, gas inventories climbed +1.44m barrels to +214.6m, the highest in 3-months vs. an expected increase of +0.875m. Recent strength is highly dependant on advancing equities. Gold has now printed a 5-week high on the back of stronger oil prices and a weaker USD boosting the ‘yellow metal’s’ appeal as an alternative investment and hedge against inflation ($946).

The Nikkei closed at 9,652 up +256. The DAX index in Europe was at 5,063 up +33; the FTSE (UK) currently is 4,468 +26. The early call for the open of key US indices is lower. The 10-year Treasury’s eased 4bp yesterday (3.62%) and are little changed in the O/N session. Longer term yields continue to gyrate close to monthly highs ahead of Bernanke’s testimony later this morning. With CIT supposedly offered financing by its bondholders and US fundamental data yesterday pushing global equities higher has encouraged investors to shy away from this asset class. We will just have to see what gentle Ben has to offer us this morning!

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