Bernanke’s iPod play list urges ‘US to be frugal and Asia to consume more’

Apparently, this is how we should be tacking global imbalances of trade. Ben was rather outspoken on this yesterday and acknowledged that the US cannot continue to let the twin deficit get out of control! Also, the Fed went out of their way to say it. The recent reverse repo tests ‘in no way signals that they are on the verge of tightening credit’ no matter what Barron’s featured article is asking for. There are some policy makers who want to move sooner rather than later (look at Australia, they have shifted from growth to inflation concerns), but ‘helicopter’ Ben has the controls. Not surprisingly, it will put further pressure on the USD, as intended!

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 ‘whippy’ trading range.

Talk and more talk will do nothing for the greenback! With the US administration saying that they ‘want’ a strong currency and ‘needing’ a strong one are two very different things. One is only lip-service! Yesterday, European finance chiefs expressed their ‘worries’ about forex movements and backed Obama’s administration’s stated preference for a ‘strong dollar’. Trichet and Co. may be disappointed this morning as a large 1.5000 strike option expires later. With Apple-charged equity markets booming like they are, with gold and oil heading higher we might see EUR moving higher after these expiries are out of the way. And least one of them will be more disappointed!

The USD$ is currently lower against the EUR +0.13%, GBP +0.12%, CHF +0.17%, JPY +0.32%. The commodity currencies are weaker this morning, CAD -0.12% and AUD -0.27%. This morning we have the BOC interest rate announcement. There will be no surprises. They are expected to remain on hold well into 2010 unless we experience an inflation blip. Canadian inflation remains well behaved. If one adjusts Fridays Canadian inflation numbers for seasonal variances, both headline and core inflation climbed a modest +0.1%, m/m vs. unadjusted gains in core-CPI of +0.3%. With the loonie on its way to parity, combined with high inventory levels, analysts expect the core-CPI to remain ‘well-behaved for some time’. Do not be surprised to see a revision once again to the BOC inflation forecasts this week after the MPR report. With the USD struggling and commodity prices remaining well supported, has option traders continuing to bet heavily that the CAD will reach parity by year end. Currently it stands at 68%. Dealers remain better sellers of USD on upticks.

The RBA keeps providing the ammo to lift the AUD towards parity. They said it was ‘possibly imprudent’ to keep borrowing costs at a 50-year low in the minutes of its October meeting, last night. The AUD managed to print new 14-month highs in the O/N session after RBA Stevens said that policy makers ‘cannot be too timid in raising its benchmark interest rate now that the threat of an economic crisis in the nation has passed’ (3.25%). Futures traders are betting on a 30% chance the rates will be hiked another 75bps by year-end (0.9276). Expect a slow grind higher with limited pullbacks.

Crude is higher in the O/N session ($78.86 up +33cc). Crude has climbed 10% in the last week and a half and all on the back of economic expansion is to accelerate in the US. This morning, during the European session, the commodity managed to record its highest level in over a year. Year-to-date the black-stuff prices have advanced +76%! Technically, prices have been aggressively mobile on ‘speculation’, which will lead to a ‘tightening of the supply demand balance’ going forward. There are a small percentage of speculators who believe that global supplies remain too high to justify this latest surge in prices, perhaps we will get it in this weeks inventory levels. Until then, investors will take their lead from rising equities and a weak dollar scenario. Last week’s EIA report showed that inventory levels for gas unexpectedly declined as refineries idled units for maintenance. Stocks plummeted -5.23m barrels w/w, and the largest drop in over a year. Consensus expected a +1.13m barrel weekly increase. With refineries operating at 80.9% of capacity, the lowest level in 6-months, gas output declined 10%, the most in 13-months. To put that in prospective, refineries have reduced their output by -964k barrels a day to +8.45m! The decline has left inventories at +209.2m barrels. On the flip side, inventories of crude rose + 334k barrels to +337.8m vs. an estimated weekly increase of +1m barrels. Overall, the report remains bullish for products until inventory levels say otherwise!

Rock solid, that’s gold. The ‘yellow metal’ has rebounded on fears that the USD will extend its slump, thus boosting the appeal of gold and commodities as an alternative investment ($1,063). For now, every pull back is a buying opportunity.

The Nikkei closed at 10,336 up +100. The DAX index in Europe was at 5,820 down -32; the FTSE (UK) currently is 5,259 down -22. The early call for the open of key US indices is lower. The 10-year bonds eased 2bp yesterday (3.41%) and another 2bp in the O/N session (3.38%). Positive data had been curtailing the demand for higher-returning assets amid subdued inflation. The long end of the yield curve was leading the decline and 2’s/10’s had managed to widen to 245. Analysts believe that there is good technical support at 3.50% in 10’s the first time around. The fall in global equities has given the front end some support as investors become risk averse. But, looking at the big picture, Treasury buybacks are almost over. MBS buybacks have about $250b to go. The US Treasury still has to raise $1.8t per year (more pressure on the curve). Despite the USD encroaching on a 14-month low, analysts foresee 4% 10-yr notes before the year-end and 4.5% by middle of next year!

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