Bernanke to take center stage.

The USD$ is mixed in the O/N trading session. Currently it is higher against 9 of the 16 most actively traded currencies in a ‘subdued’ trading range ahead of the FOMC two day meeting beginning this morning.

With the lack of North American economic data providing investor guidance yesterday, traders took their lead from weaker than anticipated European manufacturing and German confidence numbers. The net result has heightened trader’s speculation that the ECB will remain on hold (4.00%) for the remainder of the year. Analysts do not expect Trichet and Co. to remain aggressive in their rhetoric regarding growth and inflation. Euro analysts foresee the second half of the year to ‘bear little fruit’ after a strong 1st half. With the Fed expected to remain on hold this week (2.00%) and commodity prices being walked down by large funds, OPEC and CBankers, the USD$ should gain some traction vs. the EUR in the medium term. Traders are basically betting on the fact that the current economic slowdown in the US (caused by the sub-prime debacle) will not be contained to North America, but will spread to Europe, while the US recovers. Bernanke has stated already this month that economic risks have faded (brave statement). Currently, risk aversion trading strategies remain the order of the day as credit concerns again with financials remain front and center.

The US $ currently is lower against the EUR +0.32%, GBP +0.07%, CHF +0.40% and higher against JPY -0.12%. The commodity currencies are stronger this morning, CAD +0.03% and AUD +0.27%. The loonie remains contained in a tight trading range, despite the pro-loonie BCE announcement last week and tumbling commodity prices (especially gold). With very little participation ahead of the FOMC decision on Wednesday, the CAD$ with its lack of liquidity has had a whippy trading session so far this week. One can expect the currency to be driven especially by commodities. Already large funds have liquidated some of their long profitable positions and by default have given the greenback a leg up against most of its major trading partners. Commodities account for 50% of Canada’s exports. Last week BOC governor Carney said that policy makers will not be ‘complacent’ even if it means surprising investors like he did earlier in the month by holding rates steady and not even hinting to the market through his original policy of transparency. The AUD$ has advanced O/N (0.9544), peaking at a 7-month highs vs. the JPY after China agreed to pay record prices for Iron Ore. Combine this with traders continuing to speculate that the RBA will maintain their interest rate advantage (7.25%) over the US as the Fed is expected to delay hiking borrowing costs (2.00%) this week, one should expect stronger bids on pull backs.

Crude is higher O/N ($137.53 up +17c). It’s not happening. The Saudis good intentions outlined at the oil summit in Jeddah have done little thus far to ease crude oil prices. They continue to hover dangerously close to historic highs. The Saudis pledge to increase production to boost global supply may not be enough to make up for production disruptions in Nigeria. Attacks on a Royal Dutch Shell platform and a Chevron pipeline last week have halted +300k barrels a day of Nigerian output. Analysts are anticipating that the disruption could halt deliveries for as long as 6 weeks. Market observers are hoping that MEND will announce a cease fire (as early as today) and give ‘dialogue another chance’. This of course would be bearish for the market as the higher grade Nigerian crude would be on line much sooner. Saudi Arabia has suggested that it may increase production beyond the +200k barrel a day increase already planned if the markets require it. For market prices to react negatively, the production would have to be far more substantial i.e. a million barrel increase per day. The Saudi Oil Minister seeks ‘reasonable’ prices, but, OPEC’s president believes that the Saudis solution is ‘illogical’, as refineries do not need more crude. President Khelil blames record prices on speculative investors, the subprime credit crisis and geo-political concerns (Nigeria, Iran etc) rather than a shortage of supply. With a stronger USD$ and last weeks EIA report showing that inventories declined less than forecasted, should start to weigh on crude prices. Some analysts believe that the ‘bull’ run may be over and expect prices to correct themselves over the next few months. Gold fell the most in 2 weeks yesterday ($891) as the USD$ strengthened vs. the EUR, thus reducing the appeal of the yellow metal as an alternative investment for now.

The Nikkei closed at 13,849 down -8. The DAX index in Europe was at 6,565 down -24; the FTSE (UK) currently is 5,665 down -2. The early call for the open of key US indices is higher. Yields of the US 10-year bond eased 1bp yesterday (4.15%) and are little changed O/N. Treasury prices remain close to home ahead of government reports that are expected to confirm weaker house prices and softening consumer confidence numbers. Traders continue to pare bets that the Fed will raise O/N borrowing costs to combat inflation (2.00%) amid signs that an economic slowdown will deepen in the 2nd half of the year.

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