China gives the ‘Green Light’!

All the action happens this Thursday, or we think so, in this holiday shortened USD week. It’s the clash of the ECB rate decisions and US non-farm payrolls release. Only one of the announcements could ruin a US bank holiday and it will not be the expected unchanged rate announcement! Despite the tight trading ranges, the tides and sentiment is shifting slightly towards owning the USD. Region instabilities warrant this, historically in crisis the greenback is coveted and besides ‘big brother’ aka China has given the thumbs up, albeit temporarily!

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 are a number of variables that are throwing their weight behind the greenback’s recent resurgence. Firstly, China, they commented that they would not continue buying metals for reserves in these ‘current market conditions’. They want their economy to benefit from the already ‘state stockpiling’. By default this should put pressure on both the commodity index, higher yielding commodity currencies (CAD, AUD and NOK) and further boost the USD directly. Secondly, despite some Chinese officials publically stating over the past few days that China supported the call for a ‘super sovereign currency’, it was left to PBOC Zhou to reassure capital markets that their ‘country’s foreign-exchange reserve policy is always quite stable’ and that they would not change their reserve currency suddenly. Result, more support for the ‘big dollar’. Finally, on the face of it, capital markets are ‘short’ the USD, not materially, but short, which we all know will eventually lead to a squeeze in the USD’s favor!

The USD$ currently is higher against the EUR -0.28%, GBP -0.00%, CHF -0.45% and JPY -0.32%. The commodity currencies are weaker this morning, CAD -0.23% and AUD -0.63%. The loonie remains in a tight range and to date is the worst performing currency vs. the USD this month. It is down -5.7% since reaching a yearly high on the 1st day of the month. Governor Carney has been rather vocal about the currencies aggressive appreciation since March and the effects it is having on Canadian economic growth. The markets took his comments to heart and have had a good winning streak going by being long USD. To date investors have ignored the positive spin both OECD and the IMF are putting on things, it seems that Canadian domestic ‘green shoots’ are not rooting! The BOC last week said that Canada’s recession is as deep as their southern trading partners. They believe that ‘Canadian households are facing rising stresses because of increases in unemployment’, which will not be currency positive in the medium term.

The AUD for the 1st-time in a week succumbed to pressure from a rising USD after a Chinese official commented that the greenback will dominate foreign exchange markets for some time. With commodities under pressure expect dealers to be better sellers on AUD rallies (0.8016).

Crude is higher in the O/N session ($69.30 up +14c). Despite the ongoing military issues in Nigeria which supported crude prices for part of last week, it was the announcement that the US savings rate climbed to the highest level in more than 15-years that caused prices to splutter on Friday. A higher savings rate provides a strong economic indication that the world’s largest economy will be slow to gather strength. We continue to see little evidence of an economic recovery in the commodity reports. Last week the API reported that gas stockpiles increased to +211.4m barrels and crude supplies fell -72k barrels to +356.6m. The weekly EIA announcement supported the API findings. Refineries are also operating at the highest rates this year (+87.1%) and fuel demand is off -5.5%, w/w, the biggest year-to-date. Demand destruction remains commodities greatest nemesis and not volatile currency levels. It’s now expected that OPEC in Sept. will not announce a further reduction in production, but, ‘will ask for more compliance with existing quotas’ (to date members have a 77% compliance record with last years production cuts). The weekly reports are a bearish report for commodity prices. Over the next couple of months expect the market to focus on the US driving season that ends on US Labor Day. The ‘yellow metal’ continued its winning streak and advanced for a 4th consecutive day on Friday as investors speculated that with the Fed being on hold well into next year, making gold a good alternative investment as a ‘store of value’ . But, the turn around in the USD in the O/N session should allow the metals prices to back up a wee bit this morning ($940).

The Nikkei closed 9,783 down -93. The DAX index in Europe was at 4,809 up +32; the FTSE (UK) currently is 4,268 up +27. The early call for the open of key US indices is lower. The 10-year Treasury’s eased another 5bp on Friday (3.53%) and is little changed in the O/N session. Last week was the 3rd-consecutive week for fixed income prices to rise. That was expected after Bernanke said that the Fed would keep rates at or close to zero for a considerable length of time. Data showing that US inflation remains tame combined with surprising jobless claims reports continues to provide support along the US yield curve.

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