Darling’s Poison Pill. NY’s Poison Apple?

It was not long ago when we witnessed the masses taking to the streets of London to air their negative views on Bankers actions. Their lobbying has worked. Bankers will have to swallow Darling’s ‘poison pill’, a once off 50% levy on UK banker’s bonuses. This will be the death of the ‘City’s’ dominance, once the financial center of the World. Now we go back State side-to the Big Apple. Imagine if Congress was to implement a similar idea. Certainly we would have to redefine ‘capitalism’ as we know it!

The US$ is stronger in the O/N trading session. Currently it is higher against 11 of the 16 most actively traded currencies in a ‘subdued, yet illiquid’ trading range.

When trading gets to this side of the Atlantic we seem to be stuck in an apathetic range. To us, unlike other centers, it feels we are slap back in the middle of the holiday trading. Perhaps this morning’s plethora of data will give us something to do and think about. Earlier, SNB’s Roth at their monetary meeting stated that they will stop the purchasing of corporate bonds, an indication of an commencing an exit strategy. As expected they kept their 3-month libor target at 0.25%, and stated that they will ‘act decisively to prevent any excessive appreciation’ in the CHF. The SNB is a law onto its own when defending the domestic currency. The way it should be done! Roth said that the CHF has stayed ‘stable’ vs. the EUR since they began intervening and believes that their monetary policy since Mar. ‘has been effective’. The RBNZ who kept their rates on hold at +2.50% yesterday said it will raise the benchmark rate sooner than it previously indicated as a stronger housing market leads the economy out of recession. Their timing seems to be very much in line with the BOC earlier in the week. Governor Bollard said the economy has ‘moved out of recession, buoyed by demand for housing and rising commodity prices’. The fundamentals for New Zealand, Australia and Canada are rather similar, yet Cbank rhetoric is somewhat different!

The USD$ is currently higher against the EUR -0.07%, CHF -0.04%, JPY -0.38% and lower against GBP +0.16%. The commodity currencies are mixed this morning, CAD -0.09% and AUD +0.72%. The BOC‘s Governor Carney did what was expected of him and keeps O/N rates on hold at +0.25% this week. Global growth uncertainties have favored the dollar and questioned the strength of growth currencies. Despite commodities, for a third consecutive day, taking it on the chin, the loonie actually found some traction in a tight trading range as dealers believed the currency was initially over sold on BOC Carney’s dovish communiqué. This morning we have Canadian trade balance numbers. The market anticipates a less negative deficit print. Overall, the currency will be dictated by the dollar and commodities direction as we wind up this calendar year. Expect liquidity to become a concern across the board as we close in on the holiday season. Investors continue to be a comfortable buyer of the greenback on pull backs.

The AUD gained for a second consecutive day after a government report showed employers added more than 6-times the number of jobs forecasted by the street (+31.2k vs. +5k). This is a similar scenario to Canada’s experience. They also managed to push down the unemployment rate 1-tick to +5.7%. With unemployment peaking, it validates the RBA‘s tightening cycle. Currently, commodity values are the one problem to potentially curb AUD advancement (0.9163). Investors continue to want to buy on pull backs. Do not be surprised to see the currency achieve parity by the 1st Q 2010.

Crude is higher in the O/N session ($70.68 up +1c). Crude oil fell to a new 2-month low yesterday. The weekly EIA report showed that inventories climbed as refiners boosted their operations and imports fell. Oil inventories declined -3.82m barrels to +336.1m million last week vs. the market expectations of a gain of +600k barrels. On the flip side, gas stocks climbed more than forecasted and supplies of distillate fuel (heating oil and diesel) advanced for the first time in a month. Technically the report was a zero-sum game. Gas inventories rose +2.25m barrels to +216.3m vs. an expected increase of +1.6m, while distillate fuel increased +1.62m barrels to +167.3m. Refineries operated at 81.1% of capacity, up +1.4% points from last week and now at the highest level in 2-months. Two reason contribute to this, firstly, refiners anticipate greater future demand and secondly, the need to reduce stock before the end of the year because of tax consideration. Overall a modestly bearish report that has dealers testing the $70 support level. Fundamentals continue to promote demand destruction. Various OPEC members have been rather vocal of late ahead of their meeting at the end of the month. They believe that prices are in ‘the right range and there is no need to reduce inventories’. Expect the USD’s direction to dictate price action medium term. Support levels continue to look vulnerable!

Gold expressing its inverse relationship continues to track the USD’s movement. Over the last five trading sessions the ‘yellow metal’ has managed to fall close to a $107 drop from last week’s highs. The recent record rally required a healthy ‘lemming purge’ which we are witnessing this week. The commodity’s prices have experienced wild gyrations of $20-$40 price swings over the past few trading sessions and remains exposed to further selling pressure if the USD continues to find traction. Sellers beware, despite the ‘mother in-law’ and anyone who can, does own this ‘hot’ commodity, these pull backs remain strong buying opportunities as it’s ‘the international currency’ ($1,127).

The Nikkei closed at 9,862 down -141. The DAX index in Europe was at 5,679 up +31; the FTSE (UK) currently is 5,224 up +20. The early call for the open of key US indices is higher. The US 10-year bond backed up 5bp yesterday (3.45%) and are little changed in the O/N session. The second of this week’s $74b auctions, the 10-year, was a slight disappointment compared to Tuesday’s 3-year issue. The notes drew a yield of 3.448%, compared with the average forecast of 3.421% and the bid-to-cover ratio was 2.62, compared with an average of 2.63 at the past 10-auctions. Are investors beginning to have their fill of US debt? Two possible reasons for the lack of interest, duration extending and secondly, the possibility of higher future rates. Finally, the most interesting stat from the auction was that indirect bidders (Cbanks) was only 34.9%, the average has been close to 40%!

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