Dean’s FX May 29th | Inflation Persistence!

The USD$ is stronger in the O/N trading session. Currently it is higher against 13 of the 16 most actively traded currencies in another ‘whippy’ trading range. Surprising data yesterday egged on the greenback.

US core-durable goods orders (ex-auto and planes) unexpectedly rose in April by the most in nearly a year (+2.5% vs. -0.4%), which may convince the populous and analysts alike that demand from abroad may be helping factories ride out the housing-led economic slowdown. Manufacturing seems to be defying analysts more pessimistic views of the economy as exports (aided by the weaker USD$) continues to provide some sort of buffer from a free fall in growth. The US economy continues to rely heavily on other global regions to provide support; if they flounder then we are all in trouble. The data has provided support for the greenback and a reason to sell the FI class. Investors are now speculating that the Fed will raise interest rates by year end (of course a failed Bund auction coupled with $50b worth of new product hitting the street could not have cheapened the curve on its own!!).

Inflation is a global concern; hawkish rhetoric continues to remain front and center as commodity prices are dictating product hikes. Yesterday an interesting piece of tidbits was forwarded to me regarding global price hikes, below a compilation of inflation headlines.

• Michelin (the world’s second-largest tire maker), will raise prices when ‘opportune’ as it seeks to offset rising raw-material costs. According to the CFO they will do it ‘with complete independence, when we judge it opportune’.

• The Dow Chemical Company will raise the price of all of its products by up to 20%-depending on their exposure to rising energy.

• Mexican restaurants raised menu prices by as much as 20% the past few months because of higher food costs.

• UK inflation expectations near an all-time high show there is no letup in demand for inflation-protected government bonds.

Fed official Fisher said this morning that ‘inflation is a sinister beast, the enemy of capitalism’ and that the fiscal deficit risk was ‘the mother of all financial storms’. He went on to imply that the Fed could hike even if the economy was weak, hence the strength of the greenback O/N. Finally according to EU’s Joaquin Almunia yesterday, ‘inflationary consequences are more serious and we are facing a strong inflationary shock and we need to pay a lot of attention not to provoke an inflationary spiral’. Cbanks monetary policy meetings over the next few months will be far from boring and we start next week!!

The US $ currently is higher against the EUR -0.45%, GBP -0.51%, CHF -0.74% and JPY -0.52%. The commodity currencies are weaker this morning, CAD -0.16% and AUD -0.36%. With no Canadian economic data out yesterday, the currency once again had to take the lead from commodities. Not dissimilar to watching paint dry, the loonie once again has found a comfortable trading range. One would have expected it to depreciate further as oil hit weekly lows, but, market orders seemed to be temporarily putting a lid on any USD$ strength (do not expect this to last). The CAD$ has underperformed against most of its major trading partners. Commodities such as gold and crude oil account for 54% of Canadian exports. With the similar global theme, traders are starting to speculate that rising inflation will keep the BOC from cutting interest rates (3.00%) further any time soon. Despite growth slowing the BOC governor appears to be in a bind. Traders continue to look at better levels to sell the currency vs. both JPY and CHF. One can expect Supreme Court applications and appeals in respect to BCE to continue to underpin the currency in the short term as it remains a national portfolio concern. The AUD$ advance vs. the USD$ has temporarily come to a halt, but appreciated on a cross related basis as equities remained in the black encouraging investors to grab some yield (0.9583).

Crude is lower O/N ($130.74 down -29c). Analysts have stopped the bleeding and the freefall in oil prices over the last two trading sessions. Crude oil was little changed; rebounding from the week’s low, after Morgan Stanley said that Brent oil prices could ‘easily’ reach $150 a barrel (that’s really going out on a limb!). Earlier this week the market started to see some panic liquidation of commodities as the ‘Anti-investment Anti-speculation’ focus of the US Govt. moved to the fore. The head of the Senate Energy Committee in the US wrote an open letter demanding that the CFTC answer sensitive questions about speculations in US energy markets by June 10 (one should expect further liquidation of large long positions held in US energy markets). Oil has risen over 15% this month and it was inevitable that this one way movement was not going to persist. Global growth concerns and the potential of the consumer unwillingness to spend their way out of trouble have had speculators booking some well deserved gains. The appreciation of the greenback vs. the EUR also took some of the luster off commodity prices. A concern about further militant attacks in Nigeria that may disrupt supplies has once again provided a strong under current bid. But, some analysts believe that the recent run up in prices is not justified by stockpiles and demand. The market technically has found it strong resistance point at $135 a barrel, the line has been drawn. This morning we will get the EIA weekly report, which we expect to give us guidance. Last week it took the market by surprise. Gold prices remain under pressure ($903) as the greenback gained some support vs. the EUR thus reducing demand for a hedge against inflation.

The Nikkei closed at 14,124 up +415. The DAX index in Europe was at 7,065 up +31; the FTSE (UK) currently is 6,121 up +52. The early call for the open of key US indices is higher. Yields of the US 10-year bond backed up 8bp yesterday (4.00%) and a further 5bp O/N (4.05%). Treasuries declined yesterday after a US government report showed that core-durable goods unexpectedly rose last month, indicating that the Fed may be more likely to raise borrowing costs later this year (2.00%). A failed Bund auction coupled with $50b new product is bound to cheapen up any curve.

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