Dean’s FX May 27th | Oil sets new records

The USD$ is stronger in the O/N trading session. Currently it is higher against 10 of the 16 most actively traded currencies in another ‘subdued’ trading range as risk aversion one again appears.

With the UK and the US in holiday mode yesterday, global currency markets have been on hiatus. Today, we have consumer sentiment in the US, coupled with other reports that are expected to show that consumer spending has slowed even further as property values and confidence sink. On Friday, US sales of previously owned homes fell in April and the supply of unsold properties reached a new record, providing further evidence that the is no let-up from the fall out the sub-prime debacle. Analysts believe that inventories will remain out of synch until the end of next year, while prices continue to remain under pressure. Defaults on sub-prime mortgages have prompted lenders to restrict credit, while falling property values have given buyers who are still able to get financing reason to delay purchases.

The US $ currently is higher against the EUR +0.00%, GBP -0.30%, CHF -0.02% and JPY -0.26%. The commodity currencies are mixed this morning, CAD +0.31% and AUD -0.01%. Higher commodity prices and a changing rate expectation are helping the loonie. Traders are starting to speculate that rising inflation will keep the BOC from cutting interest rates (3.00%). Despite growth slowing the BOC governor appears to be in a bind after last week’s Canadian inflation numbers. The data came in stronger than anticipated (core-CPI +0.3% vs. +0.2%) and coupled with commodity prices has caused the loonie to appreciate 4% vs. its southern neighbor in the past 10 days. But, markets have been very quick to discount risk over the past two months. The US is Canada’s largest trading partner and Canada cannot sustain growth on commodities alone, look for better levels to sell the CAD$ vs. both JPY and CHF as a ‘risk aversion’ trade. If one took commodity prices out of the equation then economic data of late remains soft especially the manufacturing base. Keep an eye on BCE buyout fiasco. Supreme Court applications and appeals had the loonie under pressure at one time yesterday. It remains a national portfolio concern. The AUD$ rose to its highest level in a quarter of a century (0.9614) last week and remains better bid as investors continue to search for ‘yield’. The RBA said policy makers spent a ‘considerable time’ at their last meeting discussing an interest-rate hike (7.25%). Commodity prices continue to give it a boost and technical analysts believe that parity is only a matter of time away as the RBA continues to keep rates high and attract further support.

Crude is higher O/N ($133.25 up +106c). Oil has risen over 16% this month and remains on course to print new records. On Friday, with the greenback struggling against most of its trading partners had prompted investors to buy commodities as a hedge against further depreciation of the currency. Some profit taking and second guessing had oil prices pare some of its recent gains. But, for now market has only experienced ‘shallow corrections’. 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. Speculators and short covering ‘under- water’ positions has had an immense impact on recent prices. According to the EIA reports last week consumption averaged 20.3m barrels a day over the past month, that’s down 1.3% y/y. The fundamentals justify a much lower price for the commodity ($80-$100), the premium portion can be attributed to institutional investors coming into speculate the market. The one variable that is capable of derailing recent price movements is ‘is demand destruction’. The peak US gas consumption period lasts from this weekend’s Memorial Day holiday until Labor Day in early Sept. as Americans take to the highways for vacations. Gold prices remain elevated ($924) as the greenback waivers and surging energy costs boosts demand for a hedge against inflation.

The Nikkei closed at 13,893 up +203. The DAX index in Europe was at 6,926 down -27; the FTSE (UK) currently is 6,104 up +17. The early call for the open of key US indices is mixed. Yields of the US 10-year bond eased 8bp on Friday (3.85%) and are little changed O/N. The Short end of the curve rose, pushing the yields down the most in over a month, as a decrease in US sales of previously owned homes data reveled that the housing market is to remain a burden to the economy. 10-yr bonds rallied as US equities extended their biggest weekly drop since Feb. Investors are thinking twice about putting on more risk.

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