Dean’s FX May 20th | US fuel demand falls

The USD$ is weaker in the O/N trading session. Currently it is lower against 14 of the 16 most actively traded currencies in another ‘tight’ trading range.

Yesterday, leading US economic indicators rose for a second consecutive month (+0.1% vs. +0.0%), providing fresh evidence that the economy may not keep weakening in the 2nd half of the year. Analysts have been quick and vocal to point out that the ‘mild slump’ may be the shallowest since the ‘great depression’. The seven consecutive interest rate reductions since last Sept. (2.00%) by Bernanke’s team, combined with their efforts to provide more liquidity to boost borrowing and spending, may help the economy to start to recover in the 2nd half of the year. The lack of signals pointing to a US recession continues to favor the greenback. Despite the headlines, Trichet remains hawkish in an interview yesterday, and said that the ECB will do all it can to deliver price stability and remains steadfast that high inflation will not ‘stand forever’.

The US $ currently is lower against the EUR +0.61%, GBP +0.51%, CHF +0.89% and JPY +0.54%. The commodity currencies are mixed this morning, CAD -0.15% and AUD +0.54%. Even with Canada celebrating Victoria Day yesterday did not heed the appreciation of the Loonie. It rose to a two month high as surging commodity prices and equities at new record levels boosted the currency’s appeal for now. Some analysts believe that there is a positive bias for the currency in the medium term and they expect it to hit 0.9700CAD$ over the coming months. Others believe that commodity prices have appreciated far too quickly and the price action is being dictated by speculators rather than fundamentals. With softer data of late emerging in Canada coupled with BOC governor Carney leaning towards lower rates, some investors seek to sell the loonie on rallies. Last week, Canadian data revealed a sharp decline in auto-production and widespread weakness in 18 out 21 manufacturing industries. This has led shipments lower for Mar. as the strong CAD$ and a weak US economy continues to take a bite out of Canada’s trade sector. The loonie has also gained by its proximity and association with its southern neighbor. Corporate USD$ bids continue to queue below parity. The AUD$ rose to its highest level in a quarter of a century (0.9594) after the RBA said policy makers spent a ‘considerable time’ at their last meeting discussing an interest-rate hike (7.25%).

Crude is higher O/N ($127.18 up +13c). Crude oil prices remain elevated and little changed as investors question if Saudi Arabia’s decision to increase output by +300k barrels a day will be sufficient to reduce prices. Other variables continue to contribute a demand for the black-stuff. Firstly, Goldman Sachs raised its forecast last week. Secondly, the market is also concerned that Chinese diesel purchases would strain global supplies after the earthquakes in central provinces. Analysts are now looking for $141 a barrel by year end due to supply constraints (it seems that the market does not want to bet against GSNY as they have predicted accurately oil appreciation over the last 18 months). The market had expected some sort of reprieve after Saudi Arabia’s oil minister; al-Naimi indicated that his country will increase crude oil production, but, alas it has not come to pass. Last weeks EIA report in the week showed that US supplies of distillate fuels (including diesel) rose more than forecasted. Stocks of distillate fuel gained +1.34m barrels last week vs. the expected +1m barrels. But, total implied US fuel demand fell -2.7% from a year earlier to 20.3m barrels a day. This reduction may be due to overall higher oil prices, the slowing of the US economy and consumer changing their behavior. US crude-oil inventories have now climbed in 15 of the past 18 weeks. Gold has risen and remains close to its 2-month high ($908) as energy costs surged to a record and the greenback weakened against most of its major trading partners, thus boosting the appeal of the yellow metal as a hedge against inflation.

The Nikkei closed at 14,160 down -109. The DAX index in Europe was at 7,169 down -57; the FTSE (UK) currently is 6,323 down -53. The early call for the open of key US indices is lower. Yields of the US 10-year bond backed up 1bp yesterday (3.83%) and are little changed O/N. The curve continues to flatten. Traders are once again increasing bets that the Fed will raise rates by year-end (2.00%), after cutting borrowing costs 7-times since Sep. ’07.

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