Dollar Déjà-vu.

Seeing the USD rally yesterday must have been an optical illusion for a contrarian’s trading strategies. An oasis that does not exist! Geithner’s strong dollar comments, a plug ahead of Obama’s China trip, temporarily gave the greenback a purpose. Market rumors that German lender WestLB required additional cash and not so ‘hot’ US long-bond auction demand managed to push the currency away from its 15-month lows. It’s Friday, optimism is back, and it’s contagious, stronger economic recovery is convincing investors to buy high-yielding assets. Both Germany and France managed to produce reports showing that expansion occurred in the 3rd Q. These reports are reliable. It’s the Chinese data that’s market questionable.

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

OK, NFP headline print was worse than expected, but the revisions were modestly upbeat despite the 26-year high unemployment level. Last week’s initial unemployment claims fell by -12k to +502k, the lowest level since Jan. However, it remains above that important +500k psychological level. The number of people receiving jobless benefits and extended payments both declined w/w. The 4-week moving average for claims (less volatile measure), decreased to +519k, the lowest level in a year, while continuing claims dropped by -139k to +5.63m w/w. The numbers are a tad deceiving as claimants eventually fall off the radar once the benefits time period expires. It was only last week that Obama signed into law a plan to extend jobless benefits and give 20 additional weeks of unemployment assistance. Some analysts believe that jobless claims around these levels are consistent with stable payrolls (may stop dropping) and that’s even with unemployment above +10%!

The problem of foreclosures will continue to pressurize house prices in the US. According to RealtyTrac, yesterday, for an 8th consecutive month, US foreclosure filings surpassed the psychological +300k print! That’s up +19% y/y or 1 in every 385 households. Expect shadow inventories from Banks, houses not yet put on the market, to dictate further price reductions, as no one knows the extent of their inventory levels that are on their balance sheets. It’s worth noting that distressed transactions accounted for 30% of all sales in the 3rd Q with the medium price -11% from a year earlier. Expect high-risk mortgages, negative equity, and unemployment concerns to impede any growth in prices well into next year.

The USD$ is currently higher lower against the EUR +0.39%, GBP +0.60%, CHF +0.36% and JPY +0.30%. The commodity currencies are stronger this morning, CAD +0.54% and AUD +0.62%. Phew! Governor Carney can breathe a sigh of relief for the moment at least. For a brief period this week it felt like the loonie was going to test the BOC’s metal. Carney has insisted that they will use a combination of currency intervention, credit and quantitative easing options to influence the loonies’ value. Policy maker’s consensus has us believing that a strong currency is detrimental to Canada’s economic growth. Dovish comments by the BOC have managed to depreciate the currency by -1.6% this month thus far. Geithner’s strong dollar rhetoric and softer commodity prices have also contributed to the loonies’ downfall. Yesterday, Canadian new home prices advanced the most in 10-months.They accelerated at a faster pace than expected from Sept. (+0.5% vs. +0.1%). The house-only component accounted for almost all of the strength. Analysts expect this to boost Canadian CPI a tad. On a y/y basis, however, prices still remained down -2.7%. For now the loonie trades in a tight 3-cent trading range with dealers continuing to play the support and resistance levels until fundamentally or technically told otherwise or commodity prices start to fall off a cliff!

The AUD managed to end a 2nd consecutive week on a high note. Yesterday, it printed its 15-month high as unexpected jobs growth (+24.5k) spurred prospects that the RBA will raise interest rates in Dec. (3.50%). Other factors this week have also aided the currency. China, their largest trading partner, said that their industrial production (+16.1%) and retail sales (+16.2) accelerated last month. It has also climbed on speculation that the Fed will now have to keep its O/N borrowing costs low for a considerable period of time after weaker US fundamentals. Governor Stevens has indicated that because of Australia’s growth prospects his policy makers will continue to lead the world in raising borrowing costs. The currency is well supported by commodity prices and expects dealers to remain better buyers on pullbacks (0.9270).

Crude is higher in the O/N session ($77.44 up +50c). Crude prices felt the full weight of the weekly EIA stock report yesterday. Prices fell just under 3% after the surprisingly larger than expected gain in the inventory level, as refinery operating rates dropped to their lowest level in 12-months. The strength of the greenback also underpinned the commodity as an alternative investment strategy. Crude stocks rose +1.76m barrels to +337.7m vs. an expected market gain of only +1m barrels. With refiners not able to drawn down excess inventories is strong evidence that demand destructions remain healthy. Refineries operated at +79.9% of capacity, down -0.7% w/w, vs. an expected gain of +0.2%. It’s worth noting that imports actually increased by +6.5% to + 8.66m barrels. Not to be out done gas inventories also managed to advance by an aggressive +2.5m barrels. Due to softer fundamentals and tropical storm Ida last week, technically the market has once again aggressively got ahead of itself and will probably lay assault on medium term support levels. To date over the past 2-months the market has been wishy-washy within a $7 range with very little follow through above the $80 a barrel level. All this despite the IEA earlier this week declaring that global oil demand will grow in the 4th Q for the first time in over a year. Both OPEC and the EIA expectations are a tad weaker!

Yesterday, for a brief moment in time gold managed to register a new record ($1,123) before plummeting back to earth as the USD rebounded curbing demand for the yellow metal as alternative investment. The Bulls continue to dominate most of the action and remain strong buyers on pull backs ($1,108).

The Nikkei closed at 9,770 down -34. The DAX index in Europe was at 5,659 up +6; the FTSE (UK) currently is 5,276 down -1. The early call for the open of key US indices is lower. The US 10-year bonds eased 1bp yesterday (3.45%) and are little changed in the O/N session. Treasuries prices rallied this week despite the market absorbing another $81b’s worth of US debt (3’s, 10’s and 30-year bonds). Yesterday’s 30-year take down was not so hot if we compared it to the other two issues earlier in the week where strong demand was consistent. The bid-to-cover ratio was 2.26, compared with an average of 2.39 at the last 10 auctions. Analysts believe that ‘seasonal’s’ are calling for a flattening rally from here (360 spread 2’s -30’s). With the Fed on hold, the market will not want to be a contrarian ahead of ‘month end index extension’. Do not be surprised to see more money to be taken off the side-line and invested in the FI asset class.

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