EUR vs. USD……….round 2!

Everyone is betting that Trichet will step up to the plate and lower rates more aggressively. G7 economies need much lower rates combined with the fiscal stimulus packages already seen to encourage any signs of growth. OPEC remains in a precarious position, they desire higher prices, but at the same time they cannot contribute to the global growth concerns. At the moment go with the flow and ‘buy the big dollar’, as ‘green’ is king!

The US$ is stronger in the O/N trading session. Currently it is higher against 14 of the 16 most actively traded currencies, in a ‘volatile’ trading range.

Markets gladly took back some of the relief rally experienced earlier in the week. The greenback remains king. The EUR technically has further to decline as trader’s wager that the ECB (3.75%) will lower rates at a faster pace than the Fed (1.50%). Yesterday, the BOC became the first member from the G7 to lower rates at a ‘scheduled’ meeting (25bp). Less than the market anticipated, but, in line with other developed nations who continue to provide bearish rhetoric. A light week of US fundamental data has many traders sitting on the side lines watching as other asset classes give it up. With global economies determined to boost growth and add liquidity to stave off a financial crisis, investors are happy selling higher yielding currencies as CBankers continue to ease borrowing costs.

The US$ currently is higher against the EUR -1.30%, GBP -1.87%, CHF -1.16% and lower against JPY +1.01%. The commodity currencies are mixed this morning, CAD -1.74% and AUD +0.24%. The BOC acted, the loonie stumbles and the ‘greenback’ remains king. The BOC yesterday reduced overnight borrowing costs by 25bp (2.25%), less than the market had anticipated, but added that it will probably need to act again to fend off the effects of a credit crisis and global recession. The loonie weakened for a 3rd straight day as commodity prices remained under pressure, thus taking the shine once again off the loonie as it retraced last weeks trading range. Overall the report downgraded the BOC growth and inflation forecasts and was definitely ‘dovish’ policy guidance. The BOC justified the less aggressive move in the context of how much action that has been taken since its last meeting (75 bps) and the cumulative cut in rates since Dec (225 bps). Their new GDP forecasts for this and next year is +0.6%, which is to rise to +3.4% in 2010. Expect core-inflation to be below 2% until 2010. The BOC stands ready to take further action: ‘some further monetary stimulus will likely be required’. But given the less decisive move yesterday, expect the market to price for 25bp increments going forward. So far this week, the currency has depreciated 12% vs. its southern trading partner. Commodities have also helped to underpin the loonie value. This morning, the loonie managed to create new yearly lows (similar to other currencies), the trend remains your friend, do not expect to find resistance from investors, who continue to better buyers on pull back.

One expects the AUD to underperform in recessionary times, but in the O/N market the currency actually managed to advance vs. the USD, despite commodities remaining under pressure. The currency pared earlier losses after a government report showed that annual inflation accelerated to 5% in the 3rd Q, the fastest pace since 2001, this was driven by costs for housing and food. One can expect North America to be better sellers of the currency on upticks (0.6738).

Crude is lower O/N ($69.40 down -278c). This week’s early advance was a short lived price ‘aberration’. Crude prices remain under pressure as the greenback climbed to new yearly highs vs. the EUR yesterday, thus reducing the appeal of commodities as a currency hedge. The market waits for OPEC’s meeting this Friday, where it is expected to cut output to halt the 50% slide in prices since the beginning of the summer. Last week with oil penetrating the $70 a barrel level briefly had OPEC bring forward its extraordinary meeting to be held in Vienna. It is anticipated that they may pare production by 1m to 2m barrels a day in stages to stabilize prices. But, they are in a tight corner; they cannot contribute to further economic decline. So far this week traders and investors had been getting ahead of this, but the strength of the ‘big dollar’ has quickly pared any advancements. OPEC is panicking as commodity prices have tumbled on growth concerns, retreating from the highs archived in July ($147.27). They still produce over 40% of the world’s oil. Last weeks bearish DOE report showed that crude and gas stockpiles increased more than twice as much as forecasted. Crude inventories rose +5.6m barrels to 308.2m w/w. Inventories were expected to rise by +2.6m barrels. Analysts continue to aggressively pare their future price estimates, down from $90 to a year end price of $60. Sluggish demand continues to be the catalyst for rising inventories. US fuel demand averaged about +18.6m barrels a day over the past month, that is the lowest reported in nearly 10-years. Last week OPEC cut its world demand forecast for 2009, because of ‘dramatically worsening’ conditions in the financial markets, the adjusted levels were cut for next year by -450k barrels or -0.5% to 87.21m barrels a day. The IEA has also indicated that it foresees growth advancing at its slowest pace in 15-years as global economies slip into a recession. OPEC President Chakib Khelil said that the ‘ideal’ price for crude is between $70 and $90 a barrel. Gas stockpiles climbed +6.97m barrels to +193.8m w/w, vs. an estimated rise of +3m barrels. Growth and recession will continue to be apart of the demand equation despite the economic stimulus package. Equity markets yesterday seem to be buying into the rescue plan. Gold remains under pressure as the greenback continues to dominate the FX market. Gold declined once again to a new 1-month low as the big dollar rallied vs. the EUR and global equities declined, thus reducing the demand of the ‘yellow metal’ as an alternative investment strategy.

The Nikkei closed 8,674 down -631. The DAX index in Europe was at 4,655 down -129; the FTSE (UK) currently is 4,162 down –67. The early call for the open of key US indices is lower. The 10-year Treasury yields eased 11bp yesterday (3.73%) and another 6bp in the O/N session (3.67%). With lending rates continuing to ease, traders are now focusing on next weeks Fed meeting. Yesterday treasury prices rose as traders increased their bets that the Fed will cut interest rates next week to revive the economy, similar to that of other major countries. With global equities remaining under pressure, investors supported the demand for safer heaven assets. Futures contracts continue to show a 96% chance that the Fed will cut its O/N 1.5% target rate by 25bp at the Oct. 29th meeting.

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