Euro policy makers beat up on Euro while ‘buck’ reigns supreme!

Today we get the first of the week’s three Cbanks rate announcements. The BOC takes center stage providing us with a coin toss. The market will of course be more concerned with the BOE and ECB tomorrow where bearish rhetoric on Euro-lands economy has heightened of late, with the SNB Thomas Jordan believing that the Euro-zone downturn will be stronger than the US’s. Perhaps this Fridays NFP data could deflate his pessimism.

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

Yesterday’s US ISM manufacturing data did little to stoke enthusiasm despite equities having a volatile day. It came in at 49.9 in Aug. vs. 50 in July. The slight decline in the headline ISM index confirms that the US manufacturing activity is still waning. This will be the fourth consecutive month hovering close to neutrality (50-neither expansion nor contraction) convincing investors it continues to see no signs of recovery in manufacturing activity. It’s worth noting that there seems to be a slight disconnect with regional Fed surveys (which showed some improvement last month-Philly, NY and Chicago). The sub-components were not that flattering, the forward looking New Orders contracted for the ninth straight month while other demand indicators also eased. For instance, the production index fell from a six-month high and employment from a 15-month high. But, on the bright side exports continued to expand at a strong rate which should help to offset some of the domestic weakness (how will the stronger USD effect this going forward?). As for the price dynamics, the prices paid component fell to the lowest level since Mar. (down -11.5pt to 77). This should keep Bernanke and Co. temporarily happy as the effects of lower oil prices are been passed on to the consumer thus far. After yesterday’s data do not expect the Fed to change their monetary tune in two weeks time (2.00%).

The US$ currently is higher against the EUR -0.71%, GBP -0.58%, CHF -0.65% and lower against JPY +0.04%. The commodity currencies are weaker this morning, CAD -0.68% and AUD -1.22%. The loonie has remained under pressure ahead of BOC rate announcement this morning. The market remains divided on whether ‘proactive’ BOC Governor Carney needs to cut O/N rates (3.00%-so far their decision process has not been that transparent) at this point, as commodities prices retreat 25% from their yearly highs easing inflation concerns. Consensus has them at least adjusting once by year end. But, ahead of employment data this Friday, today’s announcement is a coin toss. The loonies’ strong correlations with commodity prices have certainly caught up over the past week. With oil dropping to a 5-month low yesterday and the greenback rising against most of its major trading partners has pressurized the CAD to print new lows. The Dec. BA’s (futures contracts) have dropped 15bp to 2.85%. Historically, they settle at a 3- month lending rate averaging 16bp above the BOC target. Despite weaker Canadian fundamentals of late, investors will continue to closely monitor commodities direction for investment guidance. For now in this current climate expect traders to be better buys of US$ on pullbacks.

The AUD dropped to its lowest level vs. the USD in over a year (0.8275) as declines in commodity prices are expected to slow their economy even further. Earlier this week the RBA cut O/N lending rates (7.00%- first time in 7-years). Higher yielding assets have remained under pressure, as investors fear a deepening economic slowdown and are happy to dilute both Asian stocks and pare some of their ‘carry trades’.

Crude is lower O/N ($107.95 down -177c). Fact is always better to digest than rumor. Hurricane or Tropical Storm Gustav has spared the Gulf of Mexico and New Orleans the vast destruction that was witnessed by the region three years ago (Katrina and Rita). Oil led the charge lower and managed to print a 5-month low yesterday. Gas futures paired 13% of their value, which will go a long way in easing inflation concerns that have been a major concern for many CBankers. The overall market strength of the greenback has indeed contributed, but the fact remains, investors have lost their appetite for the black stuff. The major question of course on everyone’s lips will be the peaking capability of commodity prices in June. Will it be a long or a short term effect? Prior to hitting land, petroleum companies halted 96% of offshore oil production in the Gulf and limited their refinery capacity in preparation for the storm. One can now expect commodities to continue their 2 month trend of trading under pressure now that the worst is over, but remember we continue to track three other potential hurricanes. With demand weakening and abundance of the black stuff of late, energy traders will continue to be better sellers of futures on rallies at the moment. Technical traders will have us believe that yesterday’s daily supports have been broken and that 62% retracements of ‘the entire advance’ since Aug. of 2007 remains at $98.50. With the market impulse wanting it lower (Elliott wave terms), then technical targets will target $90. But, do not be surprised to experience the whiplash effect to remain in vogue after what we experienced during last weeks sessions. Gold plunged yesterday ($797) on the back of spiraling energy costs coupled with a strengthening greenback reducing the demand for the ‘yellow metal’ as a hedge against inflation.

The Nikkei closed at 12,689 up +80. The DAX index in Europe was at 6,484 down -33; the FTSE (UK) currently is 5,559 down -61. The early call for the open of key US indices is lower. Yields of the US 10-year note eased 11bp yesterday (3.74%) and are little changed O/N. Treasuries rallied from their initial pullback despite global equities staying close to home. The ISM manufacturing data eased m/m yesterday providing further proof that the US economy continues to flounder. Bernanke and Co. still have their work cut out, but look on the bright side, the US economy seems more positive than what Euro-land is entering.

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