Expect irrational currency movements this Christmas week!

The final two weeks of a ‘forgettable’ year will be highlighted once again by random volatile markets with very little substance and liquidity. Traders just want to ‘close’ the shop and start again in the New Year. In such periods, liquidity drains and single flows have a big impact on price moves, sometimes making very little sense, its best to watch from the sidelines.

The US$ is mixed in the O/N trading session. Currently it is higher against 9 of the 16 most actively traded currencies, in another ‘volatile’ trading range.

The IMF says that CBankers are not spending enough. Most headlines have different governments willing to pledge billions to one industry or another. Policy makers are aggressively battling global deflation by manipulating their central borrowing rates. Like the US and Japan when you are close or at ‘zero’ percent, one has to print more money….and keep on printing. In theory, that is fine, but, the credit cycle has both financial institutions and the consumer (who by the way is afraid of loading up on further debt when they are in danger of loosing their jobs) hoarding cash balances at the moment, technically not putting anything to work. US bailing out the auto industry, billions, Canada ditto, billions, the Irish government propping up three of its biggest banks, billions, UK government and its ‘nationalized’ banks, billions. It is all ‘fine and dandy’, but nothing seems to be working yet……President-elect Obama has already revised his month old objectives as the short, medium and long-term economic forecasts have worsened since Nov. 22 and his inauguration is the end of next month.

The US$ currently is lower against the EUR +1.06% and CHF +0.84% and higher against GBP -0.37% and JPY -0.55%. The commodity currencies are stronger this morning, CAD +0.09% and AUD +0.44%. On Friday, the Canadian core-inflation rate (ex-food and energy) unexpectedly advanced (+0.7% vs. -0.2% m/m). This data reveals that the BOC will find it much harder to continue slashing rates as aggressively as the Fed has been doing. But, analysts believe similar to other economies, inflation will ease in the coming months and will not be a barrier to stimulus cutting. The loonie managed to pare some losses after the report despite the greenback aggressively rallying across the board. The loonie despite plummeting commodity prices has hung in very well at these levels. But, on a cross related basis the loonie is very much struggling. With liquidity issues, do not be surprised to see the currency retrace back towards the 1.3000 level in the short term. It’s not necessarily the genuine strength of the loonie but the demise of the greenback that gave the CAD$ its lift earlier in the week. Year-to-date the currency has shaved 17% off its value against its largest trading partner as a global recession reduces demand for commodities, which generate about 50% of the country’s export revenue.

The AUD$ rebounded in the O/N session due to the US bailout of the auto section. It has given some investors confidence to once again purchase high-yield currencies for now (0.6866).

Crude is little changed O/N ($42.34 down -5c-new contract). The market is bigger than OPEC and Russia. Crude continues its downward spiral as investors speculate that the drop in global demand because of the deepening recession will outpace OPEC supply cuts. Couple this with stockpiles at Cushing, Oklahoma (+21% rise w/w), has left the market little room to store supplies for delivery next year. OPEC is hinting that they may meet again next month to discuss further production cuts. It’s expected that that they will continue to reduce output as demand falls. The world is currently awash with the ‘black-stuff’. The US Energy department provided no support when it announced late last week that consumption will be lower next year because of the contraction. Analysts are quickly revising their target levels and many now see the black stuff retreating towards $25 a barrel. The market technically has no confidence in OPEC’s ability to manipulate prices. OPEC has done little to elevate prices that have dropped 75% from their record highs during the summer. This deep recession has had a profound effect on global consumption. Since the last imposed cut in Oct. of -1.5b, the rate of compliance by members has been more than 85%. The weekly EIA inventories report climbing for an 11th consecutive week has not helped to boost prices. Inventories rose +525k barrels to 321.3m last week. It is believed that inventories have gained because the oil market is in ‘contango’ (crude for future delivery is more expensive than near-month), this has let to increased stockpiles and greater demand for oil tankers to store the inventory. With the greenback rebounding aggressively on Friday, we witnessed the ‘yellow metal’ prices fall the most in nearly 3-weeks as traders liquidated profitable positions. But, this morning with the USD under renewed pressure, investors are happy to once again own the ‘yellow’ metal ($848).

The Nikkei closed 8,723 up +135. The DAX index in Europe was at 4,617 down -79; the FTSE (UK) currently is 4,257 down -29. The early call for the open of key US indices is lower. The 10-year Treasury yields remained unchanged on Friday (2.13%), but prices managed to gain for a 7th consecutive week. Treasuries rose, pushing yields to record lows after the Fed slashed funding costs to a range of ‘zero to +0.25%’ earlier last week and enforced that they ‘will do whatever is necessary’ to ease the longest recession in 25-years. Investors are sacrificing returns to ensure the safety of their principal amid the worst financial crisis since the Great Depression. Traders are concerned that the Fed’s actions are added proof that this ‘ongoing’ credit crisis is far from over. The demand for the safety of principal continues to outweigh prospects for record debt sales by the US Treasury.

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