Foreign Widgets paid in USD’s are expensive now!

Domestic political agendas will outshine whatever they are trying to achieve here at this weeks G20 meetings. Chancellor Merkel goes to the polls this w/d, and despite being the favorite for re-election, Pittsburgh is probably the last place she wants to be running her campaign from! Gordon Brown is on his way out, but needs the exposure. The UK economy is in worse shape than the US’s. President Obama seems to be fighting on all fronts, but has time to be interviewed on a comedy show! PM Harper has been ducking the UN assembly because of the failed Kyoto pacts, refuses to give speeches in case he is held accountable for something! What’s all this got to do with Capital Markets? Absolutely nothing, they are professional politicians hell-bent on keeping their powers. Postponing the 2nd coming of a double-dip not exactly the top of their personal agendas!

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

Oh Canada! Yesterday’s retail sales data took all analysts by surprise. Not one of them where in the same ball-park when the headline print was reveled (-0.6% vs. +0.8%). The plummeting sales print for July was broad-based weakness, with only pharmacies and building supplies posting gains for the month. Ex-autos, sales were down a larger -0.8%, m/m. However, there is a ray of sunshine, if we exclude the most volatile components of gas, food and autos, then retail sales grew +0.3%, m/m. How does one interpret the data? Basically consumer spending is recovering slowly (sluggishly) as the jobless rate rises and households continue to cut back following the uplift in data in May and June. However despite this, the loonie has managed to get caught up with all the euphoric ADB predictions and China’s healthy appetite for commodities. All like minded currency pairs continue to be sough after as investor’s attitude to embrace risk again heats up. Year to-date the loonie has appreciated +15% vs. its southern trading partner, last year it depreciated -18%! Dealers continue to play the range and will take their cue from commodities and equities.

Higher yielding currency’s got a boost on two fronts this week. China import data showed a large commodity demand which of course can only be bullish for commodity-bloc currencies. Secondly, the Asian Development Bank (ADB) said that Asia (ex-Japan), will grow +3.9% this year, much improved from March’s estimate of +3.4% and that growth may strengthen next year to +6.4%! This announcement managed to push regional bourses higher and the AUD to its new yearly highs (0.8745).

Crude is lower in the O/N session ($71.51 down -21c). Crude like most other asset classes has managed to complete a U-turn, the first one in 4-days. Speculators are expecting that today’s inventory reports to be of a bearish nature. Couple this with the USD struggling vs. all its major trading partners can only have the black-stuff but bid. Commodity bulls also received a helping hand from Chinese data this week which showed that net crude oil imports by Asia’s largest consumer, rose +18% to +17.92m metric tons last month (the 2nd highest on record). Technically we are caught in a $10 range and fundamentally with record high inventories (gas and distillates) further prices losses are warranted. The theme of demand destruction continues to exist. That being said, last week’s EIA report temporarily supported higher crude prices. US oil stockpiles fell much more than expected as imports continued to decrease while inventories of refined fuels increased. Crude inventories fell by -4.7m barrels w/w to +332.8m, beating analysts’ forecasts of a drop of -2.4m. Imports fell -192k barrels per day. It’s worth noting that refiners cut crude runs by -56k bpd as refinery utilization was off -0.3% to 86.9% of capacity. The market was anticipating a -0.5% fall. Inventories of distillates fuels (heating oil and diesel) were up +2.2m barrels at +167.8m, vs. forecasts for a rise of only +1.3m. On the flip side, gas supplies increased +500k barrels to +207.7m, w/w. For now, directional play is telling us to ‘follow the buck’!

Gold advanced yesterday and in doing so ended a 3-day decline as the greenback weakened against all its major trading partners, thus boosting the appeal of the yellow metal as al alternative investment ($1,016).

The Nikkei closed at 10,370 down -73 (holiday). The DAX index in Europe was at 5,740 up +31; the FTSE (UK) currently is 5,171 up +29. The early call for the open of key US indices is higher. The 10-year bonds eased 4bp yesterday (3.45%) and are little changed in the O/N session. Treasury prices caught a small bid yesterday ahead of the bulk of this weeks debt auctions. Investors are speculating that the falling US cost of living will see stronger demand for the remaining $69b worth of issuances $40b in 5’s today and $29b in 7-years tomorrow. Are dealers worried that the Chinese may want to scoop the auctions similar to the LB auction last time out?

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