Is ADP data to surprise Forex?

The big dollar has roared back with a vengeance despite ML’s impending fire sale of its mortgage bonds, which has convinced some analysts of the ‘endgame’ for CDO risk at financial companies. The strong correlation of commodities and the greenback remain intact, longer term technical support levels are under threat. Will the remaining data this week end this bullish run?

The USD$ is weaker in the O/N trading session. Currently it is lower against 10 of the 16 most actively traded currencies in a ‘subdued’ trading range ahead of the ADP employment data.

No surprises yesterday as the Case-Shiller 20-metropolitan city home price index (HPI) declined again, but, at a faster pace than previously registered (-15.8 vs. -15.2 month-to-date, y/y). The index has declined every month for the past 19-months. Rising mortgage rates coupled with stricter financing policies and an increase in foreclosures numbers last week are impeding prospective buyers, thus hurting home sales and backing up inventory. The three year housing slump, combined with higher fuel prices and a shrinking job market (NFP this Friday), is changing the consumers spending patterns and weighing on the economy. Economic logic will want prices to fall much further, to at least stimulate demand. We are a long way from the housing debacle bottom, for an economic recovery to start, one need housing to stabilize and that’s not going to happen soon. This cyclical effect can only put further pressures on financials balance sheets, thus equities and create a stronger bid for FI asset class.

Yesterday’s consumer confidence index came in at +51.9 vs. + 51, m/m (lowest reading in 16-years). On the face of it, this small reversal cannot be supportive of a sign of recovery in the near term. The major culprits continue to weigh on the index (oil prices, weaker labor markets and bearish equity indices) and are expected to pressurize consumer spending for the remainder of the year. Digging deeper, the labor market component continues to deteriorate (down to -16.8 vs. -15.6, m/m). This highlights that people are having problems finding a job and does not bode well for Friday’s NFP number. As for expectations, 37.1% of respondents see fewer jobs in the next 6-months vs. 35.7% in June. Inflation sub-index remains close to their recent high, with the index at +7.6 from +7.7, concluding that Fed rhetoric cannot take the foot of the gas on inflation expectations as the index is still far too high.

The US $ currently is lower against the EUR +0.10%, GBP +0.21%, JPY +0.22% and CHF +0.19%. The commodity currencies are mixed this morning, CAD +0.08% and AUD -0.46%. Commodity prices continue to beat up on the CAD$. The loonie fell to a 2-month low as oil prices plummeted to a new 4-month low yesterday. Investors are concerned that weaker commodities may translate into slower economic growth for Canada (commodities account for about 50% of Canada’s exports). Fundamental data has provided a lift for the USD$ across the board. The perception that the US is entrenched in their ‘slowdown’, and that other economies are only starting to slowdown, coupled with the idea that the US economy could recover in the 1st half of ’09 will only favor the greenback vs. its major trading partners. The CAD$ has had little data to chew on this week. Expect the CAD$ to remain under pressure, because of its ‘proximity and association’ with its southern neighbor. Traders continue to be better buyers of USD/CAD on pull backs, as market consensus anticipates further weakness for crude prices in the short term at least.

The AUD$ was the biggest mover O/N (0.9475) and fell to a six- week low as a government report showed home-building approvals unexpectedly dropped in June. With Australian banks setting aside more funds for US credit losses, investor fear that the subprime-mortgage crisis is adversely affecting their banking sector and is expected to cap any AUD$ advances for now.

Crude is higher O/N ($122.60 up +41c). Crude oil fell to a 4-month low yesterday as the greenback strengthened vs. the EUR and signs that gas demand will extend declines through technical support levels. A stronger USD$ will give us weaker crude prices. Since achieving record highs this month, oil has backed up nearly 20%. Traders continue to speculate that today’s EIA data will show that gas supplies rose for a 5th straight week. Bearish rhetoric from OPEC’s President Khelil continues to weigh on ‘black gold’. He said that crude prices are ‘abnormal’ and that the producer groups should not cut output, because it needs to ensure adequate supply. Higher prices do not benefit either the producer or the consumer. Nigerian disruptions earlier in the week had provided a temporary reprieve for the spiraling prices. But, fundamental consumptions concerns have gained the upper hand, as least for the time being. Royal Dutch Shell has reduced its Nigerian production because of an attack on a pipeline by militants. This is not out of the ordinary, but, Nigerian crude is the highest grade. OPEC had boosted output in July (+200k barrels a day) to cut prices as fuel consumption in the US and Asia drop. Technical analysts expect oil price to test the $120 level some time soon. The US consumers is quickly changing their consumption and spending habits. Expect Iran to appear on the radar once again, as UN waits for their final response to suspending their nuclear enrichment program not be a positive one. Gold plummeted yesterday ($926) as lower energy costs and a stronger greenback have reduced the appeal of the ‘yellow metal’ as an alternative hedge against inflation.

The Nikkei closed at 13,367 up +208. The DAX index in Europe was at 6,435 up +38; the FTSE (UK) currently is 5,389 up +71. The early call for the open of key US indices is mixed. Yields of the US 10-year bond backed up 2bp yesterday (4.04%) and are little changed O/N. Treasuries prices eased as traders speculated that the ML fire-sale (their mortgage bonds-20c in the $) may indicate that losses at financial institutions could be reaching a peak and reduce the safe haven appeal of government debt. FI products are expected to remain heavy ahead of the US 10 and 30-year announcement next week as it’s predicted that Treasury will borrow 53% more this Q than originally forecasted. One should keep an eye on month end extension in Europe. It is the largest since 1999, 91b in 7/09 exiting the index, plus 16b in coupon payments. This might push US Treasury prices higher in the short term.

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