Is Forex witnessing the ‘demise’ of the US dollar?

Where is the ‘love’? Bernanke and Paulson have a tough sell this week. They will try to convince, even ‘main street’, that their deficit inducing, recession pending, ‘toxic waste’ disposal plan (what happened to eco-friendly?) will work!

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 ahead of Bernanke’s testimony this morning.

The greenback managed to register a new record one day loss vs. the EUR’s inception (nearly a decade ago) rather easily yesterday. During this morning’s London session, the ‘big dollar’ has clawed its way back from this week’s dollar lows. Record trading days have appeared in most asset classes since a financial bailout was tabled last week by Ben and Paul. Potential record FI issuances, oil futures contract ‘squeeze plays’, record equity gains and losses. The objective of this bold financial aid plan was to instill consumer confidence and not consume the last of it. Fundamental or technical data has been throw to the way side as short term panic fuels hard asset classes to lofty perilous heights. Investors continue to speculate that the Treasury’s plan to buy toxic mortgage assets will fail to prevent a deeper recession. Policy makers have not ‘on the face of it’ changed the economic fundamentals; the US economy remains debt-laden and facing further unemployment. Bernanke gets to air his views this morning before the senate committee.

The US$ currently is higher against the EUR -0.53%, GBP -0.12%, CHF -0.88% and JPY -0.23%. The commodity currencies are weaker this morning, CAD -0.09% and AUD -0.31%. Canadian July Retail Sales advanced less than anticipated yesterday (+0.1% vs. +0.6%). It rose for a 5th straight month on the back of higher furniture and appliance data. Analysts note that if you exclude price variations, the number was virtually unchanged from June. One should expect future data to remain on the softer side because of weaker job numbers coupled with home prices easing after rising for most of this decade, thus affecting consumer’s disposable income. Because of the summer of higher energy prices, if one excluded autos, then retail sales rose +0.4%, in line with market consensus. After the Paulson and Bernanke plan was tabled last w/d (despite all the details), capital markets temporarily have embraced higher yielding assets. This has pushed the loonie to new 2-month highs. The buoyant commodity market continues to lend a helping hand. But, it is interesting to note that futures traders added to their bets that the CAD$ will decline vs. the greenback (in the short term they may be getting ahead of themselves-don’t be surprised to see them bale, providing further support for the loonie). With the US$ remaining out of favor by capital markets, by default we should see the loonie appreciate even more against its southern neighbor. On a cross related basis the loonie remains sought after, as traders sell the lower yielding currencies like JPY and CHF. This morning Canadian inflation data will take center stage.

The AUD and NZD found some deserving support once again especially vs. JPY, as Bernanke and Co. seek US legislation to help financial institutions clear their balance sheets of illiquid assets and ease credit-market losses. The AUD$ printed a 3-week high in the O/N session (0.8393) as prices rose for commodities that the country exports, also aided by the greenback’s slid on concern that the world’s largest economy is headed for a recession.

Crude is lower O/N ($107.13 down -224c). Prior to yesterday, the last three day’s oil price appreciation had been the largest rally in a decade. Yesterday, at one moment in time we witnessed a $25 jump (largest one day advance in history), due to a perfectly timed ‘squeeze’ play by futures traders. While commodity markets traded softer last week, speculators had shorted the Oct. contract in anticipation of further losses before yesterday’s expiration. This was not to be; hence the dramatic appreciation was caused by traders buying back the ‘shortened’ contracts before end of day or be forced to deliver the underlying oil. Of course the black stuff advance has also been fueled by the greenback largest one day depreciation vs. the EUR since its inception nearly 10-years ago. It incredulous that this was capable of happening since commodities are been heavily scrutinized by both US regulators and Congress of late. The ‘big dollar’ continues to loose its luster on concerns that the US proposal to buy $700b worth of ‘toxic assets’ from financial firms will deepen their budget deficit. Oil has risen +33% since US lawmakers last week pledged fast consideration of Treasury Sec. Paulson’s plan to buy devalued mortgage-related securities. All hard assets look desirable at the moment, as confidence battered investors seek a ‘safer heaven’. Geo-political concerns in Nigeria, coupled with output disruptions (due to the hurricane season in the Gulf of Mexico) continue to provide an undertone bid for the crude market. It is anticipated that oil prices will remain elevated this week after recent EIA reports revealed lower US inventory levels since the hurricanes Ike and Gustav made land. To date, US energy companies have resumed about +11% of oil production and a quarter of natural-gas output in the Gulf of Mexico after shutting almost all of its production platforms before the hurricanes. Last week’s EIA report showed that US crude inventories fell -6.33m barrels vs. -3.5m to 291.7m, w/w. It was the 4th straight inventory decline. Fundamentals will eventually kick in; prices are too high, it’s only a matter of time before the global economic slowdown spreads further afield (China, India) and cut consumption. Gold remains better bid overall ($897) despite paring back some of their record gains during this mornings London session. Speculators question how deep will the Fed’s plans go in resurrecting global growth? A higher proportion of investors continue to shift into the ‘yellow metal’ as a safe haven from market turmoil.

The Nikkei closed at 12,090 up +169 (Japanese Holiday). The DAX index in Europe was at 6,076 down -32; the FTSE (UK) currently is 5,158 down -77. The early call for the open of key US indices is higher. 10-year Treasury yields backed up 2bp yesterday (3.83%) and eased 3bp O/N (3.80%) on concerns that the rescue package may be delayed. Overall, treasuries prices continue to trade under pressure, especially in the short end, as Treasury Secretary Paulson and Bernanke announced plans to help curtail a collapse in financial-market confidence. Traders are speculating that the US government will accelerate debt sales to finance the $700b proposed plan, hence FI pressure will be maintained in the short term, but by the way equity markets have traded, it would not be a bad idea to pick up some short term FI product for surety reasons.

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