Is the USD getting ‘flu’ like symptoms again?

Trichet summed it up yesterday, ‘In the present situation it is extremely important that we can have in the framework at the level of global finance and the global economy a strong dollar……’ there you have it, the end of this long USD bear run. He convinced me, if the ECB says so, it’s a done deal! ‘The solidity of the dollar is very important’. Wait one moment, perhaps he was talking about the AUD, CAD or NZD? What ever one he was referring to, like other CBankers of late, they are trying to weaken their own currencies with verbal intervention. Canada’s Governor Carney is losing his battle!

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

We have little to chew on again in North America today as we wait for the granddaddy of employment reports this Friday. This morning, do not be surprised if we are treated to US house prices fallen at a slower pace and consumer confidence improving, further signs that the recession is abating. It seems that investors remain punch drunk from the G20 last week. The masses have been very quick in buying equities. Their fear of missing the next move higher is obviously too great. It’s not about global fundamentals, it’s about liquidity and the market is awash with it! Other events this week could shape our short term goals and rain on the party. Tomorrow’s unlimited provision of term liquidity by the ECB at the refi-rate and Friday’s US payroll numbers. The one way directional play of equities, commodities, treasuries and the USD will end in tears sooner than we think!

The USD$ is currently higher against the EUR -0.19%, GBP -0.13%, CHF -0.26% and JPY -0.10%. The commodity currencies are stronger this morning, CAD +0.38% and AUD +0.31%. Governor Carney took to the stage yesterday after a volatile weekend for the loonie. He continues to try and talk down the CAD’s strength. He said that the Canadian economy is recovering from its 1st recession in 17-years, however, warns that the ‘persistent strength’ in the currency could offset the improvement in growth and keep inflation below its target (2%). Again he reiterated that he would keep O/N rates at historical lows (+0.25%) until June of next year unless ‘the inflation out look changes dramatically’. After last weeks abysmal retail sales number (-0.6% vs. +0.8%), that will not to be an issue in the medium term! He remains optimistic and even commented that the economy may grow faster in the 2nd-half of this year than their ‘twice’ revised predictions. The pace of growth could be attributed to a gain in auto productions and a faster drawdown of inventories. Year-to-date the currency has appreciated +12% vs. the -18% decline that was recorded last year. The consistently weaker USD has made Canadian products uncompetitive. This is a global story, not an isolated case. On the flip side Canada has ‘stuff’ that the rest of the world requires and that commodities. Carney said that the Cbank is ‘not out of bullets in terms of implementing policy’, but, they are not also ‘trigger-happy’. For the time being the loonie remains consistently range bound influenced by commodity and global equities. On deeper USD pull-backs, speculators are happy to sell the domestic currency.

The AUD dollar rose for a 3rd-day down-under and is now approaching its strongest level in over a year vs. the USD. Traders continue to add to their bets that the RBA will need to raise rates by year end. Fundamental data remains somewhat stronger than most other major economies. Their budget deficit was -$23.7b for the year ending in June, less than the previous month’s estimates of -$28b. With global bourses advancing, investors risk appetite desires higher-yielding asset classes (0.8726).

Crude is higher in the O/N session ($66.94 up +10c). There were a number of factors yesterday that lent support to oil. Firstly, after last weeks aggressive retreat (-8%) the market was in need of some sort of correction. Secondly, crude managed to follow stocks higher on the back of proposed mergers in the tech and health industry. Finally, the threat of imposing greater sanction on Iran because of its nuclear program has heightened geo-political issues. Technically oil prices are inflated, they are not supported by market fundamentals, but geo-politics will always keep the black-stuffs prices artificially high. Do not expect the situation to change anytime soon. Last week, the surprise jump in US crude and product stocks had raised doubts that prices may have run ahead of demand fundamentals. But because of Iran, the landscape has changed again. The EIA report revealed an unexpected increase in stockpiles at some refineries idled for seasonal maintenance. Inventories climbed +2.86m barrels to +335.6m last week vs. the bullish expectation of a decline of -1.4m barrels. The fundamental gain in inventories was the largest in nearly 2-months and pushed stockpiles +9.1% above the 5-year average for the week. Refineries are operating at +85.6% of capacity, w/w, and are down -1.4% from the previous week. Ongoing proof of demand destruction is seen in the US’s fuel consumption numbers which have dropped -3.3% to +18.5m barrels a day (the lowest in 3-months). Even more of an eye opener was gas stocks whose inventories rose +5.41m barrels to +213.1m (the biggest increase in 9-months and has left stocks +6.5% above the 5-year average). The market was anticipating only a +500k gain! We could not leave the inventory for distillates out, they rose +2.96m barrels to +170.8m, and the highest level in 26-years! So we may have to forget fundamentals in the short term again and see politically what develops for guidance.
Gold prices have stayed close to home after the initial surge in the value of the greenback. However, speculators see an opportunity for the yellow metal to gain with the dollar’s renewed pressure and heightened geo-political tension in the Middle East boosting the demand for the ‘yellow metal’ as an alternative investment ($994).

The Nikkei closed at 10,100 up +91. The DAX index in Europe was at 5,709 down -27; the FTSE (UK) currently is 5,148 down -17. The early call for the open of key US indices is lower. The 10-year bonds eased 4bp yesterday (3.29%) and are little changed in the O/N session. Treasury prices continue to maintain their bid as investors speculate that the Fed will signal that interest rates will remain at record-low levels for the ‘foreseeable future’ as inflation remains subdued. Capital markets fear that the US unemployment rate may chose to grind higher in Sept. The report is out this Friday and at the moment any pull backs are coveted. Investors are moving down the curve, selling the front end in search of yield.

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