Is this a ‘Swiss Melt’ policy?

The Swiss are deliberately weakening their own currency after yesterday’s rate and quantitative easing announcements. Is this the beginning of a ‘currency war’? They have implemented a covert form of protectionism, similar to a tariff on foreign goods. The excuses and reasons have begun. Apparently this policy change is to help some eastern European countries, whose economies are heavily in debt with CHF related mortgages. This is not a calculated collective decision for Europe’s benefit but for the benefit of the Swiss economy! How will other policy makers react at the G20 meeting?

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 ‘subdued’ trading range so far.

Yesterday’s US retail sales delivered a surprise to the market. No biggie, it fell as predicted (-0.1%), but less than the expected decline (-0.5%). More importantly analysts are quick to point out that next Wednesday’s US CPI report is now more important. It will tell us if yesterday’s surprising number was just a reversal of January discounting and hence a price effect. If CPI print is higher than expected it says that sales were unwound last month. Digging deeper, it was not surprising to notice that motor vehicle sales fell -4.3% and sales of building materials and food were also down modestly. However gas station sales popped +3.4% higher on higher prices and that distorted the print. Revisions are everything and once again there was a sharp upward revision to January’s data (+1.8% vs. +1.0), while core ex-autos is now shown to be up +1.6% m/m vs. +0.9%. A decline on big ticket purchases like homes and autos still suggests a defensive consumer.

Not a friendly number was witnessed for the US labor market. It continues to deteriorate as businesses pare expenses due to weakening profits and pushing up initial jobless and continuing claims. This further solidifies the thought that the US can expect many more months of job weakness and further downside risk to economic growth. Initial jobless claims printed once again above the +650k benchmark last week. This does not bode well for next months NFP number; it suggests we may see another mirror image of last week’s print (-650k). More importantly results from the previous week were also revised up suggesting we will see February’s NFP revised down next month. Continuing claims unexpectedly jumped +193k to +5.317m (the largest 1-month increase since Nov. and a new record high).

The US$ currently is higher against the EUR -0.10%, GBP -0.32%, CHF -0.35% and JPY -0.38%. The commodity currencies are mixed this morning, CAD -0.06% and AUD +0.07%. Yesterday, the loonie was little changed against its southern rival and all this despite crude prices rallying in favor of the commodity based currency. The main culprit for little movement is this morning’s employment report. The market fears a ‘larger’ negative surprise (consensus -55k), which of course is very much in line with other global economies. Already this week the currency has strengthened from a 5-year low (1.3064) after advances in global equities signaled investors were stepping up their purchases of riskier assets. Is this rally sustainable? Traders have been hesitant to drag the currency to lofty heights until the employment report is revealed. Year-to-date the loonie has declined -5.5%, after a record -18% loss last year vs. its southern partner. It is the 2nd worst performer just ahead of the USD in a pool of the 16 most traded currencies. Expect investors to continue to look for better levels to sell the CAD$.

The AUD$ printed a new 1-month high O/N as global equities rallied after Japan and China signaled further stimulus measures. This has led to renewed risk taking with speculators seeking higher yielding assets like the AUD and NZD. As long as both commodities and bank stocks are in demand, down-under currencies will follow suit (0.6574).

Crude is little changed in the O/N session ($46.27 down -27c). The crude market is caught between concerns over the decline in demand, and the prospect of another reduction in OPEC production levels this weekend. Yesterday the market was able to pare all of the 10% loss witnessed over the last two trading sessions. Algerian Energy Minister Khelil said that OPEC is likely to reduce output again at this weekend’s meeting, while some ministers favor a halt to production cuts. Further cuts are expected to shore up the price of crude and lower global stocks. But remember too high a price can be detrimental to promoting global economic growth. This commodity has only one supporter and that’s OPEC (they pump 40% of the world’s oil). Since Sept. they have cut production 3-times to slow the slump in prices and prevent a glut on world markets. The weekly EIA report was a surprise, crude stocks increased +0.7m w/w vs. a market expectation of +0.1m. That is the 20th increase in the last 24-weeks. Global economic data does not lend support to crude prices. China earlier this week said that their oil purchases have dropped to +11.73m metric tons. Year-to-date their imports have fallen -13% to +24.55m tons, or +3.12m barrels a day. Combine this with a horrid German manufacturing order number collapsing -38% in Jan. y/y, clearly a stronger indication that demand destruction is alive and kicking. OPEC’s Secretary General said that they must remove another +800k barrels a day to reduce output by -4.2m since their objectives were established last Sept. If they do decide to reduce production targets this month, the technical charts indicate that prices may rise to $55 a barrel. With gold eroding close to 5% over the last 2-trading sessions, investors had been drawn to the ‘yellow metal’ as a safer heaven asset class ($924). After witnessing s strong equity rally in the O/N session, perhaps we will see more offers on the top side this morning.

The Nikkei closed 7,557 up +358. The DAX index in Europe was at 4,018 up +62; the FTSE (UK) currently is 3,771 up +71. The early call for the open of key US indices is lower. The 10-year Treasury yield backed up 4bp yesterday (2.91%) and is little changed in the O/N session. The fear of a deepening recession continues to attract bond investors despite an elevating US Treasury supply concern. Traders all week quite rightly cheapened the curve ahead of each tranche of a $63b issue in total. But with equities finding some traction risk aversion trading strategies are taking a back seat at the moment.

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