Is this the Summer U-turn?

The World Bank said the global recession this year will be ‘deeper’ than it predicted in March. Despite all the negativity, global unemployment rising, consumers spending less and no sign that Cbanks want to change monetary policies anytime soon continues to have investors favor selling the greenback and owning the equity markets. The squeeze is on! The flight to quality is beginning. Uncertainty and CPR will give the dollar new life. Is it sustainable?

The US$ is stronger in the O/N trading session. Currently it is higher against 13 of the 16 most actively traded currencies in a ‘whippy’ trading range.

Trading on Friday was like watching paint dry, North American markets had given up before they started. This week is once again dominated by US funding and the FOMC. The FOMC is expected to be uneventful. A portion of the market anticipates policy makers to make some announcement about the length of time that rates will remain low while other believe that they may mention something about an ‘exit strategy’. Either way it intends to be a non-event. Political uncertainty in Iran and comments in Europe over interest rates has pressurized the EUR as investors strap on ‘risk aversion’ trades in the O/N session.

The USD$ currently is stronger against the EUR -0.48%, GBP -0.43%, CHF -0.49% and lower against JPY +0.12%. The commodity currencies are weaker this morning, CAD -0.34% and AUD -0.95%. On Friday, Canadian retail sales unexpectedly declined in April (-0.8%, 1st-time in 4-months), all on the back of higher job losses convincing consumers to curtail their spending. This is further evidence that another G8 country is feeling the pressure in the 2nd Q. BOC governor Carney said that ‘Canadian households are facing rising stresses because of increases in unemployment’. This is a global theme and with the World Bank revising global growth forecasts it seems that investors may have got ahead of the curve in their enthusiasm to own commodity related currencies. With commodities and equities under pressure and risk aversion the dominant trading strategy, expect the loonie to remain under pressure in the short term. On USD pull backs dealers will want to sell the CAD.

Politics and economics are weighing on the higher yielding currencies. The Iranian political situation worsening has seen a flight to ‘quality’ and investors shying away from commodity currencies this morning. The over exuberance of late, in the belief that Cbanks would be hiking rates sooner rather than later to combat inflation had favored being long yield currencies. However, speculation that the global economy’s recovery from recession will be ‘shallow’ has pressurized the AUD in the O/N session (0.7980).

Crude is lower in the O/N session ($69.15 down -40c). Oil remains under pressure mostly on the back of the last week’s EIA report. The report showed a bigger-than-expected gain in supplies of motor fuel. Gas inventories climbed +3.39m barrels to +205m, w/w (the biggest increase in 6-months). The increase was more than 6-times bigger than analysts had predicted, all in time for the holiday driving season in the US! On the flip side, crude oil stocks declined -3.87m barrels to +357.7m, double expectations. A bearish report for commodity prices, despite the fall in crude, over the next couple of months expect the market to focus on the driving season that ends on US Labor Day. Global concerns on the longevity of this recession continue to weigh on energy demand and by default prices. This market is all about the negative correlation of commodities and the USD’s movements. With the greenback advancing in O/N action has reduced demand for the ‘yellow metal’ as an alternative investment for a hedging strategy this morning ($933).

The Nikkei closed 9,826 up +40. The DAX index in Europe was at 4,795 down -44; the FTSE (UK) currently is 4,315 down -30. The early call for the open of key US indices is lower. The 10-year Treasury’s eased 4bp on Friday (3.77%) and are little changed in the O/N session. Surprising US data last week suggests that some relief is near in this recession coupled with the US government’s announcement of $104b Treasury auctions this week should weigh on prices, expect dealers to cheapen up the curve despite equity markets remaining under pressure. The Treasury will auction $40b-2, $37b-5 and $27b-7’s.

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