Dean’s FX June 2nd|Oil Top?

The USD$ is mixed in the O/N trading session. Currently it is higher against 9 of the 16 most actively traded currencies in another ‘whippy’ trading range.

The greenback is hanging in while other global economies tout different scenarios. This is a big week ahead for policy makers. US employment data and ECB and BOE meetings are scheduled to dominate proceedings. Theses three events will most likely determine the direction of the FX market for the summer months. For instance, the ECB have been turning up the volume of the Hawkish line with Liebscher this morning saying that inflation was now in breach of their mandate, coupled with Bini Smaghi comments that inflation levels were worrying will again provide bid support for that currency. Also this morning Sterling has traded under pressure from the outset as Britain’s biggest lender of ‘buy to let’ mortgages Bradford and Bingley announced a profit warning over the weekend. One can expect equities to come under renewed pressure while the FI market finds a bid in the short term. Strap in for a busy volatile week!

The US $ currently is higher against the EUR -0.04%, GBP -0.45% and lower against CHF +0.18% and JPY +0.40%. The commodity currencies are mixed this morning, CAD +0.07% and AUD -0.04%. The loonie appreciated during the month of May against 14 of the 16 most widely traded currencies, as commodity prices printed new record highs. In spite of the fact that oil prices fell aggressively last week, the currency found support from Canada’s current account data. This took even the most optimistic analyst by surprise. The surplus almost doubled expectations at +$5.6b in the 1st Q. Commodity prices drove most of it, via a higher than expected goods surplus. But, auto exports sank to the lowest level in a dozen years. Digging deeper one noticed that travel spending deficit dipped lower, this figure is truly a misnomer as a higher percentage of Canadians do more of their cross border shopping via the internet. Commodities such as gold and crude oil account for 54% of Canadian exports. Interest-rate futures suggest traders are increasing their bets that the BOC will cut borrowing costs next week (3.00%). In hindsight the loonie has been driven by commodities and global inflation concerns, this week we will get to see the strength of the economy with the employment report. The AUD$ remains under pressure (0.9540) after a government report showed that retail sales unexpectedly declined (it may indicate that previous interest-rate hikes this year may be slowing economic growth).

Crude is lower O/N ($126.65 down -70c). On Friday, Crude oil prices pared their recent losses as the USD$ declined vs. the EUR, thus boosting the appeal of commodities as an inflation hedge. This year the black-stuff has appreciated close to 35%. Last week, the EIA weekly report said that the biggest drop in US oil inventories in more than 3-years was caused by ‘temporary delays’ in unloading oil tankers on the Gulf Coast. Supplies declined -8.88m barrels to 311.6 million. The market should not be surprised to receive a large inventory build up in this week’s data. The greenback continues to have a big impact on commodities; a shift in the currency’s direction will encourage investors to look at crude as a ‘store of value’. Last week the market experienced some panic liquidation of commodities as the ‘Anti-investment Anti-speculation’ focus of the US Govt. moved to the fore. This topic continues to heat up and do not be surprised if you see other large price gyrations in the short time. The head of the Senate Energy Committee in the US wrote an open letter demanding that the CFTC answer sensitive questions about speculations in US energy markets by June 10 (one should expect further liquidation of large long positions held in US energy markets). A concern about further militant attacks in Nigeria that may disrupt supplies will continue providing a strong under current bid. Friday saw the ‘yellow metal’ rise for the first time last week ($887), as a rebound in energy costs revived demand for an inflation hedge for now. One can expect commodities to come under renewed pressure this morning.

The Nikkei closed at 14,440 up +101. The DAX index in Europe was at 7,012 down -84; the FTSE (UK) currently is 5,990 down -63. The early call for the open of key US indices is lower. Yields of the US 10-year bond backed up 1bp on Friday (4.04%) and are little changed O/N. On Friday, Treasuries continued their decline pushing yields to the highest levels since Dec. after stronger than expected data reveled that the US economy grew at a faster pace in the 1st Q than it was originally estimated. Record oil prices and signs of economic resilience have encouraged traders to speculate that the Fed will hike borrowing costs this year to contain inflation (2.00%). With global equities in the red O/N, expect the FI asset class to catch an early bid.

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