Monetary Authority of Singapores gift to Bernanke

The neutrals have to be loving this, watching governments jockeying their own currencies lower by any means possible. The ECB must be sweating it, five-months ago capital markets were writing off the existence of the EUR and now its strength prowess will soon be calling the Euro-zones growth capabilities into question. What about all the civil en masse protesting throughout Europe? Domestically, these governments are being held to ransom. The Monetary Authority of Singapore will be on helicopter Ben’s Christmas card list after last nights surprise so called ‘intervention’. They blindsided financial markets with an effective monetary tightening by widening and raising its currency trading band. Bigger picture, it’s a vote of confidence in Asia’s economic recovery and further weakens the dollar. Where is that currency’s breaking point now?

The US$ is weaker in the O/N trading session. Currently it is lower against 16 of the 16 most actively traded currencies in a ‘volatile’ trading range.

It’s like a broken record the day to day movements of some the different asset classes. Lack of US data yesterday had currencies tightly packed in a confined trading range. Apart from FX and FI, it was global bourses in the black that kept investors interests peaked as they continue to cheer the prospects of another bout of QE in the US. Also aiding equities was a larger than expected rebound in the euro-zone industrial production (+1%), despite the stunning -13.6% drop in Irish production. The Asian sessions got tired of the broken record. The MAS move certainly stirred things up. Today, we get a slew of North American data that will give all investors something concrete to run with.

The USD$ is lower against the EUR +0.80%, GBP +0.84%, CHF +0.89% and JPY +0.82%. The commodity currencies are stronger, CAD +0.42% and AUD +0.53%. The loonie is again straddling parity, the first time in six-months, with the dollar after stronger house price data yesterday, robust commodity prices and global bourses in the black. The +0.1% advance in house prices in Aug. reversed an identical loss in July. Until this morning’s session the loonie had been the best performing currency amongst the majors c this week. Like all the majors, the loonie appreciated after Tuesday’s FOMC minutes indicated that the Fed has moved closer to further monetary easing. The ‘stepped-up quantitative easing will debase their dollar’. Year-to-date, the CAD has appreciated +4.2% vs. its largest trading partner south of the border. Traders and investors are trimming their bets that the BOC will increase interest rates again next week. Recent data like the softer jobs report and declines in housing starts is probably making Governor Carneys decision easier. The Dec. Bax’s contracts have come under pressure since the headline employment report last week (-6.6k vs. +10.2k). The ongoing threat of QE2 continues to gives all major currencies a leg up on the ‘historical reserve currency’. Carney as ever will have the final say. Expect the loonie to underperform vs. the crosses in the short term.

The AUD lost the battle of reaching parity first, that honor goes again to the loonie. However, the currency has managed to record a 30-year high vs. the greenback as regional bourses indicate the strength of the global economic resilience. This scenario will always favor growth and interest rate economies. The currency is on the verge of completing a two-month bull run as the market psyche again shifts to embrace risk. Earlier this week, a rebound in Australian consumer confidence (+3.3% vs. -5%) and an unexpected increase in Japanese machinery orders (+10.1% vs. -3.7%) boosted optimism in the region’s economy. A stronger employment report down-under earlier this month is also supporting the currency to print new highs vs. the greenback. Australia’s employers added +49.5k workers and the unemployment rate held at +5.1% in Sept. Month-to-date, the AUD has climbed +8.7% vs. the buck as data fueled bets that the RBA will raise interest rates before the year ends. Futures traders now see a 42% chance that the RBA will increase its target rate next month, down from 66% last week. Investors are better buyers on deeper pullbacks as the interest rate differential continues to be of appeal for alternative investments (0.9972).

Crude is higher in the O/N session ($83.72 +71c). Oil has climbed on the back of the IEA raising its global demand forecasts and China reporting crude imports reaching a new record yesterday. The IEA’s report shows that OECD support is very strong and they have revised higher their forecasts by +300k bpd. Last month, China alone imported a record +23.3m metric ton of crude to meet increased domestic demand. The black stuff has also got a helping hand from a weaker dollar. It’s expected that OPEC will agree to keep production quotas unchanged when it meets this morning in Vienna, citing that the ‘market is well-balanced for the next few months’. The market expects today’s US weekly inventory report to show that gas supplies probably declined as refiners performed seasonal maintenance and imports fell. Last week’s EIA report was mixed, a little bearish for oil and bullish for the products. Crude supplies climbed +3.09m barrels to +360.9m, leaving stockpiles +13% higher than the five-year average. In contrast, gas stockpiles fell -2.65m barrels to +219.9m. Supplies of distillate fuel (heating oil and diesel) slipped -1.12m barrels to +172.5m. Refiners reduced their operating rates by -2.7% to 83.1%. It seems that the drop in refinery runs has probably caused the drop in fuel supplies. Also of note was the drop in fuel consumption, falling -6.4% to +18.5m barrels a day (the biggest weekly decline in nearly seven years). Gas demand also fell -4.2% to +8.99m barrels a day. The market remains wary that the underlying fundamentals have not changed. The dollar value continues to dictate the direction of commodity prices supported by pending QE strategies.

Gold this morning has rallied to a new record as a weaker dollar has boosted demand for an alternative investment. There is a distrust of currencies and gold seems to be the only solution as investors use it as a proxy for the third reservable currency. With market confidence wavering in currency prices, and with free money, it’s making commodities attractive on any pull backs. Any time that governments are in the business of printing money then the commodity is bound to do well. To date, gold has outperformed global equities and treasuries (+26%), prompting record investment in gold-backed exchange-traded products. The debasing issues of the dollar, coupled with the sustainable growth issues of the US economy has investors seeking protection in an asset with a ‘store of value’. With the Fed on the verge of implementing further QE programs ‘tend to be supportive of asset prices and is fueling concerns about the potential longer-term inflationary affect of such measures’. The opportunity costs of holding gold are low due to low interest rates. There seems to be bids everywhere in the market ($1,382 +$12.30c).

The Nikkei closed at 9,583 up +180. The DAX index in Europe was at 6,468 up +34; the FTSE (UK) currently is 5,749 +2. The early call for the open of key US indices is higher. The US 10-year backed up 1bp yesterday (2.44%) and is little changed in the O/N session. The second tranche of the treasury’s $66b’s worth of product weighed on the curve. With global bourses in the black seems to have temporarily curbed investors appetite for FI. Unlike this week’s soft 3-year auction, 10-years were better received. Product was taken down at 2.475% vs. the 2.466% WI’s. The bid-to-cover was 2.99 compared to an eight auction average of 3.17. The indirect bid was +42%, bang-on the average over the past eight-auctions. The direct bid was +11% vs. the +15% average. This month’s bond rally may have overshot the upside target in the short term. With the final tranche, the long-bond today, expect dealers to again cheapen further out the curve.

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