Noda Yen for me thank you

Its fear that is driving capital markets, the kind of thing that may reinforce the idea of a double-dip recession, not fundamentals or technical’s. An Irish downgrade three-months ago would have sunk the EUR, instead the German Ifo survey rising to a three-year high this morning, is tentatively convincing the market that ‘their’ economy will not lose as much momentum as believed. How long can the one economy shoulder the EUR? Mind you, with US yields so low most economies could. Japan debating over a rising yen has markets speculating on the timing of intervention by the BOJ. Owning the currency is not yet toxic, but positions are been lightened in anticipation. Direct intervention will probably be trumped by monetary easing.

The US$ is weaker in the O/N trading session. Currently it is lower against 12 of the 16 most actively traded currencies in another ‘whippy’ trading range.

It’s the ‘bad’ after the ‘bad’. Currently, it’s difficult to sugarcoat any data coming out of North America. US existing home sales happened to plunge to a new record low yesterday. In the absence of any stimulus, the headline print is devastating to the sector (+3.83m vs. +5.26m, -27.2%). The months ahead look similarly dismal, as the inventory overhang headache is worsening. By default, this will lead to weaker house prices for the future. Digging deeper, there was nothing positive in the report. Months supply ballooned to +12.5 months vs. a +8.9 prior print. This has occurred on the back of increased listings and collapsed sales, and we are not evening including shadow inventories in the data (foreclosed homes off the market). Analysts are even predicting future direr months supply prints ahead. By default, this will lead to further erosion of prices and no positive wealth effect. The permanent wealth shock will lead to a higher savings ratio by the consumer, the go to variable for the Fed. Interestingly, most of the record decline occurred in the single family component sub-category (+3.37m vs. +4.62m).

The Richmond Fed data was better than the market had been expecting (11 vs. 8), but continues to lean on the softer side. The manufacturing activity in the district remains in expansion mode. However, that being said, the pace continues to decelerate for the 4th-straight month. Digging deeper, the rate of shipment growth was cut in half from last month. Not helping was the easing up of the new-order volumes and the backlog of orders from July. This will eventually point to a slowdown in shipments over the coming months. Worth noting was the six-month forward expectations plummeting – 77% to 7 (lowest level in two years). New-orders is expanding in the district, but at a slow pace. This is in contrast to other surveys of late. Companies expect capital spending to slow down to levels not seen in over a year. Finally, employment conditions continued to improve, but at deteriorating pace.

The USD$ is lower against the EUR +0.09%, GBP +0.09%, CHF +0.21% and higher against JPY -0.47%. The commodity currencies are stronger this morning, CAD +0.11% and AUD +0.41%. One should not get too upset with the Canadian retail sales data yesterday. In fact it was much stronger than the headline would have you believe (+0.1% vs. -0.4%). The disappointment on the dollar value of retail sales was due to lower prices. In volume terms, total sales advanced +0.9%, m/m, a huge plus and contributor to this quarters GDP final print. What is the BOC to do? Well, prior to the report, futures were pricing in a 32% chance of a hike in Sept. But, one has to assume that they are not solely relying on Canadian fundamentals. With respect to the report and weighing up the strong gains in real-manufacturing shipments, expect Governor Carney to continue to normalize his rate policy by hiking +25bp and then step to the side lines for a breather. Retail sales are only about 40% of consumer spending. Weaker global equity and commodity prices pushed the loonie to a new six-week low yesterday. The currency is not immune to the weaker data out of the US. Over the past two trading sessions, weaker CAD long positions have been squeezed out as fear of a double-dip occurring has investors seeking sanctuary in risk aversion trading strategies. It is only natural that growth and interest rate sensitive currencies would be dumped even more aggressively. Traders are happy to play the risk-aversion card with longer term CAD bulls looking to pick up cheaper loonies north of 1.0650.

The AUD has ended two downward days on speculation that Japanese policy makers may consider intervening in the markets and dampen the demand for JPY. Comments from Japanese officials have squeezed their currency lower across the board in the O/N session. Global bourses under pressure have been capable of pushing the AUD to test its one month lows this week. On the whole, concerns that global growth is slowing has damped investor appetite for higher-yielding assets. The currency has underperformed against all of its major trading partners and is expected to do so until there is a new Government formed. The commodity rich currency is not isolated, as other growth sensitive currencies are suffering the same fate. Government data has also happened to put a lid on the recent rally. Net result traders are adding to their bets that the RBA will leave interest rates unchanged for the next 12-months. Interest rate differentials play a big part of the currency’s attractiveness. Risk aversion will likely force the bull’s hand, capping rallies with better sellers on upticks (0.8870).

Crude is higher in the O/N session ($72.05 up +42c). Yesterday, crude prices fell to a new 7-week low on speculation that US inventories of crude and fuel increased last week as economic growth slows. It is the fifth daily decline undermining investors’ need to hedge against inflation using dollar-priced assets. Last weeks EIA report provided fodder for the ‘bears’ and the market anticipates this morning release will fare no better. Oil stockpiles declined -0.8m bpd vs. a market expectation of a -1m barrel print. Inventories fell to +354.2m barrels w/w. Not to be left out, gas stocks dropped -39k barrels to +223.3m. On the flip side, distillate supplies (heating and diesel) climbed +1.07m barrels to +174.2m. Prices have also gravitated towards these lows on the back of data showing that economic growth in both China and the US is slowing. The demand for oil products also fell, as gas demand hit a 2-month low, while demand for distillates is close to its lowest level in 10-months. The report re-confirms the IEA conclusion earlier this month that ‘oil demand could take a substantial hit should economic growth continue to falter’. It’s no wonder that the market continues to pressurize commodity prices. Speculators remain better sellers on up-ticks in the short term.

Gold rebounded with a vengeance yesterday, and continues to stay the course this morning, from its 4-week lows as investors seek sanctuary in the safer heaven asset classes on the back of weaker equity markets. With global bourses under pressure, investors are trying to retain cash on mounting evidence of an economic slowdown. Speculators again are supporting the various safe heaven assets on pullbacks, avoiding risky assets due to uncertainties in the markets. With a genuine fear for global growth, by default, should boost the demand for the metal as a protector of wealth in the grand scheme of things. Year-to-date the metal has risen +11.9%. With treasury yields expected to remain low for sometime and with the Fed announcement earlier this month of their intentions to buy bonds, could promote a quickening inflation rate, which would promote pushing commodity prices higher. For most of this year, we have witnessed a gold rally on the back of a weaker EUR ($1,221 -$6.70c). Even with the dollar strengthening, the historical negative correlation is only tentatively holding true at the moment. It’s about preserving wealth that is driving metal and keeping commodities in demand on bigger pullbacks.

The Nikkei closed at 8,845 down -150 The DAX index in Europe was at 5,927 down -8; the FTSE (UK) currently is 5,141 down -15. The early call for the open of key US indices is lower. The US 10-year plummeted 10bp yesterday (2.50%) and are little changed in the O/N session. The short end of the US curve happened to print record low yields after yesterdays worse than anticipated US home sales. Investors are concerned for the strength of the global recovery and are trading to flatten that US yield curve, 2’s/10’s are currently at +203bp. Analysts medium target has been +200bp as fear drives the market to lower rates. Treasuries 2-year note sale came in with a yield of 0.498% (a record low). The bid-to-cover ratio was 3.12, compared with a 4-auction average of 3.19. The indirect bid (foreign buyers) was 29%, compared to the average of 35.4%. The direct bid was 12% vs. 17.9%. In total, the US plans to sell $102b of debt this week. We had the 2’s yesterday (+$37b), 5’s today (+$36b) and 7-year notes tomorrow (+$29b). This will be the smallest monthly offering of ‘the’ combination thus far. Longer term buyers continue to control the market, that being said, product does look rich on the curve.

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