Obama fails to resuscitate the dollar

APEC keeps the status quo and gives Capital Markets the green light to renew their disdain for the greenback and they love for anything shining ‘yellow’. Same script, just a new week. On Friday, the markets were temporarily lulled into believing that China was on the cusp of allowing the CNY to strengthen. Smoke and mirrors for the Obama visit. We are back to China keeping their currency artificially low. Obama stated that his administration was not trying to contain China’s rise, but said that trade between the two countries needed to be more balanced. ‘We welcome China as a strong, prosperous and successful member of the community of nations….’ Who else is going to buy the US debt?

The US$ is weaker in the O/N trading session. Currently it is lower against 14 of the 16 most actively traded currencies in a ‘whippy’ trading range.

On Friday, we witnessed the US trade deficit widen more than expected in Sept. (-$36.5b vs. -$30.7b) and return to levels not seen since the beginning of the year. Imports advanced almost +6%, m/m, supported by government stimulus programs, while exports also posted a gain, although it was more modest at +3%. The real goods deficit widened as well! However, analysts expect that going forward, the economy can anticipate a pull-back in imports as several government stimulus programs have expired, but, the demand for oil may remain as industrial production recovers along with the economy at large. Digging deeper, crude and autos accounted for the largest share of the gain in imports during the month, rising +26.2% and +11.5%, respectively. As expected, the ‘cash for clunkers’ program boosted auto sales and depleted inventories, while oil demand likely picked up as the economy gained strength. On the flip side, goods exports jumped +4.0%, m/m (the largest monthly gain in 16-month). Consumer and automotive exports also increased +3.7% and +3.0%, respectively. It’s also worth noting that the ‘real’ goods trade deficit widened to -$41.7b after narrowing in Aug.

The engine of any recovery is the consumer. Friday’s sentiment number does not paint a rosy picture as we enter the holiday shopping season. Retailers beware! The University of Michigan’s Index of Consumer Sentiment fell to 66.0 this month vs. 70.6 in Oct. Consensus had expected a 70 print. At 66.0, consumer sentiment is on par to data back in July. The current conditions component fell to 69.6 from 73.7, while the economic outlook declined to 63.7 from 68.6. This is strong evidence that the US consumers have yet to buy into this incentive induced recovery. Expect consumer spending to remain ‘the’ issue as increased savings look to be the order of the day! In the report as expected, personal finances remain weak and inflation rather benign. The median inflation expectation over the next 5 to 10-years advanced to +3.1% from 2.9% in Feb.

This morning, financial officials in Japan and China have warned that the Fed’s interest-rate policy risks spurring speculative capital that may ‘inflate asset prices’ and derail the global economic recovery. BOJ Governor Shirakawa said that emerging economies ‘might overheat and experience financial turmoil’. China’s Liu added his weight by stating that low rates and the dollar’s depreciation present ‘new, real and insurmountable risks to the recovery of the global economy’. It’s not that Bernanke has not heard this before. There is a fine line between promoting growth and choking it!

The USD$ is currently lower against the EUR +0.25%, CHF +0.27%, JPY +0.05% and higher against GBP -0.13%. The commodity currencies are mixed this morning, CAD +0.62% and AUD -0.17%. On Friday, Canada’s trade deficit narrowed just under $1b in Sept. (-$0.9b vs. -$2b, m/m) as exports rebounded after an over -5% decline in Aug., imports remained weak. The ‘real’ trade deficit also narrowed to -$3.5b after export volumes rebounded while import volumes continued to decline. Analysts expect to see a boost in Canadian exports going forward as the global recovery finds traction. However, an expected surge in imports given stronger domestic growth should offset much of those gains along with a stronger loonie! The loonie has new found strength as the greenback wilts across the board and commodities receive a boost from APEC’s pledge to keep the status quo. Governor Carney will be tested, or perhaps it’s more accurate to say that Capital markets want to test the Governor. Carney has insisted that they will use a combination of currency intervention, credit and quantitative easing options to influence the loonies’ value. Policy maker’s consensus has us believing that a strong currency is detrimental to Canada’s economic growth. Dovish comments by the BOC depreciated the currency, however, nothing lasts forever! For now the loonie trades in a tight 3-cent trading range with dealers continuing to play the support and resistance levels until fundamentally or technically told otherwise. It’s the 3rd consecutive week witnessing an ailing ‘buck’, its support is eroding, look out below Governor!

With O/N data revealing that Japan’s economy is growing has pushed the AUD close to it’s 15-month high as speculators increase their bets that the RBA will once again raise interest rates next month (3.50%). With the Fed on course to keep its O/N borrowing costs low for a considerable period of time after weaker US fundamentals has boosted demand for higher yielding assets like commodities. Governor Stevens has indicated that because of Australia’s growth prospects his policy makers will continue to lead the world in raising borrowing costs. The currency is well supported by commodity prices and expects dealers to remain better buyers on pullbacks (0.9336).

Crude is higher in the O/N session ($77.50 up +115c). Crude prices felt the full weight of the weekly EIA stock report on Friday, but have managed to rebound in the O/N session as the greenback comes under renewed pressure. Prices originally fell after the surprisingly larger than expected gain in the weekly inventory level, as refinery operating rates dropped to their lowest level in 12-months. Crude stocks rose +1.76m barrels to +337.7m vs. an expected market gain of only +1m barrels. With refiners not able to drawn down excess inventories is strong evidence that demand destructions remain healthy. Refineries operated at +79.9% of capacity, down -0.7% w/w, vs. an expected gain of +0.2%. It’s worth noting that imports actually increased by +6.5% to + 8.66m barrels. Not to be out done gas inventories also managed to advance by an aggressive +2.5m barrels. Due to softer fundamentals this month, technically the market has once again aggressively got ahead of itself and will probably lay assault on medium term support levels. To date over the past 2-months the market has been wishy-washy within a $7 range with very little follow through above the $80 a barrel level. All this despite the IEA earlier this week declaring that global oil demand will grow in the 4th Q for the first time in over a year. Both OPEC and the EIA expectations are a tad weaker!

It seems like a new record print every day. The yellow metal hit an all time high ‘again’ this morning in London as investors continue to purchase the commodity as an alternative to a plummeting green back. Expect the Bulls to continue to dominate all of the action and remain strong buyers on ‘any’ pull backs ($1,131).

The Nikkei closed at 9,791 up +21. The DAX index in Europe was at 5,746 up +60; the FTSE (UK) currently is 5,354 up +57. The early call for the open of key US indices is higher. The US 10-year bonds eased 3bp on Friday (3.42%) and another 3bp in the O/N session. Treasuries prices rallied last week despite the market absorbing another $81b’s worth of US debt (3’s, 10’s and 30-year bonds). Strong demand for US product remains consistent. Analysts believe that ‘seasonal’s’ are calling for a flattening rally from here (360 spread 2’s -30’s). With the Fed on hold, the market will not want to be a contrarian ahead of ‘month end index extension’. Do not be surprised to see more money to be taken off the side-line and invested in the FI asset class.

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