Paulson supports Freddie and Fannie!

Perception has a strong influence, it was capable in driving the USD$ to within a cent of all time lows vs. the EUR, grease plummeting FI prices and reddening equity indices last week. The market had perceived that the Fed would need to step in and oversee the operations of both Freddie and Fannie (still not a foregone conclusion).

The USD$ is stronger in the O/N trading session. Currently it is higher against 15 of the 16 most actively traded currencies in a ‘whippy’ trading range, due to the fall out and perception of Freddie and Fannie.

US Treasury Secretary Paulson signaled that a government takeover of the GSE’s would not be necessary, saying ‘they should continue as shareholder owned companies with federal charters’ (This weekend the treasury-GSE worked out a plan, which looks far more reaching than many would have thought). He was reassuring shareholders that they will not be wiped out by any government efforts to ensure the stability of the firms that own or guarantee almost $6trillion worth of mortgages. The Fed is fighting three fronts, growth, inflation and a financial institution crisis. The consumer does not wear rose colored glasses anymore as their household wealth disappears. The fine balancing act by the Fed continues as new crisis appear week over week.

Not all data was soft on Friday, the US trade deficit unexpectedly narrowed in May as the weak dollar (policy!) yet again encouraged gains in exports, thus offsetting the soaring cost of imported oil into the US. The headline trade gap narrowed -1.2% (-$59.8b vs. -$60.5b-I think Freddie and Fannie need more than this!). Technically this is attributed to an increased demand by overseas economies and of course the USD$. Despite it being one of the better reports that the US can point to, how will this be sustainable as global economies contract? Other countries insist on a stronger dollar policy, the US government outwardly support a stronger policy, but, economically cannot adhere to it at the moment. On the flip side to this, the US consumer confidence last month remained near the lowest level in 30-years (56.5 vs. 56.4), signaling spending may slow even further as the effects of the tax rebates fade. With US household net worth continuing to decline due to falling property prices and a soft labor market can only threaten even further consumer spending. The Fed will continue to worry about its ‘go to variable’ the consumer, who seems to be forced to ‘shut up shop’.

The US $ currently is higher against the EUR -0.63%, GBP -0.40%, JPY -0.63% and CHF -0.87%. The commodity currencies are weaker this morning, CAD -0.41% and AUD -0.36%. Canada’s economy is guilty by proximity and association to its southern neighbors. On Friday, Canadian employers unexpectedly shed jobs last month for the first time this year (-5k vs. +10k), pushing the unemployment rate higher (6.2%). Analysts note that full time job losses (-39.2k) and part time gains (+34.2k) make the reduction in hours worked worse than what just the net headline job losses suggest. By default, this will add to an already reduced income and dampen consumer confidence even further (lowest in 13-years). It looks like the BOC will not be able to fall back on the consumer as this sector looks less resilient than previously thought. Interestingly, wage growth has slowed a touch, and this should restrain wage-price spirals in Canada, concluding that this report combined with inflation at 1.5% provides further evidence for Governor Carney at the BOC that rate hike are not warranted (3.00%). Not dissimilar to other CBankers, they continue to fight inflation and growth issues. Some analysts believe that we give up some growth to curtail future price hikes, but, the environment does not seem need it just yet. Futures continue to price in no hike by the BOC for the remainder of the year. With the general weakness of the greenback and elevated commodity prices continue to lend support for the loonie. The CAD$ continues to trade within its tight range, despite some softer economic data of late. Depending on what happens to commodity prices the loonie has potential to trade at a premium once again vs. the USD$, other wise it may drift back towards the higher end of the USD/CAD range for now.

The AUD$ rose (0.9678) and traded near its 25-year high once again after stronger than expected employment data last week coupled with traders speculating that a deepening credit market crisis will prevent the Fed from hiking rates any time soon(2.00%). The AUD$ will be expect to maintain its yield advantage. Strengthening commodity prices will bring the AUD$ ‘parity’ question to the fore again.

Crude is lower O/N ($143.78 down -130). Geo-political concerns and inventory levels boosted crude prices again on Friday. With Iran test firing missiles in the Persian Gulf (despite growing global condemnation), it was rumored that Israeli war planes practiced over Iraq. This has heightened concerns of the possibility of conflict within the region (in the past 5-days, crude has advanced with an insurance premium of $10). There are reports out of South America that oil workers there are planning a 5-day strike, combined with Nigerian delta unrest continues to have the market better bid. Rapid price movements have created a situation where computer generated buying of oil contracts were also triggered. Analysts believe that eventually global economic worries will ‘trump all else’ and prices will fall. Last weeks EIA report showed a bigger-than-forecasted decline in inventories w/w. Stocks fell -5.84m barrels to 293.9m vs. an anticipated decline of -2.1m barrels. Oil also rose because of the weakening greenback. A weaker USD$ continues to boost the appeal of commodities as a hedge against the currency’s fall. On Friday, the USD$ declined to within 1c of historical lows vs. the EUR as investors become concerned that the US Government will ‘have’ to step in and run the GSE’s. Gold printed 5-month highs on Friday ($945) due to higher energy costs and plummeting equities increasing demand for the yellow metal as a safer heaven. This morning with the USD$ advancing, traders were happy to lighten their positions.

The Nikkei closed at 13,010 down -29. The DAX index in Europe was at 6,207 up +53; the FTSE (UK) currently is 5,342 up +80. The early call for the open of key US indices is lower. Yields of the US 10-year bond backed up 12bp on Friday (3.96%) and are little changed O/N. Treasury prices plummeted as traders speculation subsided after the Fed indicated that will not have to bail out Freddie and Fannie (in the short term anyway!), thus reducing demand for ‘a haven from credit market turmoil’.

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