Resuscitating the USD!

Oh, it seems that by making an announcement late on a Friday, you are trying to bury something? Under the recommendation of ‘his’ ITC, President Obama accepted to impose additional duties on Chinese-manufactured tires for cars and light trucks following a ‘surge’ in imports. I do not think that the USA has a much of a tire industry anymore. There are currently 20 tire producers in China and 4-of them ‘are’ from the US! It is believed that the President’s decision may affect the employment of +100k workers in China and may bring an aggregated loss of -$1b. At the moment, China has hit back with autos and chicken! Just what we want in this recession, the ingredients of a trade war from 2 of the superpowers!

The US$ 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.

Friday’s US inflation and confidence headlines pose little threat for a USD’s short term revival. Import prices rose +2% last month, above consensus of +1%. The culprit being energy, whose prices led the way with a strong +10.5% gain! Analysts expect similar results for this week’s consumer and producer price indexes. Digging deeper, one notices that food prices also posted the strongest gain in 9-months. In the macro sense, import prices continue to deflate from last years levels, down -15%, y/y. This is strong evidence that deflation will remain with us for the short term! Do you feel confident? Friday’s UOM consumer sentiment advanced to 70.2 vs. 65.7, despite the gain, it remains below last June’s print of 73.2! Basically the report states that consumers expect economic conditions to improve, while their personal financial conditions remain uncertain. Digging deeper, various sub-categories were mixed. The index of consumer expectations sub-index increased from 65.0 last month to 69.2. The business expectations components advanced while expected personal financial conditions deteriorated. Consumers are hopeful and now expect positive economic growth. The economic outlook 1-year out improved from 69 in Aug. to 79, while expectation 5-years out increased from 80 in Aug. to 88. More importantly, consumers are increasing their savings and decreasing their indebtedness, which can only suggest that we will experience weak consumer spending well into next year!

The USD$ currently is higher against the EUR -0.22%, GBP -0.76%, CHF -0.16% and JPY -0.26%. The commodity currencies are weaker this morning, CAD -0.61% and AUD -0.65%. The loonie has managed to post its 2nd consecutive week of strength vs. it largest trading partner. Last week it appreciated close to +1.5% as the ‘buck’ struggled against all its major trading partners. If commodities and equities can maintain their bid in the short term, then growth currencies like the loonie and the AUD will be wanting. It’s worth noting that despite performing positively vs. the USD, the CAD strength is unlike the other G10 currencies, if anything it looks tenuous at best. Why? Last week, Canada’s Finance Minister Flaherty said that their budget deficits will be double earlier forecasts and the country is to remain in the ‘red’ until 2015 (a governments moving target). Other reason can be attributed to the BOC’s lack of urgency to ‘remove’ fiscal stimuli. Last week, as expected Governor Carney kept rates on hold (+0.25%) and there were only a few surprises in their statement, a conditional commitment to keep rates on hold until next June being repeated and no further unconventional policy announcements after July’s step backward in such programs. The surprising element to the statement was at the end rather than in its most recent position in the 1st-half of the announcement, the BOC noted that persistent strength of the loonie continues to remain a risk to economic growth. The sad part is that a country’s very own Cbank cannot ‘talk’ its currency down! The loonies’ direction continues to be dictated by global risk tolerance and not by its CB. In the short term, dealers continue to prefer to sell USD on rallies. Parity whispers are getting louder and Prime Minister Harper may get his comeuppance this week, but, that tends historically to be currency positive!

The AUD has retreated from its strongest level in over a year vs. the USD in the O/N session. The main cause is weaker commodity prices, which account for +50% of the country’s exports. It does not help the currency’s position when China announced a probe in US dumping of auto and chickens! This is in retaliation to the USA’s tariff on tires from themselves. World bourses have fallen and the USD has found some traction. Dealers are looking to sell on upticks (0.8559).

Crude is lower in the O/N session ($68.46 down -83c). A technical correction and not the might of fundamentals managed to push Crude prices lower on Friday. Speculators who could not breach that $73 a barrel high wound up being impatient it seems. It was the 1st time in over a week that the commodity failed to advance, noticeably in tandem with North American bourses retreating. Last week, we were subjected to the ‘weak’ dollar boosting the appeal of commodities to investors as an inflation hedge. OPEC held oil production quotas unchanged earlier this month, as expected, with most members voicing satisfaction with current global crude prices. Interestingly the focus was on persuading members not to sell more oil than their quotas permit. The black-stuff also received support from IEA, who raised its estimate for next year’s global demand for a 2nd-consecutive month. The reason, they predict growth in Chinese consumption and a stronger than expected oil use in the US. Is someone fudging the books perhaps? Do consumers not play a part of the equation? Obviously not! US crude oil inventories posted a much larger than anticipated fall last week on lower imports and higher demand from refiners because of the Labor Day holiday. Both the EIA and ADP recorded larger than expected drawdowns (-5.9m and -7.2m barrels respectively). The EIA also showed that stocks of gas and middle distillates were up w/w, to the highest level in 26-years! It seems that the market believes that the oil products supply builds likely will be offset by the somewhat bullish impact of a large crude drawdown. Be aware that high distillate stocks in the G20 economies present a clear downside risk to oil this winter! Demand destruction remains healthy.

It seems in this trading environment new records are to be broken every day. On Friday, the ‘yellow metal’ surged to its highest price in 18-months and in doing so managed to record a record close on the back of a weak dollar scenario. However, in the O/N session the dollar has once again found its sea legs and reduced the demand for the commodity as a hedge against inflation ($996).

The Nikkei closed at 10,202 down -242. The DAX index in Europe was at 5,542 down -84; the FTSE (UK) currently is 4,964 down -47. The early call for the open of key US indices is lower. The 10-year bonds eased 2bp on Friday (3.34%) and are little changed in the O/N session. All this occurred despite $70b worth of US government auctions last week. For instance, Thursday’s $12b long-bond auction drew the strongest demand in nearly 2-years causing longer maturity yields to plummet and 30-year product to rally the most in almost 6-months. The market remains somewhat skeptical about the sustainability of the US recovery. With inflation subdued and retail sales data anemic, purchasing yield has been prudent. This week we are laden with data, and perhaps we may get some clarity!

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