Risk Aversion strategies dominate as USD$ avoided!!

The USD$ is weaker in the O/N trading session. Currently it is lower against 13 of the 16 most actively traded currencies in a ‘whippy’ trading range, ahead of US ISM data this morning.

Capital markets remain on tender hooks ahead of rate announcements and employment reports in this holiday shortened week in North America. The twin evils of ‘no’ growth and inflation (stagflation) are providing a numbing headache for CBankers. Speculators vs. genuine demand theory have caused commodity prices to skyrocket. The fear of a hyperinflation depression occurring in the US will surely garnish more press time. Currently the ostrich theory of burying ones head in the sand can only last for so long. China publicly called on the US to stabilize the USD$ yesterday. Market consensus has the US operating on a weaker USD$ policy without admitting to it for far too long. Data yesterday revealed that currency volatility fell the most in 7-years last Q, emphasizing that CBankers do not need to intervene directly on the ‘bucks’ behalf. Policy makers can take a bow as they seem to have achieved their objective of a more ‘stabilized’ currency market. They need the USD$ to stabilize so that commodity prices do not continue to rise at such an outlandish pace. So far it’s not working.

Yesterday, NAPM index surprised to the upside (49.6 vs. 49.1) easing market concerns that the slump in manufacturing was deepening. As explained earlier this week, the Fed’s ‘go’ to variable, the US consumer is spending their tax rebate cheques. Coupled with the strong USD$ policy (endorsed by Treasury Sec. Paulson again yesterday), sorry weak dollar(!!) has increased demand from abroad making US goods much cheaper and widely affordable. Analysts expect that increased sales will help companies to overcome the higher fuel costs and the housing fiasco. One cannot expect this scenario to be maintained as the rebates can only be stretched so far. The report’s measure of new orders fell to 52, signaling smaller gains, from 56.1 in May. Order backlogs dropped to 42.3 from 46.8.

The US $ currently is lower against the EUR +0.01%, GBP +0.26%, CHF +0.15%, JPY +0.54%. The commodity currencies are mixed this morning, CAD +0.38% and AUD -0.31%. Despite record commodity prices the loonie lost ground as investors become concerned with Canada’s growth. With higher fuel prices the consumer is expected to cut spending and company’s investment as the economy suffers a similar fate to that of its southern neighbor. Commodity prices have been masking the plight of a slowing Canadian economy. Yesterday’s rise in GDP m/m surprised market watchers to the top side (+0.4% vs. -0.2%). Analysts believe on face value the report ‘overstates the resilience of the Canadian economy’. A strike at a US parts plant (Feb-May) disrupted production in Canada, its end signaled more normal conditions and caused a large +7% rise in motor vehicle production that had distorted the headline gain. Worse is anticipated for both the US and Canadian economies for the 3rd Q. By default this should continue to weigh on the loonies value short term. The market expects the CAD$ will remain guilty by proximity and association with the US economy (more than 75% of its exports head south of the border). Technically and fundamentally the loonie should be stronger, but, perception seems to have the upper hand at the moment. Currently, technical support remains intact close to 1.0050-75 levels, but corporate Canada remains better buyers of their own currency on USD$ advances. Today is also a national holiday in Canada. RBA governor Stevens left borrowing costs on hold early this morning at 7.25% and he expects economic growth rate to slow as the highest borrowing costs in 12 years and record gas prices force households to cut spending, This is of course is an on going global issue. Slumping stock markets, surging fuel prices and a drop in employment has eroded consumer confidence. After reaching 25-year highs this week, one can expect further pull back (0.9560).

Crude is higher O/N ($141.37 up +137c). Crude oil prices recoded new records highs yesterday as geo-political concerns continue to take center stage. Traders are concerned that Israel may attack Iran over its nuclear program and disrupt supply from OPEC’s 2nd largest producer. Analysts and market watchers believe that Israel’s intentions are very clear and it will keep the ‘black gold’s’ prices high for some time. Year to date, crude has climbed nearly 50%, as the greenback struggles against most of its trading partners despite global policy makers seeking assurance from the US to support a strong USD$ policy. This week should be no different, as the fear that Trichet may hike rates will only add to the pressure on the USD$ and by default speculators will continue to purchase commodities. Goldman Sachs in a report yesterday attributed higher prices to a supply issue and not that of speculators. Truth be told, it’s a combination of both. No matter what the reason is commodity prices will remain elevated for some time unless a coordinated cohesive policy to tackle the situation is jointly established. Libya has threatened to cut production and OPEC’s President predicting that crude prices could hit $170 a barrel by summers end does not help the situation. Qatar over the w/d indicated that they will not side with the Saudis; they do no plan to increase production, along with Libya they believe that the world is over supplied. President Khelil from OPEC believes that if the ECB hiked rates (similar to a Fed ease) the net result would be another surge in oil prices. Certain OPEC members like Qatar believe it’s not necessarily a supply issue but a refinery process concern. Expect geo-political concerns to continue to influence the market in the short term. Gold eased yesterday and remains better bid overall ($928 up +60c) after the USD$ strengthened vs. the EUR, thus eroding the appeal of the ‘yellow metal’ as an alternative investment. Investors will continue to buy on pull backs.

The Nikkei closed at 13,463 down -18. The DAX index in Europe was at 6,318 down -99; the FTSE (UK) currently is 5,493 down -132. The early call for the open of key US indices is lower. Yields of the US 10-year bond eased 1bp yesterday (3.97%) and are little changed O/N. Treasury prices remain better bid as global equities continue to steer investors to seek shelter in the fixed income asset class as the fear of ‘credit’ losses worsen. Some analysts expect bonds to continue their rally in the 3rd Q.

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