Safe heaven USD continues to be supported. Is this the end of the EUR?

How much longer will economies skate around the word ‘recession’? On the edge, potential, words still used as unemployment, wealth deterioration, benign inflation and record lows in consumer confidence persists in all developed economies. No country is an island, and that would include Canada, who the IMF indicated last week would be somewhat immune from the other G7 economies. Fundamental data will continue to soft for the remainder of the week as all eyes will turn towards the G20 in Washington.

The US$ is weaker in the O/N trading session. Currently it is lower against 11 of the 16 most actively traded currencies, in another illiquid trading range.

With North America on holidays yesterday, eyes turned towards fundamental data out of Europe. The initial euphoria for future Chinese financial stimulus was short lived. Earning warning and increased funding for ‘failing’ entities by the Fed (AIG), persuaded investors to continue to cash out of their equity positions. Commodities have broken down, which will create further pressure on OPEC going forward. This will be a deep recession, how deep is any ones guess. Euro-land is folding one by one like a house of cards. Any fears of a depression? Well we would like to think not, we are putting a lot of faith in our financial leaders, who by the way have led us to this point in the first place. The greenback remains king, historical flight to quality. Obviously investors believe that the US economy is further along with their ‘recession’ and have aired most of their dirty laundry, unlike the dichotomous Europeans. This is the EUR first real test in a state of crisis, will it survive?

The US$ currently is lower against the EUR +0.20%, GBP +0.05%, CHF +0.16% and JPY+0.35%. The commodity currencies are lower this morning, CAD -0.01% and AUD -0.09%. It’s all about commodities. The loonie continues to trade under pressure as commodities come under assault as the reality of a deeper recession takes hold. This quarter alone, crude has pared 41% of its value, while the currency has retreated only 12%. The black stuff accounts for approximately 10% of all of Canada’s export revenues. Mathematically and technically the loonie has further to fall. Yesterday being a holiday, thin markets managed to trigger stops on the top side. The loonie continues to look very vulnerable as oil is finding it rather difficult to advance from its 19-month lows. Despite some positive economic data of late, the pressure remains on the BOC to ease borrowing costs one more time before year end, all this despite the IMF predicting that all of the G7 economies will contract next year except Canada’s. Governor Carney last weekend hinted that the Canadian economy may slip into its first recession in 16-years. Next year he is predicting very ‘marginal growth’, that is the equivalent of no growth or negative growth. Re-enforcing the comment he made last month that ‘further stimulus is required’. Traders are better buyers of USD on pullbacks. Expect the Loonie to remain range bound 1.1800-1.2300.

The AUD$ retreated in the O/N session to the lowest level in 2-weeks as global equities remain under pressure. This has prompted investors to once again sell higher yielding assets. Traders remain better sellers on rallies for now (0.6567).

Crude is lower O/N ($57.84 down -149c). China’s investment announcement has come and gone and has done very little to boost global confidence in commodity prices. Rumors that the IEA will lower its 2009 oil-demand forecast as slowing economic growth cuts fuel consumption continues to weigh on oil prices. The further global economies find themselves in a recession, the deeper demand destruction will be. To date, crude prices are down 60% from their summer highs and down 39% y/y. The market had been questioning China’s appetite for crude, the Chinese government responded by introducing an economic stimulus package to promote economic growth and by default increase consumption of raw materials. They plan to spend the money over the next 2-years on housing and infrastructure. Despite being the world’s second largest consumer of oil, the bullish gesture has not been sustainable. The market remains very pessimistic on demand, and to date the weather is not helping the situation. The IEA has already made several revisions to their projections already this year. This scenario will put OPEC further into a corner. They have already cut production last month, and every time they cut production they are building up spare capacity. Similar to the last cut, there is also a risk that they may make further cuts (rumored for next month) and prices still will not rebound (just look at last month). The erosion of future demand continues to be a ‘big’ question mark for global economies. Weaker US fundamental data and last weeks unexpected EIA report was bearish for crude prices. Tomorrow’s report is also expected to show that inventories advanced w/w and again will be bearish. Last week, the IEA believed that ‘oil-import prices would rebound to an average of $100 a barrel between 2008 and 2015 and that the threat of a supply crunch’ remains. Expect the numbers to be revised once again. Recent global rate cuts have so far failed to inspire confidence that a ‘deeper’ recession can be avoided. The fear of a deeper global recession continues to weigh on commodities and reduce global demand for the ‘yellow metal’. The flight to the greenback over the last 24-hours does not help their cause either ($728).

The Nikkei closed 8,695 down -113. The DAX index in Europe was at 4,752 down -5; the FTSE (UK) currently is 4,241 down -9. The early call for the open of key US indices is mixed. The 10-year Treasury yields have eased 7bp this morning (3.72%). Treasuries prices have rallied despite today’s 10-year auction. If the 3-year auction was an indication, expect debt to be better bid as corporate earning continues to pressurize global equities. Traders have increased their bets that Bernanke and Co. will cut borrowing costs again below the psychological 1% to boost consumer confidence and revive growth.

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