Sell, sell, sell and sell again!

Like a phoenix rising from the ashes, the ‘mighty dollar’ is one again gaining public G8 support. A short dollar bet is having a whiplash effect on most portfolios. In the o/n session we have witnessed aggressive selling of all major currencies and the purchasing of US FI products, actions which have caused commodities prices to ease once again! We have always believed that an exit strategy requires a great deal of confidence, finally it seems that other nations now believe they will see the light much quicker by the US aggressive actions. That’s not to say that Europe financials do not require a much needed stress test!

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

Over the w/d, G8 ministers agreed to mull over required exit strategies, a necessary action as economies cannot rely forever on government stimulus. There will be a time that these actions are required, but, not jut yet. Currently, there is a lot of pressure on the EUR directly. Firstly, reports out of the Kremlin stated that the BRIC nations’ would not contemplate new reserve currencies. Russian Finance Minister Kudrin endorsed the USD as a reserve currency. Other report confirms the ongoing ‘tight credit conditions’ in Germany, which is in evidence after last week’s Euro-zone industrial production data falling -21.6%, y/y, in Apr. Even the German economic minister warns of ‘bankruptcies and is concerned for a spiraling downward trend in Germany. We already know the public confidence remains low. It’s a prudent time to lighten up on long EUR’s as this retracement will be deeper than anticipated!

The USD$ currently is higher against the EUR -1.08%, GBP -0.77%, CHF -1.04% and lower against JPY +0.07%. The commodity currencies are weaker this morning, CAD -1.10% and AUD -1.65%. The loonie managed to weaken against all of the 16 most traded currencies on Friday and print its lowest level in a weeks trading on the back of commodity prices easing coupled with the rabid advance of the greenback. Already last week, BOC governor Carney stated that the currency gains this year may threaten economic growth if they persist. He continues to downplay a quick economic recovery, a time line similar to some of his counterparties. With G-8 ministers somewhat supporting the USD, Japanese finance minister commenting that his country’s confidence in US debt is ‘unshakable’, and Russian stating it has full confidence in the USD will probable soften the loonie even further in the short term. If one believes that green shoot economics is very much in play, then technically the market is giving CAD bulls an opportunity to re-load they long positions before the currency once again makes an assault towards parity with its largest trading partner. If global equities can manage to keep their head above water, risk appetite would favor the higher yielding commodity currencies. However, short term trading strategy states that we should looking for better levels to sell the currency on USD pull backs.

US yields and global energy prices are starting to put pressure on the higher yielding asset classes. The AUD pared some of this week’s gains in the O/N session as traders purchased the mighty greenback against all its trading partners after positive comments from the Russian delegation over the w/d said it had full confidence in the USD. Strong fundamental data last week had pushed the currency to a 7-month high. This retracement will give the bulls a better opportunity to own the currency at more advantageous levels (0.7999).

Crude is lower in the O/N session ($71.14 down -90c). Oil was unable to maintain its early week momentum on Friday. With the greenback continuing to surge and North American indices unable to keep their heads above water it’s only natural for the commodity to remain under pressure. There are many favorable reasons that have supported the commodity over the past 5-trading sessions. We witnessed reports last week which showed that China’s net imports are surging ahead and the API report on Tuesday revealed that US stockpiles dropped, w/w (-6m barrels vs. +0.4k expected rise), as refiners ramped up production. Perhaps this large draw-down is stronger evidence that weak demand is bottoming, couple this with the EIA raising its 2009 demand forecast for the 1st-time since Sept. had the market setting it sights on the $75 price that OPEC members wishfully predicted earlier in the month. Over the weekend, OPEC, who are responsible for 40% of the world’s production said that they have no intention to ramp up production levels at their next meeting in Sept., instead they want to act responsibly and ‘gauge’ how the real economies are coping. Some analysts believe the market is perhaps getting ahead of itself and pricing in the fact that high levels of global inventories are going to fall pretty fast in the 3rd and 4th Q if OPEC can maintain their current output levels. They are currently complying with last year’s production cuts, which are running at aprox. 77%. The weekly EIA report also supports the API’s earlier findings. Inventories of oil dropped -4.38m barrels to +361.6m, w/w. Gas stocks declined for a 7th consecutive week, another bearish report telling us that production levels are much lower than we originally perceived. On Friday, we witnessed the ‘yellow metal’ falling the most in 2-months as the rebound from the greenback curbed demand for the commodity as an alternative investment strategy and a stronger hedge against inflation ($932).

The Nikkei closed 10,039 down -96. The DAX index in Europe was at 4,965 down -102; the FTSE (UK) currently is 4,358 down -83. The early call for the open of key US indices is lower. The 10-year Treasury’s eased 3bp on Friday (3.79%) and a further 6bp in the O/N session (3.73%). With dealers pushing yields to print the highest levels in 8-months early last week, the $65b 3-US government auctions managed to attract the most investor demand we have seen this year. The market had become over extended on the down side. Treasuries also got support from Japan who gave the US economy a ‘thumbs up’ stating that Japan’s confidence in US securities is ‘unshakable’. This week’s direction flow has become equity dependant in the short term!

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