Sovereignty rating concerns supports dollar?

Let’s try and connect some of the dots while looking at the bigger picture. Equity markets remain somewhat resilient despite regional hotspots. Dubai being this morning’s exception, which fell to a 5-month low on concerns that Dubai World is struggling to restructure its debt. S&P is about to downgrade Greece and Portugal while Moody’s states that the US and UK ratings may be tested. The inexperienced and somewhat unpopular Japanese PM announced an $81b economic stimulus package to counter deflation and a surging JPY. Geithner and Bernanke continue to preach that the situation has improved, but, there is still a long to go to sustain growth. The world saviors’ is supposedly China and the rest of Asia. If Europe, the USA and Japan are in so much trouble, how is it possible for these other regions to sustain their supposed current rate of growth? Something is amiss!

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

Just three days after a surprising NFP print, helicopter Ben put a halt to the notion of hiking rates sooner than the already telegraphed ‘extended period of time’ yesterday. He conceded that the US economy has improved, but cautioned that the ‘recovery remains fragile’ and the jobless rate may remain ‘elevated’ for some time. He believes that the economy has some ways to go to be assured that the recovery will be ‘self-sustaining’. His rhetoric to an Economics club in Washington was in fact rather dovish. He continues to point out that despite the general improvement in financial conditions, credit remains tight for many borrowers and the job market weak. Someone has to be realistic after Friday’s movements which have seen both investors and dealers getting once again ahead of themselves. ‘Elevated unemployment and stable inflation expectations should keep inflation subdued, and indeed, inflation could move lower from here’ he said. He believes the Fed’s balance sheet will not result in higher inflation and the Fed has the tools to withdraw stimulus. Their most difficult challenge will be not how to remove stimulus, but when. The crisis showed that risk management systems were inadequate and that financial firms must improve them while at the same time regulators must overhaul their approach to supervision. Wow! and he was only attending a luncheon!

The USD$ is currently lower against the EUR +0.05%, CHF +0.07%, JPY +0.50% and higher against GBP -0.43%. The commodity currencies are slightly stronger this morning, CAD +0.05% and AUD +0.07%. The Canadian Stats Bureau must be on some sort of hallucinogen! Again no one was within driving distance with yesterday’s Canadian Building permit print. The data clearly shows that supply is coming back. It was a much more bullish than expected set of permit numbers that was nearly 5 times greater (+18.1% vs. +1.1%). Is this further confirmation that the Canadian economy is recovering at an even faster pace than what’s been expected? Last Friday’s employment numbers also surprised (+79.1k).The loonie managed to advance for the first time in four days despite commodity prices coming under renewed pressure. Until we get confirmation from Governor Carney this morning, that rates are to remain on hold again (0.25%), the currency should be treading water. Capital Market’s continue to tout June of next year as the month of the first rate increase because of fading wage gains and ‘slow’ economic growth. The market is beginning to question BOC Carney’s tactics. His pledge to freeze record-low borrowing costs until next year may be raising the chances of a bubble in home prices!

Australia’s current account deficit was much wider than expected last night (-$16.18b vs. a revised -$13.1b) and has damped market expectations for a strong GDP number next week. This and the fear that Governor Stevens will further dampen expectations for an interest rate increase after raising borrowing costs a record three-straight months to +3.75% has pushed the currency to a one week low. In the big picture, the carry-trade and interest rate dynamics continue to influence the value of the currency. In theory and technically, the currency has remained better bid on pull backs as demand for riskier assets remains robust. But, currently commodity values are the problem to the AUD advancement (0.9134).

Crude is higher in the O/N session ($74.15 up +22c). For a fourth consecutive trading session, crude had managed to fall to a new 2-month low. All on the back of the greenback surging has curbed the appeal of commodities temporarily to investors. Fundamentals continue to push the black-stuff about in a tight $6 trading range. The Saudi oil minister, al-Naimi on the weekend said that prices are in ‘the right range and there is no need to reduce inventories’. OPEC meets late this month. Weekly US data continues to support the bear trade. Last week’s EIA report revealed that US inventories climbed as consumption dropped. Oil inventories rose +2.09m barrels to +339.9m, w/w (highest level in 3-months). Also surprising was gas supplies surged +4m barrels to +214.1m. The market had been expecting a drawdown for crude of -400k, while gas was to increase by +700k barrels. Demand destruction is alive and kicking as weekly fuel demand slipped -2.6% on the back of refineries reducing operating rates for the 4th time in the last month and a half. It was also estimated that the 4-week moving average for total US daily fuel demand was +18.5m barrels. Other factors continue to contribute to negative price action. Technically, the markets have been paring their open positions ahead of OPEC’s gathering. Secondly, a report last week on Russian output (the world’s largest producer) showed that it remains at a record high for a second consecutive month. Expect the USD’s direction to dictate price action medium term. Support levels look vulnerable here!

Intraday volatility saw Gold plummeted, at one point losing just under -5.5% in the last two trading session as a rejuvenating dollar convinced investors to sell the yellow metal after it printed a new record high last week ($1,227). The commodity’s prices have experienced wild gyrations of $20-$40 price swings over the past few trading sessions and remains exposed to further selling pressure if the USD continues to find traction. Seller beware, despite the ‘mother in-law’ and anyone who can, does own this ‘hot’ commodity, these pull backs remain strong buying opportunities as it’s ‘the international currency’ ($1,161).

The Nikkei closed at 10,140 down -27. The DAX index in Europe was at 5,807 up +23; the FTSE (UK) currently is 5,319 up +10. The early call for the open of key US indices is higher. The US 10-year bond eased 5bp yesterday (3.42%) and are little changed in the O/N session. Believing that the US economy is ‘not’ in full recovery mode despite the stellar employment report on Friday had treasuries paring some of last week’s losses. Yesterday, Bernanke, prudently, continues to tout the same vein of caution about the speed of the US recovery. This week $74b of new product needs to get absorbed (3’s-$40b today, 10’s-$21b tomorrow and 30’s-$13b Thursday). Dealers for various reasons have to date significantly cheapened up the curve. If the front end is well received (3’s), the middle to the long end of the curve could experience some slippage.

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