The ‘Buck feels confident’!

Déjà vu! There is a sell in ‘May and go away’ mentality to this market. With little else of late to convince other wise, the overall sentiment remains the same. Risk aversion strategies continue to trump as investors question the depth and length of this global recession. The G8 was non-committal and not very convincing last week. This week the market will focus on earning reports in the US. The ‘Usual Suspects’ will be under the microscope. What creative accounting techniques will financials come up with this quarter?

The US$ is weaker in the O/N trading session. Currently it is lower against 9 of the 16 most actively traded currencies in a ‘subdued’ O/N session.

Well we got it from the horses mouth, Geithner said that the ‘a strong dollar is in the interest of the United States’ and is not concerned with calls to overhaul the global monetary system which would dethrone the buck. Rightly, he stated that when ‘people are most concerned about risk, generally they want to be investing in the most liquid and safe market in the world, which is still the US market for Treasury bills’. Currency rallies are to be sold as the JPY and USD remains the go-to product in theses risk avers times for investors.

The USD$ currently is lower against the EUR +0.01%, CHF +0.04%, JPY +0.27 and higher against GBP -0.86%. The commodity currencies are weaker this morning, CAD -0.01% and AUD -0.72%. Canadian employment data on Friday did not disappoint. The headline result suggests that Canada’s labor market is much stronger than everyone seems to have expected (-7.4k vs. -41.4k). However, digging deeper the underlying data paints a bleaker picture. A huge surge in self-employment accounted for all of the strength in last months numbers. Both the private and public sector experienced a joint decline of -44.6k paid employees! Analysts note that all of the gains were in part-time jobs with full-time jobs dropping by almost -50k. This resulted in the unemployment rate to jump 2/10’s to 8.6%. This certainly will not help consumer spending as they will concentrate on reducing household debt. The loonie has faltered, but not at the same pace as other G8 currencies trading vs. the USD. The commodity based currency continues to feel threatened as commodity prices remain under pressure, especially oil. Expect investor’s to continue to trim bets on riskier assets and carry trades on signs that a global economic recovery may take much longer than originally anticipated. The market continues to look to sell the currency on a USD pull back in the short term as global sentiment seeks that ‘safer heaven’ currency.

Higher yielding currencies like the AUD are heading for the doors and are now trading close to their 2-month lows on the back of weak Asian equity bourses. The ongoing slide in equities has convinced speculators to sell higher-yielding assets. Risk adverse trading strategies will continue to undermine the currency for now (0.7729).

Crude is lower in the O/N session ($59.55 down -34c). Crude has managed to solidify its longest losing streak since Dec. on the back of equities finding it difficult to maintain any positive traction and on last weeks industry reports showing an increase in US fuel inventories. Investors seem to be skeptical on the performances of global economies and the US demand for the black stuff next year. Gas inventories rose +1.9m barrels to +213.1m, w/w, vs. expectations of an increase of +900k Distillates (which include heating oil and diesel), jumped +3.74m barrels to +158.7m barrels. Crude on the other hand came in very close to expectations, falling -2.9m to +347.3m. The market had expected a -2.8m decline. Recent fundamental data have led to concerns that the US stimulus program may not be working. Oil has retreated 18% from this month’s high. Technically, prices had got ahead of fundamentals in a big way over the past few months, and recent movements seem to be filling in that gap. With ‘demand destruction’ comes higher inventories and it’s speculated that this week’s inventory reports will further pressurize prices down towards that $55 a barrel level. Last week OPEC released a report cutting its 2013 forecast for global oil demand by -5.7m barrels to +87.9m barrels a day and expects developing countries consumption to drop -1% next year to +45.5m barrels a day and remain at that level through 2013. Gold prices are little changed this morning trading near their 2-month lows. USD based commodity prices may remain under pressure with the ‘buck’ staying better bid at the moment ($911).

The Nikkei closed at 9,050 down -236. The DAX index in Europe was at 4,585 up +10; the FTSE (UK) currently is 4,137 up +10. The early call for the open of key US indices is lower. The 10-year Treasury’s eased 7bp on Friday (3.28%) and is little changed in the O/N session. Despite the FI dealers setting themselves up for last week’s auctions, prices rose for a 5th consecutive week as speculation that the recovery from the deepest recession in 50-years may take longer than expected. The economy continues to drive investors towards the safety of US debt and the dollar.

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