The Bullies Are Back In The School Yard Beating On ‘Mighty Buck’!

Let the games begin! This week should be an important week in FX-land. Schools are open, Daddy and Mum at back at their trading desks, not happy campers either of them. Historically, the week after Labor Day has always been an important week for the currency market. Looking back, one would have noticed more often than not, it tends to produce the trend for the last trading Q! We will get to answer the question, will be USD be a hit or a bust?

The US$ is weaker in the O/N trading session. Currently it is lower against 16 of the 16 most actively traded currencies in a ‘whippy’ trading range to start the shortened week.

After peeking at last nights trading ranges, the greenback is acting like a ‘deer caught in the headlights’! It does not take a genius to conclude that the current environment bodes ill for the ‘once mighty reserve currency’. The ‘yellow metal’ has the stamina of Usain Bolt! US FI yields are so low, it’s difficult to comprehend what they mean or why do they exist! Some JPY paper is worth more. The very fact that the Obama administration could monetize the US debt would support a heightened dollar crisis! Slowly but surely, there are more and more articles about this very affect occurring. Both the G20 and UN are not even USD friends, but foes! After the past weekend, the G20 meeting has backed risk-taking in an off handed way and will only result in further USD negativity. Finally, the UN issued a report stating that a ‘new currency’ is needed to fix the broken ‘confidence game’ relating to the dollar. The bullies are back in the schoolyard this week!

The USD$ currently is lower against the EUR +0.51%, GBP +0.50%, CHF +0.53% and JPY+0.63%. The commodity currencies are stronger this morning, CAD +0.44% and AUD +0.60%. The loonie never lacked direction after last Friday’s stellar employment report in Canada (+27.1k vs. -12.4k). Details made the headline somewhat less impressive than initial takes might have it, but on balance the headline print exceeded all expectations. This report will support the loonie and the early-rate hike camp. After one report and the market continues to want to get ahead of it self! One month’s data does not make a trend. Governor Carney at the BOC knows the domestic economy has been somewhat resilient, but is it sustainable? International trade and its impact on the domestic economy do not seem to be turning around just yet. Despite printing a new month loonie high, the currency does remain range bound and do not be surprised to expect some profit taking.

There is nothing keeping this currency down! The AUD managed to reach its highest point vs. the USD in more than a year O/N. All this before this week’s retail sales and employment data which has also managed to increase investor speculation that the RBA will be the 1st policy makers to raise rates, even as early as next month. A healthy rise in commodity prices is also helping the currencies cause (0.8617). For now, look for better buying interest on pull backs, if we can get any!

Crude is higher in the O/N session ($69.03 up +101c). Crude prices remain close to home following the weaker than expected US fundamental data of late, the official end of the US driving season and an expected no change from OPEC. Last week’s higher than expected claim numbers had investors questioning the strength of the US economy. The weekly EIA inventory report fell -400k barrels compared with analysts’ projections of a decline of -600k. However, the real eye-catcher of the report was that gas stocks were off -3m barrels, way ahead of analysts’ expectations of a -900k barrel draw down (the bullish element). Distillate stocks rose +1.2m barrels, double the expectation build. Total product demand rose +0.1% over the past month compared with year-ago levels as gas demand increased +0.5% over the same period. Refinery utilization was up +3.1% points to +87.2%.Investors are keeping a close eye on Chinese equities, which technically, entered a ‘bear’ market earlier last week which managed to pressurize global bourses and heightening investor concerns that a slowdown in lending would impede an economic recovery in their country. China has been the go-to region that the rest of the world has been relying on to drag us out of the worst recession in 50-years. Basically demand destruction remains healthy! It’s expected at the OPEC meeting this week that some members will demand that others comply more strictly with production quotas as global stockpiles climb. Fundamentally, inventories are above the normal level of 61 days’ worth of demand. There is little chance that OPEC will revise quotas is the short term.

Who is buying all that Gold? Conspiracy theorists are beginning to wag their tongues and speculate that someone ‘big’ is in trouble. This always encourages a violent switch to a commodity of surety! The easiest answer would be to say that global bourses are under pressure or the greenbacks weaker and by default this increases demand for the ‘yellow metal’ as an alternative investment. But, it seems to be the Chinese! China’s Central Television (the main state-owned TV-company), is running news programs letting the public know how easy it is to buy precious metal as an investment ($1007). With 1.3b investors in China who knows where this will end!!

The Nikkei closed at 10,301 down -15. The DAX index in Europe was at 5,489 up +26; the FTSE (UK) currently is 4,964 up +31. The early call for the open of key US indices is higher. The 10-year bonds backed up 9bp from Friday (3.44%) and are little changed in the O/N session. Last week we saw FI prices achieve what we expected and make a break to the top-side, managing to print 2-month lows in the process, and all this despite reasonably positive US data. A some what upbeat employment report, coupled with the announcement of US government issues this week totaling $70b in 3’s, 10’s and long bond was enough of an incentive for dealers to push yields higher.

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