The dollar is getting oxygen.

We get a plethora of US data to chew on this morning. Global bourses have remained under pressure in the O/N session. Some analysts have lowered their 3rd Q US GDP expectations to +2.7% vs. the consensus of +3.2%. Achieving the lower headline print this morning will only extend the recent movements by various asset classes. The funding currencies, like the USD and JPY, should continue to outperform, while equities and commodities will have their tail between their legs! For too long, too many speculators have been sitting on the ‘one’ directional trade. The USD will remain bid heading into next week’s Fed meeting.

The US$ is weaker in the O/N trading session. Currently it is lower against 14 of the 16 most actively traded currencies in a ‘whippy’ trading range.

Yesterday, US New Home Sales managed to retreat after 5-months of consecutive gains (+402k vs. +417k or -3.6%). Not only did the sales number register the first loss since Mar. the previous data for June to Aug. was also aggressively revised down! Perhaps, this first time incentive program may not be providing as much support as the markets believe. Nor it seems does lower inventory and mortgage rates! We continue to see some improvement in the re-sale market, partly due to the reduced prices from record foreclosures being passed along. It’s worth noting that the US Senate is close to an agreement to modify the current first-time homebuyer program which is set to expire next month. Monthly supplies remain at 7.5 for the 2nd-consecutive month, which remains the lowest level in 2-years.

Other data yesterday showed that US factory orders rebounded last month (+1% vs. -2.6%), while the core was +0.9% vs. -0.4%. However, digging deeper, most of the strength was in machinery and defense aircraft orders, while weakness remains relatively broad based. Looking at the sub-categories, shipments got a boost last month while inventories continued to deteriorate, leading to a decline in the inventory-to-shipments ratio to the lowest level in over a year. Inventories (the scourge of this recession) remain bloated and are expected to curtail production in the short term. New-orders remain healthy, advancing +1% last month, while ex-transportation they were still up +0.9% m/m. The strength in the transportation sector was in defense orders, as vehicles and parts orders actually fell! Analysts tend to use non-defense capital good ex-aircraft as a proxy for business investment, will notice that it actually rose +2% last month. Finally, inventories continued to decline, falling -1.0%, m/m, which combined with an increase in shipments (+0.8%), gives way to a decent drop to the inventory-to-shipments ratio!

The USD$ is currently lower against the EUR +0.14%, GBP +0.26%, CHF +0.10% and JPY +0.14%. The commodity currencies are stronger this morning, CAD +0.21% and AUD +0.31%. BOC Governor is insistent that a strong loonie will damper longer term growth. In his testimony before the House of Commons Finance Committee this week, he said efforts by Cbanks to affect their currencies need monetary policy to back them up. FX intervention without complimentary policy moves is seldom effective in the long term. He has options, like credit and quantitative easing to influence the loonie and meet their 2% inflation target. The commodity based currency was dealt a blow from softer crude prices as OPEC suggested that they would increase output production if higher oil prices threatened global economic growth. With equities under pressure, and the USD remaining better bid on risk aversion strategies, is curtailing the demand for the loonie. With a large percentage of the market being long CAD on the back of recent commodity advances, one should expect the technical traders to dictate the short term direction. Weak longs are being squeezed out. Dealers expect to see better levels to own their domestic currency. After breaching the 1.0800 level yesterday opens up the top side to 1.0950.

As expected RBNZ Governor Bollard kept benchmark interest rates on hold this morning (2.50%). The Cbank is expected to keep rates at these levels well into next year, similar to the BOC, as the economy needs further stimulus to recover from this recession. The best performer, the AUD, amongst the 16 major currencies managed to retreat in the O/N session on the back of Asian stocks extending a global slump, coupled with softer commodity prices which make up more than half of the country’s exports! Already this week we saw that Australian inflation cooling to the slowest pace in 10-years (+1.0% vs. +0.5%, q/q). This will ease the pressure on Governor Stevens at the RBA to hike the benchmark lending rate (3.25%) by 50bp next week. A 25bp hike looks increasingly likely to be the best case scenario from the RBA next month. Governor Stevens said it was ‘possibly imprudent’ to keep borrowing costs at a 50-year low in the minutes of its Oct. meeting. For now, the currency remains better bid on deeper pullbacks (0.9040).

Crude is lower in the O/N session ($77.44 down -2c). Crude prices plummeted the most in a month yesterday after the weekly EIA report revealed an unexpected increase in US gas stocks, while crude supplies jumped to a new 2-month high. Gas inventories climbed +1.62m barrels w/w vs. an expected decline of -1m barrels. The import number for crude also advanced for the 1st- time in 5-weeks. With the greenback once again finding traction is also managing to weigh down commodity prices. OPEC, this week also contributed by starting to talk crude down. They implied that members will increase output production to protect the global economic recovery if oil prices continue to rise above the $80 psychological level. They indicated that both ‘producers and consumers were comfortable with oil prices between $75 and $80 per barrel and that higher price’s could put the brakes on the pace of global economic recovery’. Ideally, they want to ‘maintain balance’ and will act accordingly in Dec. depending on where crude is trading. Fuel demand fell -0.8%, w/w, to an average of +18.5m barrels a day, while gas consumption fell -1% to +8.86m barrels a day. Basically, demand destruction remains intact and excess supply an issue. Over the week, refineries operated at +81.8% of capacity, up +0.7% from the previous week. On the other hand, crude stocks rose +778k barrels vs. expectations of +1.9m to +339.9m barrels last week. This has left supplies +9.1% higher than the 5-year average. Supplies of distillate fuel (includes heating oil and diesel), declined -2.13m barrels to +167.8m. Surprisingly, inventories were +29% higher than the 5-year average for the week. Technically, prices have been aggressively mobile on pure ‘speculation’ in the face of positive overall supply fundamentals. Keep eye on equities, they may have hit a ceiling, which will eventually pressurize this over supplied commodity class even more!

Gold has somewhat rebounded in the O/N session from its 3-week lows recorded yesterday. On a technical level, the yellow metal’s rapid decline has persuaded investors to increase their holdings, deeming the move to be somewhat overdone. Of course, with global equities backing off, has also boosted the appeal of this precious commodity as a ‘store of value’ ($1,035).

The Nikkei closed at 9,891 down -183. The DAX index in Europe was at 5,477 down -19; the FTSE (UK) currently is 5,070 down -10. The early call for the open of key US indices is lower. Despite a record amount of product to offload this week, the 10-year bonds eased 6bp yesterday (3.41%) and are little changed in the O/N session. Treasuries gained for a second day after a record $41b sale of 5-year notes drew the strongest demand in over 2-years (the bid-to-cover was 2.63). Also aiding the charge higher was weaker than expected US new home sales data (-3.6%) from last month.

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