The Dollar needs Life-Support.

Bring it on! We have a data laden, policy induced, and volatile employment week ahead of us. There will be a Fed, an ECB, a BOE, and an RBA interest rate announcement. Sandwiched between all of this, is a G20 meeting ending this Friday with the US employment report! This week will not be for the faint of heart. This morning, World bourses remain under pressure. The weekend bankruptcy announcement of CIT group, along with the failure of 9-regional banks in the US is not giving the markets much confidence. By the end of this week, we will have clarity, and if equities remain under pressure, then we will have USD support for risk aversion strategies.

The US$ is weaker in the O/N trading session. Currently it is lower against 13 of the 16 most actively traded currencies in a ‘whippy’ trading range.

What a week last week was? Markets up +4%, markets down -4%! Strong US GDP numbers had us on the cusp of declaring the recession over, no problems here! The headline print is now but a distant memory. Capital markets are being dictated to by consumer’s income and weak spending patterns. They require incentives to bring them back to the stores and certainly remain focused on repairing their own damaged balance sheets. Much of what they spent via the clunkers program in Aug. they easily took back in Sep. This has left intact a very weak trend in real-consumption. If consumers won’t spend, how will we ever exit this recession?

The USD$ is currently lower against the EUR +0.43%, CHF +0.46% and higher against GBP -0.19% and JPY -0.65%. The commodity currencies are stronger this morning, CAD +0.36% and AUD +1.23%. Friday’s Canadian GDP disappointed and blindsided both the currency and Capital Markets. Augusts’ headline print actually fell -0.1% as oil and gas extraction dropped -2.3% and manufacturing fell -0.7%. This is stronger evidence that the Canadian economy may not be following its southern neighbor straight out of this recession. Governor Carney may have spoken too soon when he declared that the recession ended in July-Sept. and predicted a +2% annualized expansion! Last week’s GDP announcement will have policy makers once again revising domestic expectations. To some extent we are lucky that the BOC has publically committed to keep lending rates at a record low well into next year, maybe even into the 3rd Q! Do not expect them to deviate from this, unless the inflation outlook shifts, and currently that rather benign! Governor Carney is insistent that a strong loonie will damper longer term growth. In his testimony before the House of Commons Finance Committee last week, he said efforts by Cbanks to affect their own 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. Will he get to use any of them? Dealers want to see better levels to own their domestic currency. Governor Carney has got to be worried, last time they intervened was 11-years ago!

The Aussie dollar advanced in the O/N session after policy makers revised upwards fundamental forecasts for the country. The economy is expected to grow +1.5% over the next 12-months and the jobless rate to peak at +6.75%, according to Treasurer Swan. The futures market expects the RBA to raise its benchmark O/N rate to +3.5% this evening. This has maintained the currency’s longest winning streak vs. the USD as the US economy return to growth has investors coveting higher yielding assets. The currency remains better bid on pullbacks (0.9062).

Crude is lower in the O/N session ($77.53 up +53c). On Friday, crude prices plummeted 4% after US consumer spending dropped for the first time in 4-months, raising doubt that the US economy will strengthen any time soon. Earlier last week, surprisingly strong GDP data had boosted the appeal of the commodity as speculators betted that fuel demand would increase. Initially, market actions told us that the recession has ended, but Friday’s mixed bag of data has us questioning the pace of growth of the economy and if so, is it sustainable? All last week, the black stuff has had issues sustaining a break of the $80 a barrel level. It seems that crude prices are finally beginning to follow oil fundamentals! The weekly EIA report revealed an unexpected increase in US gas stocks, with supplies jumping 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. OPEC continues to talk crude down. They implied that members will increase output production to protect the global economic recovery if oil prices rise above the $80 psychological level. They believe that both the ‘producer and consumer are comfortable with prices between $75 and $80 per barrel and that higher price’s would only put the brakes on the pace of global economic recovery’. Ideally, they want to ‘maintain balance’ and will act accordingly in Dec. 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. A robust dollar ahead of this week’s NFP number will have speculators selling upticks in the short term.

Gold bears took control on Friday paring all of the previous days strong gains as the greenback received support from risk aversion trading strategies. Technical analysts believe that the yellow metal is expected to remain under pressure this week as the US dollar index gathers momentum and rebounds from its 14-month lows witnessed 3-week ago. In the O/N session, the commodity managed to breach its one week high as the USD declined ($1,052).

The Nikkei closed at 9.802 down -231. The DAX index in Europe was at 5,427 up +6; the FTSE (UK) currently is 5,053 up +9. The early call for the open of key US indices is higher. US 10-year bonds eased 7bp on Friday (3.41%) and are little changed in the O/N session. October was the first time in four months that ‘note’ prices ended on the losing side. Even Friday’s aggressive bond rally came to naught! Capital Markets is betting that the Fed may begin to signal an increase in interest rates from their 50-year lows as the US economy is starting to show signs of stability and growth. The Fed, ECB and BOE all meet this week. We can expect a rumored fed volatile week, climaxing with this Friday’s US employment report. Goldman has revised the headline print down to -200k while market consensus remains at -175k. The ending of the Fed’s $300b buy-back program after 7-months is expected to pressurize treasury prices. The program was initiated to help stabilize the housing market and limit an increase in borrowing costs by keeping rates low. Even though we may be testing record low yields in the short term, analysts foresee 4.5% in 10-yr notes by the middle of next year!

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