The ‘Big Dollar’ has caught more than the Flu! Where is its vaccine?

Insatiable appetite for anything other that the USD is rabid! There is so much cash on the sidelines and investment mangers cannot seem to put it to work quickly enough in all the other classes. Hence, why the market pull backs have been shallow! This scenario does not feel good. Too much one directional play is not supported by global fundamentals. However, heavy printed assets such as the USD and GBP will remain under pressure. The fact that the G7 meeting omitted to state any common view in their statement last w/d is mind boggling. We know that most want to ‘support’ a stronger dollar policy, in fact they managed to achieve the reverse and took the only life preserver away!

The US$ is weaker in the O/N trading session. Currently it is higher against 2 of the 16 most actively traded currencies in a ‘whippy’ trading range.

Historically, the day after NFP ends up being one of the quietest trading days of the month. It’s no wonder that the markets basically ignored better than expected US ISM services data (50.9 vs. 48.4) yesterday. The services sector has started to expand for the 1st time in over a year. It has now joined its sister act, the manufacturing sector, above 50 (combined composite index is 51.1). Digging deeper, a faster pace of expansion in business activity and an improvement in new-orders helped support the gain. The pace of inventory contraction also slowed, along with employment, while prices fell from 63.1 to 48.8 suggesting pricing power is still non-existent. It’s not surprising to see that employment has been contracting for 20 of the last 21-months! That’s consistent with most of the other employment reports. On the flip side, there was a decline in new-export orders. It was a surprise to some analysts, who have noted that ’other global economies have been posting solid gains in growth over the past few months’. Thus we can conclude that the improvement in new-orders (54.2) is due to domestic strength, which can only be a strong positive!

The USD$ is currently lower against the EUR +0.46%, GBP +0.57%, CHF +0.52% and JPY -0.06%. The commodity currencies are stronger this morning, CAD +0.22% and AUD +1.10%. The insatiable appetite for risk continues to lend support to higher yielding currencies. Mind you, the wobbly USD is also doing it own bit. The loonie, with little strong fundamental data to report over the last week, is even defying the negative price effects of crude recorded in the last 2-trading sessions. There is so much ‘cash’ on the side lines that investment managers cannot put it to work quickly enough. Heightened risk appetite continues to drag the loonie along for the ride. ‘Too much too soon’ is a concern. Investing in equities at these lofty prices is not for the faint hearted! Today, we get Canadian building permits and the Ivy index, both are expected to out perform, however, dealers will prefer to keep the ship afloat until Friday’s Canadian unemployment numbers. Expect speculators to be better buyers of USD’s on pull backs.

So much for co-coordinated increases! The RBA unexpectedly hiked its benchmark interest rate 25bp from a 49-year low to 3.25%. Governor Stevens also indicated that further increases are forth coming in the months ahead. He stated that his actions are justified by Australia’s strengthening economy. Prior to the announcement, futures had priced in a 30% chance of a hike. The RBA is the first Cbank out of the gate amongst G20 members to reverse some stimulus. The AUD managed to aggressively advance vs. the USD and print new 14-year highs. Rising job vacancies, retail sales and house prices support the Governors view that the ‘basis for such a low interest rate setting has now passed’. It begs the question, who is next to follow? The Fed is expected to be one of the last entries, which does not bode well for the USD strength in the medium term!(0.8885).

Crude is higher in the O/N session ($71.04 up +79c). Not much of a surprise to most of us that crude has remained in a tight range after weaker than expected US data last week. Demand destruction remains healthy and with the Nigerian militia (MEND) signing another amnesty agreement at the weekend has helped to ease tensions in the oil rich Nigeria delta. Add in the fact that Russia increased production last month and surpassed Saudi Arabia as the largest produce just increases global inventory of the black-stuff. It has been prudent for investors to book profits after reaching once again technical resistance above $70. All of this has occurred despite last weeks EIA report recording a large gas drawdown. The report revealed a -1.6m barrel drop in gas inventories, inline with the API print, but against analysts’ expectations of an increase. Over the past month, US gas demand is up +5% and this after the end of the holiday driving season! On the flip side, crude inventories happened to increase by +2.8m barrels, w/w, vs. expectations of a +600k rise. With energy fundamentals remaining unconvincing, it would be a safe bet that crude should be confined to its $10 range of $65-$75. However, we can never rule out geo-political influence! Technically oil prices remain inflated as they are not supported by market fundamentals, but geo-politics will always keep the black-stuffs prices artificially higher.

Gold continue to climb as the USD succumbs to further pressure O/N as the G7 offering of no support for the currency over the weekend has encouraged investors to purchase the ‘yellow metal’ as an alternative investment ($1,019).

The Nikkei closed at 9,691 up +17. The DAX index in Europe was at 5,548 up +39; the FTSE (UK) currently is 5,061 up +38. The early call for the open of key US indices is higher. The 10-year bonds eased 1bp yesterday (3.20%) and are little changed in the O/N session. US treasuries continue to find a bid on pull backs as both dealers and investors speculate that despite US treasuries largest supporter is technically on holidays, there will be a strong demand for this week’s $71b worth of US debt. They seek duration (price sensitivity to interest-rate change expressed over time).

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