Throw a BRIC at the USD strength!

The EUR received this morning bid from the inaugural BRIC meeting being held behind closed doors in Russia today. Capital markets are fearful of any comments or proposals that could once again endanger the already ‘strongly’ endorsed dollar status as the one and only reserve currency. It’s highly anticipated that Russian President Medvedev will raise the reserve currency issue once again. Combine this with stronger German confidence numbers this morning (44.8 vs. 31.1) and we have a European currency advancing from its overnight O/N lows. At the G8 meeting last weekend, Canadian Finance Minister called for stiffer financial stress tests to be implemented in Europe. It was the ECB’s assessment that the Euro-zone banks face potential further write-downs of $283b (still too conservative) and that the write-off rates could increase by more than expected, got the ball rolling for the EUR’s slide yesterday!

The US$ is weaker in the O/N trading session. Currently it is lower against 11 of the 16 most actively traded currencies in a ‘whippy’ trading range.

Yesterday’s US data does not paint a rosy picture. It’s consistent, but, not green shoot material. The Empire state manufacturing index last month contracted at a faster pace (-9.4 vs. -4.6, m/m), as both sales and inventories declined, further proof that the US economy is months away from a sustained recovery. Inventory levels have been the surge of this recession globally, and US companies will continue to keep cutting until we see solid sales growth. On a more positive note, the next 6-month outlook managed to climb to its highest level in 2-years as the expected drawdown on goods in hand would technically open up the way for factories to boost future output numbers. Other data yesterday showed that total net purchases of long-term equities, notes and bonds in Apr. climbed at a slower pace than expected (+$11.2b vs. $55.4b in Mar.). Notably, Russian China and Japan trimmed their US foreign holdings. This was the same trio who endorsed the USD so strongly either directly or indirectly at the weekend, they must have more to do!

The USD$ currently is lower against the EUR +0.47%, GBP +0.15%, CHF +0.40% and JPY +1.29%. The commodity currencies are stronger this morning, CAD +0.21% and AUD +0.21%. Yesterday we saw a ‘big’ sigh of temporary relief for everyone at the BOC, as the loonie tumbled to new monthly lows, on the back of falling commodity prices and a resurging greenback. This gave the CAD bulls a torrid time. It was only last weekend did the market start to utter the words ‘Cbank intervention’ for commodity currencies as they have run rampant of late vs. the USD! The loonie managed to weaken against all of the 16 most traded currencies as investor appetite for risk eased. Last week BOC governor Carney stated that the currency gains this year may threaten economic growth if they persist. He continues to downplay a quick economic recovery, a time line similar to some of his counterparties. If one believes that green shoot economics is very much in play, then technically the market is giving CAD bulls an opportunity to re-load they long positions before the currency once again makes an assault towards parity vs. its largest trading partner. But, with G8 members questioning the volatile nature of commodities and its longer term effect on global economic growth, then it’s probably prudent to want to sell CAD on USD pull backs in the short term.

The decline in Asian stocks is dulling investor appetite for higher-yielding assets like the AUD and NZD. The currency pared some of this week’s gains in the O/N session as traders purchased the mighty greenback against all its trading partners after positive comments from the Russian delegation over the w/d said it had full confidence in the USD. Strong fundamental data last week had pushed the currency to a 7-month high. This retracement will give the bulls a better opportunity to own the currency at more advantageous levels (0.7999).

Crude is higher in the O/N session ($71.34 up +72c). Oil continued down a slippery slope for a 2nd-consecutive day yesterday on the back of the mighty dollar appreciating to it strongest levels vs. the EUR in over a week. A lofty USD value is curtailing speculators needs to use commodities as a natural hedge vs. inflation. The USD strength has been aided by G8 finance ministers supporting comments for the currency and by yesterday’s regional manufacturing data from NY stating that the area had contracted for a 14th straight month. With equities trading much softer, economists aiding their actions by stating that US house prices have another 15-20% of downside left in them and further ‘stress test’ warranted for US financials, will have dealers sell oil contracts on rallies. At the moment there seems to be a strong negative correlation relationship between commodities and equities. If we were solely relying on fundamentals, then Iran’s tenuous position combined with the latest US inventory reports would have the ‘black-stuff’ better bid. Last week’s API report revealed that US stockpiles dropped, w/w (-6m barrels vs. +0.4k expected rise), as refiners ramped up production, couple this with the EIA raising its 2009 demand forecast for the 1st-time since Sept. had the market setting it sights on the $75 price that OPEC members wishfully predicted earlier in the month. The weekly EIA report also supported the API’s earlier findings. Inventories of oil dropped -4.38m barrels to +361.6m, w/w. Gas stocks declined for a 7th consecutive week, another bearish indicator telling us that production levels are much lower than we originally perceived. Follow equities for the directional play for commodities at the moment. The ‘yellow metal’ managed to print a new monthly low as the strength of the greenback has eroded demand for gold as an alternative investment ($936). Already this morning has the greenbacks actions been able to pare some of the earlier losses.

The Nikkei closed 9,752 down -286. The DAX index in Europe was at 4,892 up +4; the FTSE (UK) currently is 4,347 up +21. The early call for the open of key US indices is lower. The 10-year Treasury’s eased 2bp yesterday (3.71%) and are little changed in the O/N session. Russia seems to have held the last piece of the puzzle, their ‘emphatic’ support for the USD has lifted Treasuries for a 3rd-consecutative day. Finance Minister Alexei Kudrin said last w/d that their administration has confidence in the ‘greenback’ and his nation has no immediate plans to switch reserve currencies any time soon. A powerful endorsement, which obviously aids their own currency and commodity receipts in USD terms! We should expect the FI market to rally over the week as we have Fed buy-back’s today (May-2012’s to Nov-2013’s) and tomorrow (May-2016’s to May-2019’s).

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