US dollar to renew ‘signs of stress’?

Have we put the horse in front of the cart? Are we getting ahead of ourselves? Equity market rely on a 6-9 month lead, but this 9-week rally erasing all of 2009 losses has been astounding. All what is broken now fixed? Stronger seasonal earnings have driven the markets, but no one is adjusting future earnings just yet! Despite all last weeks event risk becoming public do not be surprised to see the market take stock of its recent euphoric rise.

The US$ is stronger in the O/N trading session. Currently it is higher against 12 of the 16 most actively traded currencies in a ‘subdued’ trading range.

Capital markets are clearly in risk loving mood after last week’s ECB decision (-25bp ease), US bank stress test results and a stabilization of the US unemployment increase (not a trend, but a start). Even China is contributing to this euphoric rise from the ashes. Recent statements (despite worrying about their currency reserves) continue to positively influence the markets. All of the above reasons will only further contribute towards the USD decline. Expect little consolidation as the major trading partners breach currency technical levels. Most frightening has been the poor response to the US long bond auction last week. The government continues to issue new maturities to finance debt. However the market is beginning to drown in supply! A betting individual would expect the greenback to grind lower

The USD$ currently is higher against the EUR -0.32%, GBP -0.31%, CHF -0.39% and lower against JPY +0.40%. The commodity currencies are mixed this morning, CAD +0.13% and AUD -0.28%. Wow! The loonie posted its 6th-weekly gain after Canadian employers unexpectedly added jobs last month (+35.9k vs. –48.5) and US payrolls fell less than forecasted (-539k vs. –610k) and providing stronger evidence that the economic slowdown may be moderating. Of course global equities and commodities rallying also helped this highly correlated risk currency. Unlike its southern partner, Canadian unemployment rate held steady at +8.0%. Technically, the underlying fundamentals remain healthy in this environment, which is starting to convince speculators to purchase the currency on USD rallies. This stronger data will allow the BOC to breathe a sigh of relief. The market can expect no additional measures to be implemented any time soon by Governor Carney. Despite the move been swift and violent, the ‘trend remains your friend’!

Last week was another winning week for the best performing currency this year vs. the USD (+9.3%). It was the 10th-weekly advance, the longest streak in 6-years. Fundamentals look good, the currency managed print a 7-month high in the O/N session vs. the USD and JPY on speculation that the global equity markets will extend their 2-month gains as deep recession fears subside (0.7630).

Crude is lower in the O/N session ($57.62 down -101c). Crude managed to gain +10% last week after various reports surprised to the upside. Firstly, US home sales and manufacturing in China ‘boosted optimism’ about the global economy. Secondly, the weekly EIA crude inventory numbers climbed less than forecasted and finally, Friday’s payroll numbers fell by –539k vs. an anticipated loss of –699k. Technically, the market is primed to make an assault on $62 a barrel in the short term. However, fundamentally the underlined reports suggest that this market is overextended as overall US demand remains weak despite the black stuff printing a 6-month high on Friday as the greenback traded under pressure vs. the EUR, which supports the demand for commodities as an alternative investment. Too far too quickly, look for assets classes to pare some of their gains or losses. Last week’s The EIA release was ‘bullish’ in respect to the other reports of late. Crude supplies rose +605k barrels to +375.3m last week (a new 19-year high), but less than the forecasted +2.5m gain. Meanwhile gas supplies fell -167k to +212.4m vs. a +500k gain and distillate fuel (heating oil and diesel), rose +2.43m barrels to +146.5m, the highest print in 32-months. Gold continues its rally as a safe heaven alternative as Cbanks actions may spur inflation, thus increasing the demand for the ‘yellow metal’ as a hedge ($915).

The Nikkei closed 9,451 up +19. The DAX index in Europe was at 4,851 down -61; the FTSE (UK) currently is 4,417 down -44. The early call for the open of key US indices is lower. The 10-year Treasury’s eased 1bp on Friday (3.30%) and a further 6bp in the O/N session (3.24%). Despite a higher unemployment rate printed on Friday, treasuries managed to have another weekly loss, the 7th in a row and the longest losing stretch in 5-years. Last week the US government tendered $71b of new debt. Their borrowing requirements are starting to overwhelm the market as noted by the $14b long bond auction on Thursday. Investors and dealers managed to push yields aggressively higher and make the Fed pay up to attract buyers. We are back to trading the supply and demand push-pull by the US government and the Fed. With the abundance of supply and the pickup in economic activity, dealers will not support the longer end of the curve. The Fed will have to increase their buy-back program to keep rates low (+600b) otherwise these high rates will stifle any growth that’s been promised. With yields rapidly rising of late perhaps its time to own some?

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