Welcome to the Silly-Season for anything ‘USD’ related!

Today’s US Retail Sales will tell us if the consumer, the Fed’s go-to variable and solution for this recession, is alive and kicking back! The US consumer’s ability and desire to spend is a key ingredient to the economic recovery. Obama is absolutely sure that they can avoid a trade war with China. Let’s hope that is the end of this side show! Capital markets have been swift to entertain ‘risk’ friendly behavior again. No little tire flack will disturb the market and even bourses are consolidating at higher levels. Food for thought, one has got to believe that a coordinated intervention on behalf of the USD by other CB’s must be in the works…..it eventually will need a lifeline!

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

Yesterday we had nothing to chew on in terms of US economic data. Today, by contrast, we get US retail sales, PPI and Empire manufacturing (that’s a mouthful), nothing to do with chicken ‘bits’ or ‘tires’. By the way, in Akron, Ohio, once the heart of the US tire industry, is a tire ‘hub’ that has been dead for nearly 30-years (globally speaking), no ‘tire union’ sought tariffs, it was the steel workers union. Uttering’s of trade war or tariffs potentially could put Capital Markets into a tailspin, ‘them’s dirty words’! President Obama assured us that we are not going to be having a trade war. Enough said for the time being!

The USD$ currently is higher against the EUR -0.14%, CHF -0.28%, JPY -0.21% and lower against GBP +0.19%. The commodity currencies are weaker this morning, CAD -0.08% and AUD -0.13%. Yesterday, Canadian Capacity utilization managed to fall for an 8th-consecutive quarter and print a new record low of +67.4% vs. +70.2%. Hand in hand, the loonie yesterday achieved its lowest level this month on the back of a potential trade dispute between the US and China. The fear of a trade war has led to risk aversion and dumping of the CAD. If commodities and equities can maintain a bid, then growth currencies like the loonie and the AUD will be wanting, currently that’s not the case. It’s worth noting that despite performing positively vs. the USD last week, the CAD strength is unlike the other G10 currencies, if anything it looks tenuous at best. Why? Canada’s Finance Minister Flaherty said that their budget deficits will be double earlier forecasts and the country is to remain in the ‘red’ until 2015 (a governments moving target). Other reason can be attributed to the BOC’s lack of urgency to ‘remove’ fiscal stimuli. The loonies’ direction continues to be dictated by global risk tolerance and not by its CB. Parity whispers seem to have been put on hold while Canadian lawmakers threaten to defeat Prime Minister Harper’s minority government and it’s only Monday.

The AUD has retreated from its strongest level in over a year vs. the USD this week. The RBA is concerned about ‘premature’ tightening. Policy makers are weighing the risks of ‘accelerating inflation and choking off an economic recovery’ as they consider when to raise interest rates from their 50-year low. Weaker commodity prices continue to affect the AUD’s value. They account for +50% of the country’s exports. Dealers are looking to sell on upticks (0.8587).

Crude is higher in the O/N session ($68.98 up +12c). A technical correction and not the might of fundamentals managed to push Crude prices lower again yesterday. With global equities declining, this has raised concerns that the recent price advances may be outpacing global recovery. Basically, without equities advancing or the USD aggressively dropping, there will be no true love for the black-stuff in the short term. Last week, we were subjected to the ‘weak’ dollar boosting the appeal of commodities to investors as an inflation hedge, this week we continue to witness a weak greenback. OPEC held oil production quotas unchanged earlier this month, as expected, with most members voicing satisfaction with current global crude prices. Interestingly the focus was on persuading members not to sell more oil than their quotas permit. The black-stuff also received support from the IEA, who raised its estimate for next year’s global demand for a 2nd-consecutive month. Do consumers not play a part of the equation? Obviously not! US crude oil inventories posted a much larger than anticipated fall last week on lower imports and higher demand from refiners because of the Labor Day holiday. Both the EIA and ADP recorded larger than expected drawdowns (-5.9m and -7.2m barrels respectively). The EIA also showed that stocks of gas and middle distillates were up w/w, to the highest level in 26-years! It seems that the market believes that the oil products supply builds likely will be offset by the somewhat bullish impact of a large crude drawdown. Be aware that high distillate stocks in the G20 economies present a clear downside risk to oil this winter. Demand destruction remains healthy no matter what the USD is doing!

Last week the ‘yellow metal’ surged to its highest close in 18-months on the back of a weak dollar scenario. However, already this week we have witnessed the dollar finding its sea legs and reducing the demand for the commodity as a hedge against inflation ($998).

The Nikkei closed at 10,217 up +15. The DAX index in Europe was at 5,592 down -28; the FTSE (UK) currently is 4,998 down -20. The early call for the open of key US indices is lower. The 10-year bonds backed up 7bp yesterday (3.41%) and are little changed in the O/N session. It was too good to last. Treasuries managed to pare the last 4-day’s gains amid speculation that the recent rally that aggressively pushed yields to their lowest levels in 2-months was not sustainable. US dealers last week took down $70b of new product despite bond prices rallying. Do not expect the FI market to rally ahead off this week’s data. A strong retail sales headline should push yields close to that 3.50% print!

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