What’s the difference between Ireland and Iceland? –One letter and about 6-months!

The time has come to deliver, but, will he? The ECB rate decision is what we have been waiting for all week. Maybe the downgrading of Greece yesterday and the potential downgrades of Spain and Portugal could put Trichet and Co. under further pressure to justify deeper cuts rather than the widely expected 50bp (2.50%). With the FX market trading on interest rate expectations, one would expect the EUR to gain major traction with 50bp ease or more, just like Cable last week. But, we are talking about the ECB and historically they have a tendency to disappoint!

The US$ is weaker in the O/N trading session. Currently it is lower against 10 of the 16 most actively traded currencies, in ‘subdued’ trading range ahead of the ECB rate announcement.

The market anticipated it to be bad, but this bad? US Retail Sales plummeted twice as much as anticipated, as the record job losses and credit crunch discouraged spending by Americans last month. The data combined with revisions to previous months provides an even bleaker picture than capital markets could have imagined. Analysts have already noted that with receivables coming due at the end of this month, the market can expect retail bankruptcy filings to accelerate. Headline sales were down -2.7%, while core sales ex-autos were down -3.1%. Compared to last years readings, retail sales were about -10% lower than the previous year. This has made for the sharpest yearly retreat in retail since WWII. Analysts also noted that until they see next weeks data they don’t know how much can be attributed to ‘price effect’ however the market will be looking for one of the sharpest declines in the volume of sales in 60-years in addition to deep discounting. Oct. was revised down 50bp, from -2.9% to -3.4% m/m, and Nov. was revised lower from -1.8% to -2.1%, m/m. As per the norm nowadays’ lower gas prices had a material impact on the Dec. reading, but even ex-autos and ex-gas sales were down -1.5% m/m. There was no big surprises with discretionary items also getting hit during the holiday season as electronics store sales (-1.0%), home furniture and furnishings (-1.8%), clothing stores (-2.5%), sporting (-0.4%), general merchandise (-1.3%) and non-store retailers (-1.9%) all experienced losses.

The US$ currently is lower against the EUR +0.04%, GBP +0.15%, CHF +0.12% and JPY +0.61%. The commodity currencies are once again weaker this morning, CAD -0.13% and AUD -0.25%. Nothing technically or fundamentally can provide support for the ailing loonie at the moment. The flight to quality aka the greenback has driven the CAD dollar to new month lows. The currency has remained under intense pressure as commodity prices continue to suffer. After yesterday’s weekly EIA report, do not expect the loonie to outperform any time soon. Last summer, unprecedented peaks in oil prices helped buoy Canada’s export market (50% of all exports are commodity based). This provided a cushion for the Canadian economy as its southern partner fell into a recession. However, since oil prices have plummeted -77% since the peak in July, Canada’s exports have been deteriorating at a rapid pace, adding to economic weakness in other areas of the economy, and causing the BOC to continue its easing campaign. Futures traders are pricing in a 75bp ease next week (1.50%). Nov. was no exception as the value of exports plunged -6.8%, m/m, outpacing the -4.8% decline in imports, all this on the back of lower oil prices and weaker auto-exports, this causing a more than expected narrowing in the trade surplus to +$1.28b, the lowest level in 11-years. Even worse Oct. trade surplus was also revised down to +$2.25b from +$3.78b, once again due to energy prices and volumes. The currency remains guilty by its association and proximity to its largest trading partner, the US. Consensus has the loonie trading under pressure for the remainder of this quarter and backing up towards the 1.2800 level again.

Australia’s unemployment rate rose to its highest level in 2-years (4.5% vs. 4.4% m/m) as mining companies, airlines, and automakers fired full-time workers, adding to signs the economy faces its 1st recession in 18-years. This has put the AUD under pressure as investors due to global equities seek risk aversion trading strategies (0.6609).

Crude is lower O/N ($36.66 down -66c). The weekly EIA reports ended up being more of a hindrance than an aid for crude prices yesterday. Crude prices fell this weeks report showed that crude stockpiles climbed to a 16-month high as fuel demand continues to deteriorate. Crude stocks increased +1.14m barrels to +326.6m last week, the highest since August 2007. While fuel demand dropped 6% to an average +18.6m barrels a day, surprisingly the largest 1-week decline in 5-years. Demand destruction continues to be the bearish element for these weekly reports, despite the cold spell throughout North America, refineries continue to produce more fuel than is currently needed. Gas inventories rose +2.07m barrels to +213.5m, higher than the anticipated +1.85m expected. On the other hand supplies of distillate fuels (includes heating oil and diesel) surged +6.35m barrels to +144.2m, the biggest gain again in 5-years. The disappointing US retail sales figures did not help either, the data solidified global concerns that fuel demand will decline even further because of the recession in the US, Europe and Japan. Earlier this week the Energy Department said that global demand will average +85.1m barrels a day this year that will be down approximately -810k from last year. The geo-political issues in Gaza and the on-going Russian Ukraine natural gas crisis is no match for demand destruction caused by weakening economies. Analysts anticipate that we will once again test Dec. lows of around $32 on the back of the North American reports been so poor. Gold finding a toe hold this week did not last very long, the yellow metal once again has come under pressure as the greenback remains better bid vs. the EUR, thus eroded its appeal as an alternative investment ($811). Maybe Trichet cutting deeper than anticipated will provide some support later this morning!

The Nikkei closed 8,023 down -415. The DAX index in Europe was at 4,403 down -19; the FTSE (UK) currently is 4,169 down -11. The early call for the open of key US indices is lower. The 10-year Treasury yields eased 16bp yesterday (2.15%) and are little changed in the O/N session. Treasuries aggressively rallied after the dismal US retail Sales numbers. Sales have now successfully fallen for a 6th consecutive month, fuelling speculation that the US economic slump is deepening. This has convinced investors to seek the safety of government debt for now.

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