Will Bernanke and Co. push back?

Same canvas, same picture, but the paint is just drying much slower! It was an excruciatingly painful trading session yesterday. As predicted, the 1st-trading session never fails to disappoint after an NFP release. The USD managed to print new highs vs. the EUR with very little volume or corporate interest pushing it. The market has digested the jobs data and now shifts its focus to Bernanke and his band of merry men. Thrown in a $75b refunding event, mix a little apprehension of Cbanks appetite for US debt and voila, potential ingredients for a ‘headache’ of a week.

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

With no North American data yesterday to influence the ‘big’ dollar directly, like an apparition, all major currencies lost their footing with interest and participation being negligible. Day’s like that, if one blink’s they could lose their shirt! The ‘Big’ dollar was influenced by the ‘Big Mac index’. In a lighthearted purchasing power parity perspective yesterday, the index stated that most Asian currencies were ‘undervalued’, while Europe and Scandinavia were ‘overvalued’. Never knock the obvious!

Our savior has disappointed the markets. China’s exports fell -23%, y/y, while lending declined -$52b, m/m and industrial production came in weaker than expected (+10.8% vs. +11.5%, y/y). This has led Premier Jiabao to state that China will maintain its ‘moderately loose’ monetary policy and ‘proactive’ fiscal stance to bolster domestic spending in the face of slumping exports and industrial overcapacity. In the 2nd Q, after a $1.1t of lending in the 1st half of this year, we witnessed growth of +7.9%. An encore will be difficult!

In a unanimous decision the BOJ kept O/N lending rates on hold at +0.1% and stated that it remains concerned about ‘downside risks to economic activity and prices’, despite the deepest recession in 50-years showing signs of easing. This is the same theme that Governor King at the BOE will be promoting (and the reason that has pushed CBL down 6-cents from its recent highs). It was only a month ago that Governor Shirakawa and Co. at the BOJ extended their quantitative easing program to battle the ongoing fear of deflation and which is now forecasted to extend well into 2011. Not surprisingly rates will stay close to zero for some time as corporate and consumer spending remains weak.

The USD$ currently is lower against the EUR +0.19%, GBP +0.02%, CHF +0.25% and JPY +0.25%. The commodity currencies are mixed this morning, CAD -0.12% and AUD +0.07%. As expected the loonie floundered and for a 3rd-consecutive day gave up some ground to its largest trading partner. With commodities and equities finding it difficult to gain traction, investors were selling higher-yielding assets as risk appetite declined. There was no fundamental data to guide the currency yesterday, but this morning’s housing starts provides some fodder. It back to the ‘big’ dollar and the FOMC meeting to provide the market with food for thought. Last week’s Canadian employment report certainly provided no support. The headline (-44.4k vs. -15k) for both full and part-time jobs fell. However, on the bright side, the pace of job losses is slower than the beginning of the year. Continue to look for the CAD to finally catch up with the weaker fundamentals!

Despite Australian business sentiment jumping to the highest level in 2-years last month (10 vs. 4), the currency managed to fall the most in a month vs. the JPY O/N after the Chinese data disappointed the market. Commodities are finding it difficult to find traction, especially gold. For now, investors look content to sell on rallies (0.8363).

Crude is higher in the O/N session ($70.99 up +39c). It’s finally dawning on traders that last week’s EIA report was actually bearish. Couple this with the USD advancing vs. the EUR after the jobs report, has crude prices backing off from its 2-month highs. The EIA report showed a bigger-than-projected supply increase. The commodity’s rise of late has been rapid and technically over extended on the top side. The crude oil builds across the States and at Cushing continues to weigh on the market. Demand destruction remains healthy as noted by industries reports contracting last month. This certainly does not bode well for any strong rebound in the coming months. Crude stocks increased +1.67m barrels, w/w, vs. an expected rise of +0.6m. Gas stocks declined -212k to 212.9m. The market was expecting a decline of -800k. Supplies of distillate fuel (including heating oil and diesel), fell -1.14m barrels to +161.5m, an increase of +1.23m was projected. Technically the market needs to break below $69 to gain any true momentum. Reality tells us that inventories are high, demand is still really weak and the risk is increasing that we will see a bigger correction towards $60. We are not seeing growth, but indicators are showing us a ‘less bad is good’ scenario. With the dollar remaining somewhat firm and equities and commodities slipping, has reduced the demand for the ‘yellow metal’ as a hedge against inflation. Yesterday we witnessed it slip the most in 2-weeks ($950).

The Nikkei closed at 10,585 up +61. The DAX index in Europe was at 5,448 up +30; the FTSE (UK) currently is 4,742 up +19. The early call for the open of key US indices is higher. The 10-year Treasury’s eased 4bp yesterday (3.80%) and is little changed in the O/N session. Treasury prices remain close to monthly high yields as traders set up for the quarterly refunding, FOMC meeting, and the expected to be mixed data this week. While the refunding at only $75b should not be much of an issue size-wise, the concern is whether foreign Cbanks might step back from the auctions as they apparently did with last months 2’s and 5-year.

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