Will Trichet pull the Trigger?

When is reality going to set in? When will elected leaders truly grasp the seriousness of the situation? President elect Obama seems to be the only one sitting at the table, while other policy makers and leaders continue to walk around with their heads in a cloud. Ignoring anything will not make it go away; being reactive rather than pro-active is just as bad. Europe is on the verge of social discontent, economies are collapsing quicker than the rest of the world reads about them. The only thing that kept us happy was money in our pockets, and now that’s gone……where to next?

The US$ is stronger in the O/N trading session. Currently it is higher against 14 of the 16 most actively traded currencies, in another ‘whippy’ trading range.

There were no surprises in Friday’s US employment numbers, after taking into consideration earlier data, the dismal numbers came in close to market consensus, thus prompting investors to want to own the greenback. This action has certainly created a short squeeze for short dollar position. The EUR very much trades under pressure ahead of this weeks ECB monetary policy meeting. There is a firm belief that Trichet and Co. need to cut borrowing rates once again. The IMF’s Strauss-Kahn says Europe is ‘behind the curve’ on fiscal stimulus and that deeper rate cuts are unlikely to help much. They also believe that European leaders are failing to grasp the depth of the ensuing slump in their region, thus creating the risk of social upheaval!

The US$ currently is higher against the EUR -0.62%, GBP -0.42%, CHF -0.32% and lower JPY -0.09%. The commodity currencies are weaker this morning, CAD -0.84% and AUD -0.93%. The loonies’ rapid rise came to a halt on Friday as both commodities and a weaker than expected North American unemployment reports continues to pressurize the currency. The currency is guilty by its association and proximity to its largest trading partner, the US and 50% of all Canadian exports are commodity based. On Friday it was confirmed that Canada lost -105k jobs in 2- months and this has fully reversed the large late summer employment gains, which puts Canadian job losses proportionately more in line with their US counterparts. The Dec. loss of -34.4k was more than the -20k expected. Canada’s unemployment rate now stands at +6.6%. That’s a 3/10th rise from the +6.3% the previous month. The rise was mostly driven by job losses, but the size of the labor force also increased by +12.7k. Industry-wide losses in construction led the way as was to be expected. The sector shed -44.3k workers as both residential and non-residential construction continues to deteriorate. With the housing sector to continue to weaken this year, we can expect to see several more months of job declines. With oil paring close to 12% last week traders continue to favor selling the loonie on any USD pull backs. Consensus has the loonie trading under pressure for the remainder of this quarter and backing up towards the 1.2800 level again.

The Australian dollar fell aggressively in the O/N session after an increase in US unemployment signaled a deepening global recession, thus reducing demand for higher- yielding assets. The AUD$ had comfortably pared all of last weeks gains as the price of commodities continue to trade under pressure and investors once again contemplate risk aversion strategies (0.6876).

Crude is lower O/N ($39.25 down +158c). A fear of a much deeper recession continues to undermine crude prices. A weakening equity market and rising number of jobless workers have intensified concerns that the recession will cut fuel usage even more. Demand destruction remains the order of the day. Oil has been unable to retain last week’s earlier gains after the weekly EIA report also took the market by surprise. The black stuff managed to lose another 2% on Friday after the US unemployment rate surged in Dec. to 7.2%, raising concerns that natural demand will drop faster than the planned OPEC cuts. In total, the black-stuff lost close to 12% last week after penetrating the $50 mark briefly. US supplies have climbed in 13 of the past 15-weeks as the economy slowed according to the EIA, last week’s data showed a bigger than expected increase across the board for crude oil, gas and distillate fuel. Inventories of oil rose +6.68m barrels to +325.4m, that’s the highest level in 8-months (the market had anticipated an increase of +800k barrels). It’s all about contango trading, which encourages companies to increase stockpiles if they have available storage (hence the demand for supertankers to be used as a mobile storage facility). Dealers are encouraged to do so as the price of oil for delivery in 11-months time is 33% more than for next month. Gas stocks rose +3.33m barrels to +211.4m barrels vs. an expected +1m barrels. Finally distillate supplies (heat oil and diesel) jumped +1.79m barrels to +137.8m. Friday’s job’s data will impede future fuel demand as it provides stronger evidence that a deepening recession is occurring globally. The geo-political issues like the violence in Gaza and 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 prices rallied on Friday on speculation that the greenback will slide as the recession deepens, thus boosting the appeal of the yellow metal as an alternative investment, but so far this morning the precious metal has managed to give up most of those gains as the USD dominates ($846).

The Nikkei closed 8,836 down -39. The DAX index in Europe was at 4,760 down -23; the FTSE (UK) currently is 4,446 down -2. The early call for the open of key US indices is lower. The 10-year Treasury yields eased 3bp on Friday (2.41%) and are little changed in the O/N session. Treasuries advanced especially the short end of the US curve after Friday’s dismal US employment numbers. It highlights investors concern that the global recession may be worsening and that they seek the safety of government debt. Prior to last week’s fundamental releases, dealers had been happily pushing yields close to their highest levels in a month.

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