‘Supranational Currency’ to kill the US dollar!

Russia president Medvedev stated that they will discuss a ‘new’ world currency at the upcoming BRIC meeting on June 16th. Indirectly, both China and Brazil have already commented on this scenario happening. Whatever the outcome, the concept continues to pressurize the ‘big dollar’. Conceptually the idea is feasible but on a practical level it’s a no starter. Currently there is no currency that combines liquidity and distribution such as ‘mighty’ dollar. Why would we choose a ‘new’ reserve currency from an unproven democratic state? However, the concept must be taken seriously. BRIC members hold 42% of the world’s reserves!!

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 ‘subdued’ trading range.

Yesterday’s US pending home sales surprised capital markets with a third-consecutive monthly gain (+6.7% vs. +0.5%). Is this further proof for ‘green shoots’ economics? Digging deeper, most of the rise can be attributed to the large increase in the US Northeast (+32.6%). The Midwest was up +9.8%, the South was flat (-0.2%) and the West was up +1.8%. Despite the Northeast distorting the headline, it’s a relief to notice that no region registered a significant decline. There is no denying that the headline is a bonus for the psyche of investors, however, the ‘glass half full’ investor is able to pick holes in the report. Firstly, the sample used in the report is relatively small. Secondly, rising pending sales over the past 3-months when compared to actual monthly re-sales and mortgage purchase applications do not add up and thirdly, pending home sales do not necessarily mean completed sales. Perhaps it’s the threat of rising mortgages that’s bringing forward potential transactions? With mortgage rates no longer dropping and unemployment climbing, analysts expect the real-estate sector to tread water at current levels for some time before we do see sustainable growth.

The USD$ currently is higher against the EUR -0.42%, GBP -0.08%, CHF -0.41% and JPY -0.75%. The commodity currencies are mixed this morning, CAD -0.21% and AUD +0.18%. Is it the demise of the greenback or global green shoot fundamentals that is driving the loonie to 8-month highs? What ever the reason, anyone betting against this commodity currency and looking for retracement levels to exit offside trades is currently facing a losing battle. Even with Federal and Ontario governments announcing ballooning deficits, taking into account its GM bailout numbers, has not dented speculators enthusiasm to own the currency. With the USD maintaining its weakening bias has investors selling any upticks. The Canadian economy, like all G7 economies, on a technical basis is officially in recession. With the USD struggling, parity talk is back on the table. Some are buying into the theory that with Canada being a small, open economy and sensitive to trade flows, if and when the global economy is doing better, then Canada is expected to reap the benefits very quickly.

The AUD rose to the highest level in 8-months last night (0.8224) as the 1st Q GDP results showed that the economy unexpectedly expanded last quarter (+0.4% vs. -0.6%,q/q). Earlier this week as expected, RBA Governor Glen Stevens kept O/N borrowing costs on hold at 3%. Fundamentally the Australian economy is outperforming the US, hence the flight to a higher yielding commodity currency. In the short term look for better buying on pullbacks as the currency marches towards 0.8500.

Crude is lower in the O/N session ($68.26 down -29c). After printing an 8-month high the day before, Crude oil pared some of those gains yesterday after reports revealed that both OPEC and Russia raised production last month. OPEC’s output climbed +1.5% to an average +28.15m barrels a day while Russia’s output advanced a 3rd straight month (+0.9%). Many believe that oil prices have climbed too quickly. The rapid gain has been based on stronger equities and the weak dollar. However, with low demand, record supply, and high inventories, some analysts believe the market conditions are favorable for a pullback in prices. But, with the USD slipping to a new 6-month low vs. the EUR, the appeal of commodities as an alternative investment for speculators does remain strong. Recent global ‘green shoot’ is fueling the belief that the worst of this recession may be behind us. There are other variable that have aided the black-stuff prices of late and may provide some support on pull backs. Firstly last week’s EIA report showed that inventories declined -5.41m barrels to +363.1m. It was an eye popping drop and the biggest in 9-months (hurricane season). This morning the market does expect another drawdown on inventories, but not of the same magnitude. Secondly, technical analysts believe that with the commodity price remaining above its 200-day moving average is a signal that prices will rally even further. A spluttering USD has given new life to the yellow metal as it marches towards its record highs. One should expect speculators and investors to want to own the commodity on any pull back as a hedge for the greenbacks slide and the prospect of future inflation ($983).

The Nikkei closed 9,741 up +37. The DAX index in Europe was at 5,105 down -38; the FTSE (UK) currently is 4,398 down -79. The early call for the open of key US indices is lower. The 10-year Treasury’s eased 5bp yesterday (3.59%) and are little changed in the O/N session. Traders played it safe and close to home after already experiencing one of the largest one day movements in the past 4-months on Monday. Capital markets have been waiting to see with clarity what China does with its Treasuries. The remainder of this week is laden with data and buy-backs (today 7-year bucket). Supply and demand will continue to have a volatile impact on treasuries and the USD for that matter over the coming weeks. Expect speculators to want to sell the curve by week’s end to accommodate next week’s auctions.

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