Dean’s FX May 21st | Trichet hints at EU rate hold

The USD$ is weaker in the O/N trading session. Currently it is lower against 14 of the 16 most actively traded currencies in another ‘whippy’ trading range.

Yesterday, US core-PPI (ex-food and energy) rose more than expected last month (+0.4% vs. +0.2%), reflecting higher costs for cars and furniture. Businesses continue to have ‘considerable pipeline cost pressures’, but are having a tough time in passing on the costs to the consumer as the economy slows. The data is further evidence that inflation pressure persist in the background despite slower growth. The data has caused US equities to trade under pressure as analysts believe more credit losses and faster inflation threaten to keep Bernanke and his team from stimulating the economy in the medium term. The greenback continued to loose ground vs. the EUR yesterday as oil printed new record highs and after Trichet hinted that the ECB will keep interest rates elevated (4.00%). To date, the Fed has had to cut the benchmark interest rate by -3.25% points since Sept., to try to sustain economic growth without intensifying inflationary pressures caused by record prices for oil and other goods. Fed Vice-Chair Kohn said yesterday that ‘monetary policy appears to be appropriately calibrated for now to promote both rising employment and moderating inflation over the medium term’. He expects economic growth to strengthen over the next 18-months as the current level of interest rates promotes growth and moderates inflation. Traders now believe that the Fed is likely to leave the rates unchanged at 2% on June 25.

The US $ currently is lower against the EUR +0.57%, CHF +0.41%, JPY +0.20% and higher against GBP -0.07%. The commodity currencies are higher this morning, CAD +0.33% and AUD +0.31%. Yesterday, Canadian wholesale sales rose faster than analysts predicted for Mar., led by building supplies and machinery/equipment (+0.6% vs. +0.2%). It seems that producers of commodities such as energy and fertilizers are taking advantage of record prices and helping offset a slump in demand from the US (80% of Canadian exports head south) for manufactured goods such as cars and lumber. Other data reveled that foreign investors increased their holdings of Canadian securities by the most in a year during Mar. (+5.3B vs. +2.3b-another reason why the loonie has remained better bid of late). The loonie rose to a two month high as surging commodity prices at new record levels boosted the currency’s appeal for now. Some analysts believe that there is a positive bias for the currency in the medium term and they expect it to hit 0.9700CAD$ over the coming months. One can blame Boone Pickens for adding ‘fuel to the fire’ and creating increased demand for commodity currencies. This morning CPI data should provide a clearer picture of what Governor Carney from the BOC will need to do on June 10th. The AUD$ rose to its highest level in a quarter of a century (0.9612) this week, after the RBA said policy makers spent a ‘considerable time’ at their last meeting discussing an interest-rate hike (7.25%). Commodity prices continue to give it a boost.

Crude is higher O/N ($129.40 up +10c). Boone Pickens (the Buffett of oil) opens his mouth, utters an elevated price and speculators like lemmings follow. He said (not dissimilar to GSNY) that oil will hit $150 by year end, as supplies are not keeping up with demand. With the USD$ weakening vs. the EUR has traders buying commodities as a hedge against the currency’s further decline. European inflation data this week was higher than expected and has convinced the market that Trichet will keep rates elevated, which should prove problematic for the greenback. The market is also concerned that Chinese diesel purchases would strain global supplies after the earthquakes in central provinces and a decline in coal production at various sites as supplies. The market had expected some sort of reprieve after Saudi Arabia’s oil minister; al-Naimi indicated that his country will increase crude oil production, but, alas, Boone seems to carry more weight than OPEC. This morning the weekly EIA reports are expected to produce once again higher inventory levels. Last weeks EIA report in the week showed that US supplies of distillate fuels (including diesel) rose more than forecasted. To date, US crude-oil inventories have climbed in 15 of the past 18 weeks. Gold remains elevated ($925) as traders speculate that further depreciation of the USD$ and rising commodity prices will spur inflation, reviving demand for the yellow metal as a hedge.
The Nikkei closed at 13,926 down -233. The DAX index in Europe was at 7,142 up +24; the FTSE (UK) currently is 6,254 up +62. The early call for the open of key US indices is higher. Yields of the US 10-year bond eased 3bp yesterday (3.80%) and are little changed O/N. Treasuries remain better bid as renewed concerns by investors that credit market losses will deepen pushed stocks down, thus increasing demand for the safety of the FI asset class.

The EUR found more support this am from the German IFO business confidence data. It unexpectedly increased in May (103.5 vs. 102.4) after economic growth accelerated in the 1st Q, suggesting companies are coping with record oil prices and the stronger EUR. It provides further evidence that the ECB will unlikely follow the Fed to ease rates further. Technically, all time high assault remains in tact.

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