Dean’s FX|Fed’s lack of evidence to hike!

The USD$ is stronger in the O/N trading session. Currently it is higher against 13 of the 16 most actively traded currencies in a ‘whippy’ trading range.

Yesterday, US producer’s prices paid rose more than forecasted in May (+1.4% vs. +0.2%) as fuel and food costs climbed, but, ex-food and energy remains muted. While the headline is discouraging, what is encouraging is that aside from a handful of industry stories, there remains no real evidence of pass-through from higher food and energy prices into broader measures of final goods prices. Core-producer prices (ex food and energy) rose by +0.2%, as expected and half the rate of the+ 0.4% rise the previous month. Companies are paying more for energy and raw materials, which erodes profits and makes it more likely they will eventually forced to hike prices. The report reinforces Bernankes and his policy makers concerns that inflation pressures are picking up.

Other data showed that US Housing starts fell more than expected in May (+0.98m vs. +1.01m) while April was also revised down as demand for new homes continues to fall. Both single family and multi-family starts declined although multi-family permits moved up in May for the second consecutive month. Number of homes completed also rose, adding to the already high inventory levels although the number of homes under construction eased -1.9%, m/m, as demand for single family homes continued to weaken. Both, US Capacity Utilization rate and Industrial production came in on the weaker side. Cap U. signals dis-inflationary pressures moving forward, 79.4% of production capacity is being used, which amounts to about a 2% point drop from the peak that occurred around the beginning of the credit crisis last summer. While the May Industrial production continues to weaken going forward. Manufacturing, which makes up the majority of the IP index, came in flat on the back of stronger motor vehicle production and weaker machinery production while utilities declined substantially at -1.8%, m/m.

The US $ currently is stronger against the EUR -0.21%, GBP -0.21%, CHF -0.32%, JPY -0.32%. The commodity currencies are weaker this morning, CAD -0.08%% and AUD -0.20%. The loonie has continued its appreciation direction after yesterday’s foreign securities purchases data. Investors abroad bought a net $9.57b of Canadian securities, the most since Nov. 2006, The CAD$ has held in very well despite weakening commodity prices (50% of Canadian exports are commodity based). The move highlights a continuation of the positive trend as the currency has gained against most of its major trading partners. The improving equity markets (for now) and the ‘dangerous feeling’ that the worst is over for markets is also contributing to this move. This week the loonie by default has appreciated against all its major trading partners. In the bigger picture the CAD$ is trading within a well defined range for now (1.0150-1.0323). Even bearish Canadian economic data earlier in the week has not been able slip up the currency. More evidence of a weakening Canadian consumer sector emerged via auto sales figures for the month of April. Last week BOC governor Carney followed suit with the BOE and halted its easing cycle to ensure inflation remains contained (3.00%- despite the market anticipating a 25bp cut). Most analysts believe that core inflation will remain below Carneys target right through to next year, which ponders the question why should the BOC change policies mid stream while economic data remains soft? With very little volume going through, traders will look to sell some CAD$ near support levels once again. The AUD$ continues to pare recent gains after the RBA said in the minutes of its last meeting that the 2 interest rate hikes this year will slow growth and may be enough to cool inflation (0.9804). If the Fed remains on hold, look for both AUD and NZD to gain from interest rate differentials.

Crude is lower O/N ($133.63 down -36c). A number of variables continue to weigh on oil prices. Crude oil has fallen for a 4th consecutive day, as a slew of economic data yesterday convinced traders that slower economic growth will curb fuel consumption. Rumors that production at an offshore Norwegian field may resume after a fire sooner rather than later and Kuwait has sided with the Saudis saying that prices are too high. Lately commodity prices have remained relentless in their pursuit of new records. The Kuwaiti oil minister believes that $100 a barrel is more reasonable. With European confidence at it lowest point, one should expect the USD$ to gather some traction causing the oil prices to remain under pressure due to the strong inverse correlation scenario. The market of late has been very nervous any time supply issues are mentioned. It is anticipated that the Saudis (OPEC’s largest exporter) will announce on June 22nd an increase in production of an extra +200k barrels a day or +0.2% of world supply. Saudi oil minister al-Naimi last week described the surge in the commodity as ‘unjustified’ and called the Jeddah meeting of producers and major industrial nations to help stabilize prices. Capital market can expect an underline bid tone until we get to digest today’s EIA numbers. Last weeks report showed that US stocks declined more than expected, increasing investor concerns that inventory may come under increased pressure during the US summer driving season. Gold remains better bid this morning ($887) as the greenback remains close to home after weaker economic data this week, boosting the appeal of the yellow metal as an alternative investment.

The Nikkei closed at 14,452 up +104. The DAX index in Europe was at 6,779 down -17; the FTSE (UK) currently is 5,794 down -67. The early call for the open of key US indices is higher. Yields of the US 10-year bond eased 1bp yesterday (4.20%) and are little changed O/N. Treasury prices rose after yesterdays weaker than anticipated data (as highlighted above), convincing some traders that the US economy is too weak for the Fed to raise borrowing costs in the next few months (2.00%). Futures traders continue to pare their bets. Higher commodity prices have contributed to economic growth fears, thus the FI asset class continues to be better bid on pull backs.

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