USD$ treading water for now!

Investors were relieved that BoA was able to add to the recent list of Tier 1 financials that beat the street revenue estimates yesterday. It goes a long way in restoring capital market confidence and may encourage further the liquidation of risk aversion trades. Expect Amex and Apple not to have done any favors this morning.

The USD$ is weaker in the O/N trading session. Currently it is lower against 10 of the 16 most actively traded currencies in a ‘very subdued’ trading range.

No surprises from yesterdays US leading indicators index. As anticipated it declined for a second straight month (-0.1% vs. -0.1%), emphasizing that growth will continue to slow after the 2nd Q rebound we experienced. The usual suspects remain the biggest culprits that are pushing the US into a recession. The housing debacle, higher food and energy prices coupled with increased job losses are likely to hurt growth more than anticipated. The knock on effect from US tax rebate spending has already fizzled out with little sustaining impact. Most analysts foresee lower growth for the remainder of the year. Bernanke cited last week higher energy prices, reduced access to credit and a further deepening in the housing recession as the dangers to growth. This report justifies the Fed’s thinking. With companies in the US looking to boost their bottom line by hiking prices and curtailing hiring, can only pressurize take home pay. Paulson and Bernanke are adamant that they want to prevent a knock on to wage pressures. How to achieve this fine balancing act is in this stagflation environment is a difficult task. Increased hawkish rhetoric continues to gather momentum and sooner or later the Fed will need to act to stay ahead of the curve.

ECB’s Smaghi was quoted saying that ‘inflation expectations have already started to decrease after their rate hike’ and also that ‘recovery in Europe would take longer than the ECB forecasted’. This is in direct contrast to other hawkish rhetoric from some European policy makers.

The US $ currently is weaker against the EUR +0.00%, GBP +0.02%, CHF +0.11% and JPY +0.20%. The commodity currencies are mixed this morning, CAD -0.22% and AUD +0.05%. Watching paint dry can be more fun rather than eyeing the loonies’ recent trading ranges. It has remained anchored in ‘no mans land’ despite getting fundamental support last week and a ‘thumb’s up’ for the economy from governor Carney. Commodities continue to play second fiddle to currency strength of late. Despite oil aggressively falling from record highs in the past ten days, the CAD$ has held it own. The general malaise of the USD$ has contributed to the loonie attraction by default. One would have expected the currency to suffer by its ‘proximity and association’ with the US (its largest trading partner). Is this a delayed reaction? Difficult one to answer, potential M&A activity looms (TransAlta buyout-publically traded electricity producer) and speculators are happy to own the currency until proven otherwise. Interest rate differentials also favors the currency on a cross related basis. With global equities finding some traction and investor risk appetite rising could push the loonie into premium status once again vs. the USD$. This morning traders will take their cue from Canadian retail sales.

The AUD$ found some renewed strength (0.9778) and rallied especially on a cross related basis. This morning it printed a 7-year high vs. NZD as interest rate differential kicked in. With the New Zealand economy facing a recession the RBNZ needs to ease monetary policy to provide stimulus. With gold better bit one should anticipate further gains for the AUD$.

Crude is higher O/N ($131.39 up +30c). Geo-political issues and the weather had provided some support for ‘black gold’ as it rallied from its 2-month lows yesterday morning. Hello ‘Dolly’, currently a tropical storm, is heading towards the Gulf of Mexico and may turn into a hurricane, coupled with nuclear talks between Iran and UN representatives stalling will keep traders on edge. Iran has two weeks to conform to some of the suggestions that were put forward last weekend. It looks highly unlikely that a positive response is forthcoming as Iran is expected to continue its nuclear enrichment program. That will only leave the option of more sanctions to be imposed against the country in the short term and will of course require further insurance premium to be priced into crude. Apart from this, crudes overall bias is for weaker prices. Fundamental reports last week indicated that inventories are rising, consumption declining and global growth stalling will eventually curb prices even further, or until this weeks EIA report. Last weeks report showed that crude inventories jumped +2.95m barrels to 296.9m vs. an expected -2.2m. Crude is taking its cue from natural gas (stocks jumped 6% w/w), with gas futures remaining under pressure one can expect crude to follow its lead. Gold advanced yesterday ($972) as energy costs stabilized, thus boosting demand for the ‘yellow metal’ as a hedge against inflation.

The Nikkei closed at 13, 184 up +381 (playing catch up). The DAX index in Europe was at 6,374 down -50; the FTSE (UK) currently is 5,319 down -85. The early call for the open of key US indices is lower. Yields of the US 10-year bond backed up 2bp yesterday (4.09%) and eased 6bp O/N. Treasury prices fell yesterday as financial equities rose on better than forecasted earnings from BoA (four in a row for big banks beating street estimates). This morning the market has reversed as equities remain in the red. A private weekly sentiment index (Reid Thunberg) fell -2 ticks to 45 vs. 47 (a sub-50 reading shows that investors anticipate lower prices for 10-year product). Inflation continues to weigh on investors minds and by default had led to the bearish sentiment in FI. With more government debt product to be auctioned this week ($58b, 2’s and 5-yrs), one can expect the curve to remain temporarily heavy.

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