US$ declines, movements excessive!

Beijing was not the only place where records are being broken. The mighty US$ move on Friday, the largest 8-year ‘day rally’ vs. the EUR took many market observes by surprise. With the US sneezing, the rest of the world has caught a global cold. The dovish response from both the ECB and BOE last week had only fuelled the greenback strength. The market was expected to give some of it back.

The US$ 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.

US data on Friday provided only a percentage of the daily support for the US$. Perception of global growth has hurt other currencies more, and by default provided strength for the greenback. Worker productivity in the US grew last Q (+2.2% vs. +2.5%-it measure how much an employee produces for each hour of work) despite companies cutting jobs to withstand the jump in raw-material expenses. Labor costs climbed at a +1.3% vs. +1.4% pace, less than anticipated. Productivity remains healthy and analysts indicate that we are experiencing good cost control from businesses, which of course will keep the Fed happy. Advances in productivity will help to lower inflation and strengthen the Fed’s forecast that prices will moderate. Other data showed that US wholesale inventory rose faster than forecast m/m (+1.1% vs. +0.9%), led by gains in stockpiles of higher- priced petroleum and metals (softening commodity prices). Sales on the other hand jumped +2.8% vs. +2.2%, m/m. The big number this week will be Retail Sales on Wed. Capital markets will get a better understanding of consumers spending habits and see first hand how slow spending has retreated.

The US$ currently is lower against the EUR +1.00%, GBP +0.62%, CHF +0.98% and JPY +0.53%. The commodity currencies are stronger this morning, CAD +0.69% and AUD +1.00%. On Friday, the Canadian economy received it first real wake up call. The employment data showed that the country lost -55.2k jobs vs. and anticipated gain of +5k (albeit mostly part-time). But, this is a second straight month of job losses and has heightened speculation that the BOC may cut borrowing costs (3.00%). After gaining 17% last year vs. the greenback, the loonie has quietly given up nearly 50% of that so far this year. Spiraling commodity prices has not helped the situation, 50% of all Canada’s exports are commodity based. Its proximity and association with its largest trading partner south of its boarders who’s economy has slowed is finally been filtered through to Canadian economic data. One can expect the CAD$ to remain under pressure in the short term, as investors continue to be better buyers on pull backs.

The RBA indicated that it will have more room to cut interest rates (7.25%) because a ‘significant moderation’ in domestic demand will slow inflation, cut economic growth by half and drive up unemployment. Economic growth is expected to be slow in the periods ahead. The markets can expect Governor Stevens to commence the easing cycle in Sept. Investors will be better sellers of the AUD$ on rallies (0.8929) , technical Analysts are looking for a medium term level of 0.8500 by year end.

Crude is higher O/N ($116.18 up 98c). Crude prices have sunk like a lead weight all last week and Friday was no different. This is due to the greenback new found strength, which in one days trading gained the most vs. the EUR in 8-years and hence reduced the appeal of commodities as an inflation hedge. How much longer can this rapid decline from its record highs be sustainable? In a matter of weeks oil has pared nearly $32 of premium value. Over the last year specifically, crude has been used as a safe haven at a time of declining stocks and a declining US$, and now with the greenback finding traction investors are less interested in a safe haven. Despite geo-political concerns in Turkey and Russia/Georgia crude prices remain vulnerable to the global growth variable. Last week Turkey indicated that the pipeline carrying crude to the Mediterranean from Azerbaijan could remain closed for two weeks following an explosion earlier in the week (Kurdish separatist group had laid claim). The pipeline is capable of transporting +1m barrels of crude a day. Georgia is calling for a temporary cease fire with Russia; it’s too soon to get a handle on the situation there. Last week’s EIA crude stocks rose +1.61m barrels to 296.9m, w/w, vs. an anticipated fall of -200k barrels. Global growth issues continue to trump all other concerns. Economic data so far last week has pointed to a global slowdown, with Cbanks balancing growth with heightened inflation concerns. Demand numbers remain weak in the US due to elevated gas prices. Some investors are speculating that high prices and slower US economic growth will further reduce demand in the US in the medium term (the world’s largest consumer) and hence oil prices. Gold like most commodities has been consistent and remains under pressure overall, this morning we are seeing a pull back due to the USD been over sold on Friday ($870).

The Nikkei closed at 13,430 up +262. The DAX index in Europe was at 6,577 up +15; the FTSE (UK) currently is 5,513 up +24. The early call for the open of key US indices is mixed. Yields of the US 10-year notes eased 1bp on Friday (3.93%) and are little changed O/N. Treasuries prices rallied despite US equities ending the week on a positive note. Traders were able to cheapen the curve enough all week to absorb both 10 and 30-year government debt. After the long bond auction, traders rallied the long end the most in nearly 15 years.

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