The US dollar performs like a ‘wounded bear’-erratic and dangerous!

Robin Williams in the movie ‘Cadillac Man’ reminds me of Paulson and Bernanke’s performance in front of Congress. The salesman as ‘force majeure’ being the only possible hero that saves the day. Decision making delays continues to consume the ‘last breath’ of investor confidence.

The US$ is weaker in the O/N trading session. Currently it is lower against 12 of the 16 most actively traded currencies, in another ‘volatile’ trading range ahead of Bernanke’s continued testimony today.

US economic data at least remains consistent and paints a bleak picture. Yesterday, the US Manufacturing sector continued to contract. The Richmond Fed index unexpectedly declined to -18 in Sept. This would suggest that the manufacturing sector is weakening even more than previously expected; as foreign demand diminishes alongside a retrenchment in domestic demand (it is the softest reading in 5-years). Digging deeper, as expected, there was very little good news, as almost all of the main components weakened from the previous month’s readings. The only bright spot for the Fed was on the inflation front, prices received moderated to +1.68%, which could suggest that upward pressures on prices may have finally subsided. The forward looking component that include shipments, advanced to +11, but the ‘new order volume’ sub-component moderated. True to form, the number of employees weakened further (consistent with recent employment surveys). Not to be out done, US Home Prices fell further than expected (OFHEO-Office of Federal Housing Enterprise Oversight-home prices declined -0.6% vs. -0.2%, m/m for July- more than expected). Analysts expect the existing home sales figure to retreat further this morning, as the ongoing credit squeeze problem make mortgages more difficult to obtain. The lack of liquidity and credit will force sales again to slump after hovering around a 10-year low, despite borrowing costs dropping.

The IFO-German Business confidence index retreated to a new three year low this morning (+92.9 vs. +94.8). Their economy is s showing few signs of recovery any time soon from this yearlong credit squeeze. But, analysts believe that the recent retreat from a record EUR print combined with a 30% fall in crude may bring some relief. USD$ bears would have you believe different!

The US$ currently is lower against the EUR +0.20%, GBP +0.27% and higher against CHF -0.10% and JPY -0.56%. The commodity currencies are weaker this morning, CAD -0.09% and AUD -0.31%. A modest 1-month acceleration of Canadian core-CPI pressures (+0.3% vs. +0.1%) translates into a well-anchored y/y core inflation reading (+1.7% vs. +1.5%). Analysts expect future inflationary pressures to ease as a cooling economy, elevated credit market problems (less significant than in other countries) combined with a rapid cooling global economy will offset any price pressure build up from commodities. This should give governor Carney at the BOC latitude to ease O/N borrowing costs (3.00%) by year end, as the downside risks for slower growth will intensify. Digging deeper, the transportation component was an eye opener. Gas prices dipped -6.6% in Aug., on the back of crude prices plummeting during the month. As a result, energy dropped -3.0%, m/m (largest decline in 2-years). One should expect future data to remain on the softer side because of weaker job numbers coupled with home prices easing after rising for most of this decade, thus affecting consumer’s disposable income. The loonie managed to end the day under pressure as commodities pared this weeks historic gains and the greenback finding some traction. On a cross related basis the loonie remains sought after, as traders sell the lower yielding currencies like JPY and CHF. Expect traders to be better buyers of the CAD$ on USD$ rallies in the short term.

Over the past few trading sessions the AUD$ has suffered a similar fate to that of other commodity currencies. The currency managed to retreat as the value of its commodity exports declined. But, this morning in London, the currency has managed to advance when commodities got a boost (0.8359). With Global equities finding it difficult to find love amongst investors, safe heaven trading strategies once again are becoming the norm. Capital markets continue to seek guidance from the US congress in respect to Treasury Secretary Paulson financial bail-out plan. For now, commodity prices dictate the currency’s direction.

Crude is higher O/N ($108.13 up +152c). A day after we witnessed a record ‘squeeze play’ for crude Oct. contracts, the market returned to some normalcy under the watchful eye of regulators. Once again negative sentiment towards commodity prices prevailed. Traders continue to remain skeptical about Treasury Secretary Paulson’s bail-out plan for financial companies that would also boost economic growth and fuel consumption. With legislators debating the rescue strategy, fears that ‘when’ a finalized plan is implemented, consumers will be hit with higher energy prices. Prior to the futures squeeze play, oil had seen its largest rally in a decade on the back of a potential Capital market rescue package. The ‘big dollar’, range trading, has lost some of its luster on concerns that the US proposal to buy $700b worth of ‘toxic assets’ from financial firms will deepen their budget deficit. Today’s EIA report is anticipated to show that crude-oil and fuel inventories probably declined last week because production platforms, refineries and ports along the Gulf of Mexico were shut in the aftermath of hurricanes Gustav and Ike. Oil had advanced +30% since US lawmakers last week pledged fast consideration of Treasury Sec. Paulson’s plan to buy devalued mortgage-related securities. To date, a temporary speed bump to finalizing legislation weighs on commodities. A quick rubber stamp by congress will not be forthcoming as political parties seek inclusion of specific ‘riders’. US energy companies have resumed about +11% of oil production and a quarter of natural-gas output in the Gulf of Mexico after shutting almost all of its production platforms before the hurricanes. Fundamentals will eventually kick in; prices are too high, it’s only a matter of time before the global economic slowdown spreads further afield (China, India) and cut consumption even further. Gold has eased this morning in London ($891), after Warren Buffett bought a slice of GSNY and speculators booked profits believing that market volatility may be ‘petering’ out for now, thus reducing the appeal of the ‘yellow metal’ as an alternative safe heaven investment.

The Nikkei closed at 12,115 up +24. The DAX index in Europe was at 6,021 up +21; the FTSE (UK) currently is 5,153 up +18. The early call for the open of key US indices is higher. 10-year Treasury yields eased 3bp yesterday (3.80%) and are little changed O/N on concerns that the rescue package may be delayed. Bernanke testifying yesterday and again today warned lawmakers that any hesitation in implementing the $700b financial plan would pose a further threat to capital markets and the US economy. US Democrats are demanding stronger support for homeowners and limits on executive pay, while their Republican rivals question the plan’s reach and size. Despite the 2 and 5-year auctions this week the FI asset class remains a safer bet with global equities continuing to see red. Do not be surprised to see traders cheapen up the curve ahead of today’s government debt auctions.

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