‘Obama’s $30 Billion dollar Ride…..’

They need another $30 billion to survive, they will eliminate 50k jobs in the near term and close production plants, accepting defeat and declaring bankruptcy apparently is too expensive. The US auto industry could see these ‘initial’ costs escalate if economic circumstances worsen. Who are we kidding? Of course this recession is deepening; the initial handout to Detroit was an alternative Unemployment Assistance incentive. The Administration is delaying the inevitable; throwing good money after bad is stalling. No one wants a new car, not even an old car.

The US$ 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.

Forex heatmap

Daily US economic data is only heightening the depth of this global recession. The data continues to provide further evidence that the recession is intensifying. Yesterday’s Empire State manufacturing index contracted this month at the fastest pace on record (-34.7 vs. -23.0). The same old news is laying claim to the blame, lack of credit and retreating sales data continues to pressurize and trim production/output and jobs! There is fear that despite President Obama’s stimulus package, global economies will regress much further, but at a slower pace. Manufacturing outlook predictions are woeful in the US, so bad that analysts are pushing further out the first signs of recovery taking place, like deeper in 2010. All this is like a bad dream where one is unable to wake up. Economic Japanese regression coupled with a threatening Moody’s credit downgrade of Eastern European Financial units has both the EUR and global equities remaining on the canvas and prone to a standing count. The 3-pronged attack on the US economy by Obama’s administration, the $700b Denver Stimulus package (combinations of tax breaks and government spending to create or sustain 3.5m jobs), the tinkered $700b ‘G.W’ Financial rescue and today’s intended announcement of ‘extraordinary measures’ to stem the record home foreclosures has to provide soon some evidence that something is actually working.

More depressing news, both Germany and France may be forced to contemplate the bailout of entire nations (Ireland Hungry Czech Republic for starters) rather than just individual banks (results are surprisingly positive this morning!) as European government budgets buckle under the weight of recession. Earlier this week, the German Finance Minister Steinbrueck said that ‘some of the 16 EURO- nations are getting into difficulties and may warrant help’. Already the cost of insuring Irish, Greek and Spanish debt against default rises to records and bond spreads widen. Next, expect further signs of heightened Social Unrest.

Many believe he fathered this recession, but, finger pointing and deflecting blame is scornfully easy. Alan Greenspan said the US may be doing too little to repair its financial system and promote an economic recovery. ‘The amount of money in both these pots may not be enough to solve the problem’. Yesterday he stressed the importance of halting the decline in house prices that are battering banks. He said ‘they can stabilize the asset side of bank balance sheets, this crisis will not come to a close’. Enough said, let’s see what President Obama has in store for foreclosures this morning!

The US$ currently is higher against the EUR -0.10%, GBP -0.60%, CHF -0.32% and JPY -0.21%. The commodity currencies are mixed this morning, CAD -0.04% and AUD +0.67%. The loonie managed to print a new 6-week low yesterday as global equities and riskier assets took it on the chin. The ‘fear factor’ has speculators offloading the CAD dollar, most commodities and seeking safer heaven sanctuary in US government debt and gold. The depth of the ‘doom and gloom’ will continue to weigh on the currency even after this morning US data. Pessimism expressed in lower equity markets has nervous investors unsettled about wagering the ‘farm’. In this current market mood, traders are content in buying USD on pull backs. Do not be surprised to see the loonie threatening to penetrate that psychological 1.3000 level sooner than later, technically and fundamentally speaking, there is nothing to support the currency in the short term.

The AUD$ slid to monthly lows earlier this morning as the threat of a much deeper and prolonged global recession continues to pin down commodity prices. Apart from the ‘yellow metal’, commodity indexes continue to point south. Some analysts are predicting that the currency may slide to sub-55cents as the global recession drives down commodities coupled with the fact that the RBA may warrant lowering borrowing costs to a new record low (3.25%). Traders want to continue to sell the currency on rallies (0.6395).

Crude is lower O/N ($34.87 down -6c). Crude continues its stoic retreat as investors fear the depth of this global recession. There is no appetite for the black-stuff as fear has once again forced investors to liquidate any risky positions. With Moody’s threatening to cut credit ratings for specific Eastern European financial units has caused global indices to loose their luster and by default renew the fear of ‘demand destruction’ for energy once again. Year-to-date, crude is down 22% so far and threatening to once again make an assault on the psychologically technical level of $30 a barrel. For the past month speculators had bought into the theory that the substantial cut undertaken by OPEC this year (who represent 40% of global supply) will eventually curb these surplus global inventories and bolster prices. But, the market is telling us differently. The focus is on global macroeconomic thoughts rather than anything directly affecting crude. Once again this morning the market anticipates an increase in the weekly inventory reports. Yesterday according to the Iraqi oil minister al-Shahristani, OPEC may need to once again cut production quotas at their Mar. 15th meeting if prices and markets remain unstable. A risk aversion strategy has investors looking a ‘store of value’ and buying the ‘yellow metal’ as financials and global equities remain under pressure ($970). Investors are gravitating towards precious metals as a safe heaven asset class.

The Nikkei closed 7,534 down -111. The DAX index in Europe was at 4,191 down -24; the FTSE (UK) currently is 4,024 down -10. The early call for the open of key US indices is higher. The 10-year Treasury yields eased 22bp yesterday (2.67%) and are little changed in the O/N session. With Moody’s wanting to lower the credit rating of Bank’s with Eastern European units has investors seeking shelter once again and liquidating any questionable assets. Risk aversion trading remains front and center. The questionable depth of this global recession continues to favor higher FI asset prices for the medium term. Next will be the questioning the strength of some European Sovereign debt!

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell