USD ‘bears’ be afraid, be very very afraid!

Food for thought for USD bears. We have a Cbank, lets call it the Fed, initiates quantitative easing, usually story, buy’s bonds etc. and then implies that it may implement an exit strategy when capital markets normalize and there is no more stimulus needed. Now we introduce another Cbank, we will name that one the ECB, they too go to the market and buys bonds (EUR 442b 1-year repo transaction with 1123 banks!) declares a fix exit point in 1-years time when it will ‘exit’, by selling the said bonds back. Now we all know when the ECB quantitative easing strategy ends. There is no need to be in love with the EUR by then! ‘Supposedly’ and there have been many covert ones of late, the SNB intervened again yesterday by buying USD vs. their own currency and not using their regular avenue of EUR/CHF. Makes one wonder about wanting to own a short USD position!

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

Yesterday’s advance in US durable goods last month was much stronger than expected (+1.8% vs. -0.6%), even after the downward revisions for the previous month were taken into account. Much of the strength was in the core-capital goods headline. New orders for non-defense capital goods ex-aircraft jumped +4.8%! The May data still leave the 3-month annualized growth rate for core-orders at -13.5% vs. 1st Q decline of -44%. Analysts note that a flat June reading would push 2nd Q growth into positive territory. Digging deeper, core-shipments were down -24% over the last 3-months. For the naysayers, firstly, the upbeat headline may be driven by foreign orders rather than domestic strength. Proof may be seen in May’s ISM manufacturing index foreign orders component which posted some improvement. Secondly, markets continue to deal with ‘rabid’ volatility off of a very low order mark and of course this will exaggerate any series of data. Thirdly, the durable goods inventory-to-sales ratio now stands at its highest level in nearly 2-decades (manufactures are bullish on the future-but it’s the consumer we are concerned about) and finally, not for any bull to enjoy, aircraft orders are a huge headline factor in the report and could easily reversed next month!

Again yesterday US New home sales disappoint. With sales falling -0.6%, m/m (342k vs. +344k), falling inventory levels have led to a decline in months’ in May’s supply. Inventories are at 10.2 months and analysts believe it will take us into next year to ‘burn off’ the current stock. Of course this will not occur if sales aggressively advance, not much of a chance with the consumer lying dormant! Do not expect US housing numbers in general to positively add to 2nd Q GDP. Existing home sales have been up for 2-consecutative months, but on low volumes, while new home sales remain flat. Conclusion, purchasers want lower-priced re-sales and foreclosures.

Bernanke and Co. came and delivered what was expected. No real surprises, the FOMC communiqué was probably more on the hawkish side (how else will they influence the most important variable-the consumer). Positives, policy members believe that businesses have pared inventories to levels better ‘aligned with sales’. Inventories have been the scourge of this recession. Any drawdown of stocks must be seen as a positive! On the inflation front, they mention commodity prices, however, the feeling is they are not that concerned (bang goes the exit strategy!). One note, they said that will ‘make adjustments to credit and liquidity programs as warranted’. Analysts interpret this as an indication that they might raise the rate on TAF and perhaps the discount rate to encourage further wind down of these programs which could be the 1st-step for an exit strategy.

The USD$ currently is lower against the EUR +0.08% and CHF +0.21% and higher against GBP -0.48% and JPY -0.11%. The commodity currencies are mixed this morning, CAD -0.21% and AUD +0.26%. The loonie has weakened after the Fed left its bond-purchase program unchanged, thus boosting the appeal of the greenback as a refuge. Despite what positive spin both OECD and the IMF are putting on things, it seems that Canadian domestic ‘green shoots’ are not rooting, which have a negative impact on commodities and eventually a negative impact on higher yielding commodity based currencies. The euphoric rise of the loonie since March has hinged on ‘green shoot’ economic theory and the rampant rise of commodities. In reality, the market has very much got ahead of itself and has easily squeezed weak long CAD positions out all week. BOC governor Carney this week said that Canada’s recession is as deep as their southern trading partners. He believes that ‘Canadian households are facing rising stresses because of increases in unemployment’, which will not be currency positive in the medium term. On USD pull backs dealers will want to sell the CAD.

The AUD managed to rise for a 3rd-consecutive day on the back of a rebound in global equities combined with the IMF stating that the Australian economy will recover faster than previously estimated. With the Fed remaining on hold yesterday, speculators continue to grab higher yielding assets like the AUD (0.7951).

Crude is higher in the O/N session ($68.97 up +30c). Oil smallish bid, but not with the same enthusiasm we witnessed last week. On Tuesday the API reported that gas stockpiles increased to +211.4m barrels and crude supplies fell -72k barrels to +356.6m. The weekly EIA announcement yesterday supported the API findings. However, with Japanese export numbers disappointing (-40.9%, y/y), combined with a higher gas number, and despite a floundering ‘greenback’, the bulls should be concerned about future demand for the commodity. Demand destruction remains commodities greatest nemesis and not volatile currency levels. It’s now probably expected that OPEC in Sept. will not announce a further reduction in production, but, ‘will ask for more compliance with existing quotas’ (amongst members they have complied 77% with last years production cuts). It was a bearish report for commodity prices, despite the fall in crude, over the next couple of months expect the market to focus on the driving season that ends on US Labor Day. The ‘yellow metal’ managed to appreciate on the back of a weaker greenback and on speculation by investors that with the Fed endorsing their treasury program could heighten inflation ($935).

The Nikkei closed 9,796 up +205. The DAX index in Europe was at 4,805 down -30; the FTSE (UK) currently is 4,272 down -7. The early call for the open of key US indices is higher. The 10-year Treasury’s eased 4bp yesterday (3.67%) and are little changed in the O/N session. As to be expected, dealers cheapened up the US curve ahead of the record $37b, 5-year auction yesterday, an hour ahead of the FOMC decision. The market was anticipating rates to remain on hold for some time. What if not? Who would want expensive product on their books? Not much of a gamble really, as proven by the FOMC communiqué, but a higher US durable headline had already pressurized prices in the morning session.

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