Bernanke befriends the Buck today!

The main event enters the Capital Markets ring today. In June the Fed acknowledged ‘the pace of economic contraction is slowing’, however, conditions in financial markets have generally improved in recent months. They noted that inflation will ‘remain subdued for some time’, which will warrant keeping the Fed funds rate at ‘exceptionally low levels for an extended period’. It would be a shock if Bernanke and Co. decided to change their stance on rates. The US Yield curve would be smoked during the mid-week auctions too! Will there be a hint of an exit strategy this afternoon?

The US$ is stronger in the O/N trading session. Currently it is higher against 12 of the 16 most actively traded currencies in a ‘whippy’ trading range.

Not much to get enthusiastic about yesterday in the US. The main event occurs at 2.15pm this afternoon. Will the Fed soften their stance on the state of the economy? It’s a slam dunk that rates will not change. But, whatever is decided and announced via the communiqué, the greenback may take a breather after the last 4-trading session’s gains. Fundamental data State-side yesterday revealed that worker productivity increased and labor costs declined. The productivity of the US workers grew in the 2nd Q (+6.4% vs. +0.3%-the fastest pace in 6-years) as companies continued to slash payrolls to boost profits. Not to be outdone, labor costs declined the most in 8-years (-5.8% vs. -2.3%). On a two front basis, lower costs could help reduce the pace of job losses and increased worker efficiency curbs inflation, which should take some of the heat off the timing of the Fed’s exit strategy!

The USD$ currently is higher against the EUR -0.26%, GBP -0.37%, CHF -0.09% and lower against JPY +0.71%. The commodity currencies are weaker this morning, CAD -0.37% and AUD -1.13%. The loonie has had a strong run this quarter. It was the best performing currency vs. the USD last month and for Aug. it has depreciated 3% against its largest trading partner. Yesterday, the currency eased the most in 2-months on the back of a depressed equity market and on trader’s willingness to pare some of their bets on higher-yielding currencies before this morning trade data and the FOMC announcement this afternoon. Canadian housing starts has not helped the currency’s plight, it actually declined -4.1%, m/m yesterday. It back to the ‘big’ dollar and the FOMC meeting to provide the market with food for thought. Continue to look for the CAD to finally catch up with the weaker fundamentals!

Despite Australian business sentiment jumping to the highest level in 2-years last month (10 vs. 4) and consumer confidence advancing, the currency managed to fall the for a 2nd-consecutive day vs. the USD as regional equities remain under pressure and prices for commodities fell (commodities account’s for more than 50% of the two countries’ exports). For now, investors look content to sell on rallies (0.8222).

Crude is lower in the O/N session ($69.10 -35c). Crude prices finally caved to demand destruction and the USD’s strength yesterday. With some equity analysts cutting ratings on specific companies, it also pressurized stocks and by default oil. It’s finally dawning on traders that last week’s EIA report was actually bearish and we have technically been subjected to elevated prices for too long. In reality, we may have seen the worst of this recession, but global growth will remain very subdued. This morning we get this week’s EIA report and the market again anticipates another build up of inventories just like last week’s data. This certainly does not bode well for any strong rebound in the coming months. Crude stocks increased +1.67m barrels, w/w, vs. an expected rise of +0.6m. Gas stocks declined -212k to 212.9m. The market was expecting a decline of -800k. Supplies of distillate fuel (including heating oil and diesel), fell -1.14m barrels to +161.5m, an increase of +1.23m was projected. Reality tells us that inventories are high, demand is still really weak and the risk is increasing that we will see a bigger correction towards $60. With the dollar remaining somewhat firm and equities and commodities slipping, has reduced the demand for the ‘yellow metal’ as a hedge against inflation. It continues to trade close to its monthly lows ($945).

The Nikkei closed at 10,435 down -150. The DAX index in Europe was at 5,305 up +19; the FTSE (UK) currently is 4,668 down -2. The early call for the open of key US indices is lower. The 10-year Treasury’s eased 13bp yesterday (3.66%) and is little changed in the O/N session. Treasuries prices advanced for a 2nd-consecutive day as 10-year yields near their highest levels in 2-months enticed buyers, despite the $75b refunding this week. Weaker commodities and equities also helped their cause. Today’s 10-year auction, an hour before the Fed announcement, could be a bitter pill to swallow on concerns that foreign Cbanks might take a step back, similar to last months 2’s and 5-year. Going by yesterday’s indirect demand, it should be a non-issue!

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