The USD takes a breather!

Excluding the distraction of the Olympics and lack of currency volatility this week, Capital Markets seems to be preparing for something out of the ordinary. Despite certain foreign politicians flexing their muscles, maybe US domestic issues will be ‘trumped or triumphed’ by an international incident.

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

Yesterday, with little US data to influence currency movement, capital markets relied on speculation and rumor of financial failures for guidance. Treasury prices moved higher once again receiving risk aversion bids due to trader’s speculation that the US Treasury will bail out the mortgage-finance companies, and wiping out shareholders. The greenback maintains its negative correlation relationship with commodities. Softening oil prices of late continue to provide the dead cat bounce for the EUR and play into US$ bull hands for the moment. But, as the Olympics enter the home stretch, expect geo-political rhetoric to gain traction. The Russian finance minister said that they will counter with more that just diplomatic response to the US/Poland shield agreement. This should have capital markets concerned. So it begins the eerie feeling of a ‘cold war’ scenario. This is a high profile chess game that will have far reaching consequences. What effect will this have on the US$, the EUR and FI markets? Will this distract from their domestic fiascos?

The US$ currently is lower against the EUR +0.31%, GBP +0.38%, CHF +0.47% and JPY +1.09%. The commodity currencies are mixed this morning, CAD +0.31% and AUD -0.37%. Yesterday, Canadian Retail sales rose for a 4th straight time in June, led by higher gas prices and clothing purchases. At first glance, the retail sales headline gains look stronger than expected, but, a good part of the headline gain was a result of higher energy prices. When price movements are taken into account, real-retail sales fell -0.4%. It’s worth noting that the Canadian consumer spent more in $ terms during the month, but purchased less with their money in terms of the volume of goods and services. Analysts point out that this paints a bleaker picture for Canadian economic fundamentals and lends supports for a BOC ease by Oct. (futures prices are pricing this in). In hindsight, expect eroding consumer confidence, a softer job market and weaker wealth gains to finally affect the end consumer’s wallet. Add this to softening commodity prices of late and one can expect the end result to impede the loonies’ strength in the short term. The net result, traders will be better buyers of US$ on pull backs.

The RBA said that they may cut rates for the first time in 7-years to avoid a ‘deeper and more persistent’ economic slowdown (7.25%). Stronger commodity prices are not lending enough support as growth concerns prevail (0.8692). Expect better selling on AUD rallies for now.

Crude is higher O/N ($116.05 up +49c). An eye popping inventory EIA headline initially pressurized crude prices yesterday. It was the largest reported gain in nearly 7-years. The US is awash with the ‘black stuff’. Stockpiles rose +9.39m barrels to 305.9m, w/w. US fuel demand averaged +20.2m barrels a day over the past month, that’s down -3% from a year earlier (higher energy prices have influenced the consumers needs). Gas consumption averaged +9.46m barrels a day, down -1.6%, y/y and refineries are operating at +85.7% of capacity, down -0.2% w/w. More importantly gas supplies dropped -6.2m barrels (double of that predicted). The overall market strength of the US$ continues to have a negative impact on commodity prices, emphasizing the strong negative correlation between commodities and the greenback. The drop in demand can be attributed to slowing global demand growth and oil coming into the market from newly developed fields from non-OPEC member nations. In just over a month crude prices have pared 23% of its value from its historical highs. Traders continue to speculate that fuel consumption declines in the US will spread to other global economies as growth stalls. In the London session this morning, Gold printed weekly highs as the greenback dropped vs. the EUR and boosting demand for the ‘yellow metal’ as an alternative investment.

The Nikkei closed at 12,752 down -99. The DAX index in Europe was at 6,275 down -43; the FTSE (UK) currently is 5,336 down -35. The early call for the open of key US indices is lower. Yields of the US 10-year notes eased 1bp yesterday (3.80%) and are little changed O/N. Treasuries remain better bid on concerns that financial firms face widening losses from credit markets. A report claiming that Freddie Mac will be meeting with government officials had investors seeking the safety of the FI market.

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