Are the US Treasury actions just a legitimized ‘Ponzi’ scheme?

We have had 50b reasons to figure out how a ‘Ponzi’ scheme works. It’s incredulous that something could go undetected for so long. Not doing one’s own due diligence unfortunately leads to one to getting burnt eventually. This weekend, financial institutions from far a field lined up to declare their losses. Greed has created this financial debacle and we are far from the bottom, there is never one ‘cockroach’ in an infestation!

The US$ is weaker in the O/N trading session. Currently it is lower against 15 of the 16 most actively traded currencies, in another ‘violent’ trading range. The greenback remains under pressure as investors speculate that the Fed will lower interest rates this week and that the US will bail out the auto industry with funds meant to shore up financial institutions.

Forex heatmap

On Friday, prices paid to US producers fell more than forecasted last month, mostly due to a reduction in gas costs. This is further evidence that the recession is cutting demand for fuel and keeping inflation contained. It’s deflation that this market is worrying about. The -2.2% drop followed the record -2.8% plunge in Oct. Ex-food and energy, the index advanced +0.1% m/m. Inflation concerns continue to diminish as worries about a prolonged global recession intensifies, this leads a clear path for another aggressive interest rate move by the Fed this week. Fuel prices once again influenced the US consumer sentiment last month. Other data showed that US Confidence unexpectedly improved from the lowest level in 28-years, reflecting a record drop in gas prices that has given temporary relief to household budgets. The UOM index jumped to +59.1 from +55.3 in Nov. One should not expect this number to be sustainable in the short term, despite declining energy costs, rising unemployment, declining household wealth and fluctuations in the financial markets will continue to discourage spending, in the foreseeable future. Does the index reflect stabilization? Too early to tell, headline unemployment will of course be the biggest influence and that’s only getting worse. It was not too much of a surprise to see US retail sales decline for a record 5th consecutive month last week. Once again the index was led by the slumps at auto dealers and service stations that overshadowed gains at electronic and department stores. Despite beating analysts expectations (-1.6% vs. -1.8%) the loss of +1.3m jobs in this quarter and an ailing property market certainly will not improve future sales figures over the coming months.

The US$ currently is lower against the EUR +0.61%, GBP +0.54%, CHF +0.28% and JPY +0.86%. The commodity currencies are stronger this morning, CAD +0.69% and AUD +0.47%. Last week’s fundamental data has been kind to the CAD dollar, despite the Political fiasco that’s taking place federally. The loonie advanced vs. its southern neighbor as global equities and commodities rallied and the greenback remains under pressure across the board. Last week’s Canadian trade surplus narrowed to less than expected ($3.8b), as imports grew faster than exports. It’s worth noting that the gain in imports was due to higher prices as the CAD dollar depreciated by -12% during the month; import volumes declined -0.8% m/m. Exports volumes, on the other hand, rose +0.5%, this has provided some support to economic activity for the economy in Oct. Another added bonus for the currency has be the weekly strength of the commodities. Prices of commodities, which generate about half of Canada’s export revenue, have plummeted since the summer highs as a global recession has reduced demand. Last week Governor Carney from the BOC delivered an unexpected ‘deep interest rate’ cut. The market expected 50bp, the economy warranted 75bp and Carney pushed rates to a new 50-year low of 1.5% vs. 2.25%. In his communiqué he signaled that more action may be needed as economic growth sputters in a ‘broader and deeper’ global slump. This week we will have OPEC production cut decisions, perhaps this will once again provide support for the loonie short term. With the general malaise of the greenback, it’s difficult to want to own that currency in the short term. On a cross related basis the loonie has faltered and traders continue to want to sell the CAD$ on strength.

The AUD found some O/N support as traders continue to speculate that the Fed will ease 50bp tomorrow and by default provide some support for higher yielding currencies. With global equities remaining in positive territory coupled with robust commodity prices had traders remaining better buyers on pull backs for the moment (0.6649).

Crude is higher O/N ($47.66 up +138c). Crude prices had its strongest rally in over a month last week and the market remains on a firm footing ahead of OPEC meeting in Algeria this week, where it’s anticipated further production cuts are planned by the group. Last week the Saudi oil minister said that the Kingdom had delivered the output cuts promised to OPEC (last month). The market has taken this as a sign that world supplies are smaller than traders believe. The Kingdom pumped +8.493m barrels a day in Nov., in line with its OPEC production quota of +8.477m barrels. Oil has advanced +17%, that’s the largest weekly gain in 10-years. This ‘new’ policy of transparency from the Saudis has everyone looking. It basically indicates that they are serious and that more cuts will be forthcoming, in other words they mean business. Libya’s top oil minister reiterated that the recent production cuts were not enough and at this weeks OPEC meeting deeper cuts need to be implemented. He said’ that there was a consensus to reduce production’. Russia also has indicated that they could join ranks with OPEC and cut production (world’s second largest producer), by default this will be bullish for commodity currencies. Last week’s weekly EIA report showed that inventories of gas and distillate fuel, a category that includes heating oil and diesel unexpectedly jumped. Gas stockpiles rose +3.7m barrels to +202.7m w/w, while distillate inventories climbed +5.6m to +130.6m barrels. They were anticipated to fall -400k barrels and distillate supplies by -1.5m respectively. Inventories of crude rose +392k barrels to +320.8m (analysts had anticipated a 10th consecutive increase of +1.3m barrels). Refineries operated at 87.4% of capacity and were up +3.1% from last week. The 4-week US fuel consumption averaged +19.3m barrels a day, that’s down -6.1% for the same period last year. Gold prices have rallied 2-month on the back of a weaker greenback; by default it has temporarily increased the appeal of the ‘yellow metal’ as an alternative investment ($828).

The Nikkei closed 8,664 up +428. The DAX index in Europe was at 4,732 up +69; the FTSE (UK) currently is 4,311 up +32. The early call for the open of key US indices is lower. The 10-year Treasury yield backed up 3bp O/N (2.59%). Treasury prices have fallen from the record lows recorded on Friday as global bourses advanced on speculation that the US government will provide financial aid to prevent the nation’s biggest automakers from going bankrupt. There is a possibility that the Bush may use some of the TARP bailout ‘kitty’ to keep them afloat. This has temporally dissuaded the implementation of ‘safe-heaven trading strategies. Next up we have the Fed, traders have already priced in a 50bp cut.

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