Japanese housewives to be ‘burned’ in FX Markets!

One day down and many to go, President Obama was sworn in again and then hit the ground running. What a mess he has to preside over. Global equities rebounded on the potential of an Obama Bank rescue plan. Financial equities have gained the most in 2-months over the past 24-hours. The British banking system is becoming isolated, some European Tier 1 Banks are in danger of being nationalized or merged. Irish Banks are penny stock, Barclays is in denial. Governments want to stop the rot, but, first they have to be allowed to find it!!

The US$ is weaker in the O/N trading session. Currently it is lower against 10 of the 16 most actively traded currencies, in another ‘whippy’ trading range.

The BOJ like most CBankers has once again cut its growth forecasts and said it will consider buying corporate bonds to prevent a shortage of credit from deepening the recession. Another example of capitalism being dictated by big brother, unfortunately we have no choice, left alone we would not survive economically. Governor Shirakawa expects the economy to shrink until 2010 and similar to other economies return to deflation! The world’s 2nd largest economy will shrink -1.8% this year (that will be Mar. 31st) and 2% next year before recovering to expand +1.5% by end of Mar 2011. O/N data showed that exports fell a record 35% last month, further evidence that the economy will continue to contract for the foreseeable future as investments in Japanese companies dwindle. As to be expected the BOJ kept rates on hold at 0.1%.

This following piece was delivered by VP Hildebrand at the SNB this morning. It’s worth bearing in mind when being long both CHF and JPY. ‘With short-term rates of practically zero, the SNB cannot prevent a further appreciation in the Swiss franc through a rate cut. The SNB is able to sell unlimited Swiss francs vs. another currency. In an extreme case, it can commit itself at the same time to buying unlimited currencies at a fixed-exchange rate. A central bank is always able to increase the absolute amount of its own currency in circulation. Further options for policy makers include purchasing government bonds on the secondary markets’. He also conceded that ‘using unconventional tools is not without risks’. He went on to say that the ‘SNB will assess very carefully whether and to what extent it will use them. Deflation is just as undesirable as inflation’. Interestingly he finished by posing the question if in ‘today’s environment, one could ask whether it would not be better to aim for a higher inflation rate in order to avoid deflation at any cost’.

The US$ currently is lower against the EUR +0.20% and JPY +0.34% and higher against CHF -0.08% and GBP -0.63%. The commodity currencies are weaker this morning, CAD -0.12% and AUD -0.49%. The loonie remains well entrenched on that slippery slope towards our medium term target of 1.2800. Earlier this week the BOC did what futures contracts expected and eased 50bp to 1%. There were no surprises from Governor Carney, maybe next weeks Federal Budget (Jan. 26th) will enlighten the populous further on potential quantitative easing. Traders continue to bet that the BOC will repeat their actions next month and then remain on hold for the remainder of the year. Governor Carney expects the real-GDP to fall by -1.2% this year, notably weaker than the +0.6% expected last Oct. Interestingly, growth for next year has been revised up to +3.8% from +3.4%, as they believe both fiscal and monetary policy actions will start to make an impact. The BOC argued that both headline and core inflation will continue to ease for the remainder of the year on the back of a wider output gap and modest decreases in house prices. Headline CPI is expected to fall below zero through mid-2009, reflecting energy price softening. But they also predict that ‘total and core inflation’ should return to the 2% target in the 1st- half of 2011 as the economy returns to its potential. One can expect oil to once again come under renewed pressure and by default the loonie will lose its luster!

The AUD dollar advanced for the 1st-time in 3- days (0.6585) as a rebound in global equities fueled speculation that investors will be willing to purchase higher-yielding assets (4.50%). Despite weaker economic data down-under, some investors have abandoned their risk aversion strategies and starting to invest in higher yielding currencies like the AUD on deeper pull backs.

Crude is higher O/N ($44.49 up +49c). Optimism about an Obama led bank rescue plan managed to provide leverage for crude. At the moment there is a strong temporary correlation with equities and commodities. Earlier this week it was all about futures contracts expirations. Investors closed out their Feb. short covering positions, booking profits as we entered a new contract period. Despite the last few days’ positive action, prices are down 20% this year, after tumbling 54% last year. Analysts are predicating that today’s weekly inventory levels rose again (that would be the 15th time out of the last 17-weeks). This will put crude under pressure. Demand destruction remains the order of the day. Last week OPEC said that demand for its black-stuff will decline -4.2% this year as the recession in the US, Europe and Japan curbs fuel consumption. It’s expected that consumption of OPEC’s oil will shrink -1.4m barrels a day to +29.5m barrels. Last week’s EIA report showed that crude stockpiles climbed to a 16-month high as fuel demand continued to deteriorate. Crude stocks increased +1.14m barrels to +326.6m, the highest level since Aug. 2007. Fuel demand has dropped 6% to an average +18.6m barrels a day. While gas inventories rose +2.07m barrels to +213.5m, higher than the anticipated +1.85m expected. On the other hand supplies of distillate fuels (includes heating oil and diesel) surged +6.35m barrels to +144.2m, the biggest gain again in 5-years. Analysts anticipate that we will once again test Dec. lows and even print a $20 handle, all this on the back of the North American reports been so poor. Gold pared some of this week’s earlier gain as the USD rallied vs. the EUR, thus eroding the appeal of the ‘yellow metal’ as a safe heaven asset class ($854).

The Nikkei closed 8.051 up +150. The DAX index in Europe was at 4,346 up +85; the FTSE (UK) currently is 4,135 up +75. The early call for the open of key US indices is higher. The 10-year Treasury yields backed up 13bp yesterday (2.51%) and a further 6bp in the O/N session (2.57%). Treasuries once again remained under pressure as investors speculate that Governments around the world will need to issue record amounts of debt to battle this global recession. Next week, due to duration needs, there will be approximately $108b equivalent of 10-year product entering the market. This will put further pressure on long end of the US FI curve.

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