‘Let them eat cake…..again’!

The remaining will consume $1,400 bottles of wines, starting with a 1971 Petrus. The no show list at Davos reads like the New York state attorney Andrew Cuomo subpoena wish list! We have Thain ex-BOFA, Fauld ex-Lehmann, Sullivan ex-AIG, Ospel ex-chair UBS, even Blankfein and Mack from Goldman have all decided to skip the World Economic Forum starting today in Davos Switzerland. The rest of us, who will be eating cake, will focus on how transparent Bernanke and Co. wish to become!

The US$ is weaker in the O/N trading session. Currently it is lower against 12 of the 16 most actively traded currencies, in another ‘whippy’ trading range.

Forex heatmap

There were no real surprises with any of yesterday’s US data. Consumer confidence fell further this month and printed a new 42-year record low, which analysts believe that economic recovery is still several quarters away. It’s worth noting that both the present situation and future expectations components fell once again as the labor index remains negative with consumers finding it more difficult in find a job in this current environment. Expectations beyond the next 6-months also remained bleak, with +13.3% expecting business conditions to improve while +31.1% expect conditions to worsen. Only +9.4% expect there to be more jobs, while +36.7% expect fewer jobs. Other sub-categories showed that inflation expectation beyond 12-months fell once again to +5.6% vs. +7.7% in June of last year.

US home prices for Nov. fell at a slower pace than expected, but, interestingly still the fastest pace on record according to the S&P/Case-Shiller Home Price Index yesterday (down -2.23% m/m or -18.18% y/y). Not unexpectedly demand remains weak, leading once again to high inventory levels. Analysts believe that prices will continue to decline, but believe by the end of this year we will see these low prices hit bottom when some confidence returns to the market and buyers come once again reappear. But reality at the moment has foreclosures still flooding the re-sale market, combined with weaker housing starts numbers will continue to add to the already high inventory levels which in turn will cause further depreciation.

Finally, the Richmond Fed improved more than expected this month advancing to a negative -49 only, but still in contraction. Digging deeper, shipments once again remained negative at -54, along with new order volume (-50), number of employees (-40), average workweek (-41) and wages (-3). But, future business activity in six months moved up slightly with shipments at -30 and new order volume at -34. Disappointedly, the number of employees and average work-week remained weak!

The US$ currently is lower against the EUR +0.75%, GBP +1.08%, CHF +0.37% and higher against JPY -0.20%. The commodity currencies are stronger this morning, CAD +0.32% and AUD +0.80%. The loonie faltered and stumbled ahead of last night’s highly anticipated Canadian Government budget. Softer commodity prices have not helped the loonie either. After 4-days of constant strengthening, traders were eager to pare some of their long CAD$ exposure as political opposition parties digest the anticipated deficits that are proposed over the next few years. Fundamental data of late has been very disappointing, but the Governments announcement of their expected deficit numbers, pales in comparison with so many economies, has made the currency much more attractive over the past week. The unknown political layout, with Prime Minster Harper’s Government under constant threat of a coalition backlash may temporarily underpin the Canadian dollar moving upwards. Yesterday, there were no major surprises in a BOC Governor Carney’s speech. He did mention that ‘more initiatives are likely in the coming weeks’ and argued that deflation in Canada is remote. But, he did reiterate that total CPI will dip below zero in the 2nd and 3rd quarters of this year before rising back up to +2% by 2011. Analysts suggests that the BOC will keep rates low for a long time to ensure that deflation does not take hold, thus following in the footsteps of the Fed. Traders continue to make bets that Carney will cut rates by another 50bps in Mar., bringing the target rate down to +0.5% where it will stay well into 2010 (The BOC were specific in noting that they use core-CPI as its operational guide, believing it to be a more stable measure).

The AUD dollar has risen in the O/N session for a number of reasons that has affected investors risk appetite. Firstly, the government contemplates a bigger stimulus package to kick start their economy and secondly the currency was able to print a weekly high as investors speculated that the US will create an institution to take on banks’ toxic debt next week (0.6677).

Crude is lower O/N ($41.55 down -3c). US housing data disappointed the crude market. Once again the data highlighted the depth of the global recession. Yesterday, crude fell the most in 2-weeks after the report provided stronger evidence that the on-going recession in the biggest energy consuming country is only deepening. Today’s EIA report does not help the black stuff, it’s anticipated that inventories will once again rise for 16th time in 18 weeks! Oil briefly printed a three week high earlier this week and as expected it has found it difficult to maintain a bullish momentum, all this despite Crude ending last week on a high note as investors speculated that global stockpiles would decline when OPEC fully implements its promised production cuts. It is expected that OPEC will curb supplies by -5.4% this month to +26.15m barrels a day. Last weeks EIA report showed that inventories rose for the 15th time out of the last 17-weeks. Crude stocks advanced +6.1m barrels to +332.7m, the highest level since Aug. 2007. Refineries have reduced operating rates by a further -2% as fuel consumption erodes. Refineries operated at 83.3% of capacity, the lowest for the week in 18-years.The 4-week weekly averaged +19.4m barrels a day, down -4.7%, y/y. Gas stocks also increased significantly, they jumped +6.48m barrels to +220m vs. an expected rise of only +1.8m barrels. 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. Profit taking remained the order of the day yesterday. After the past 5-days strong rally, investors were happy to book some profit and sell some of their precious yellow metal. The commodity remains better bid on pull backs ($887).

The Nikkei closed 8,106 up +45. The DAX index in Europe was at 4,426 up +102; the FTSE (UK) currently is 4,258 up +63. The early call for the open of key US indices is higher. The 10-year Treasury yields eased 7bp yesterday (2.56%) and are little changed in the O/N session. Longer term securities despite duration issues and funding requirements after 4-days finally caught a bid as investors speculated that the Fed will soon be in a position wanting to buy longer dated securities as a part of their long term stimulus plan. The front end of the US yield curve was in strong demand after yesterday’s surprising 2-year auction. However, dealers will be focusing on what quantitative methods Bernanke and Co. may employ after today’s FOMC meeting.

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