Who wants’ to be King at the BOE?

This holiday shortened week is finishing off with a flourish of data. Piece-de-resistance today will be the BOE announcement (0.5%). Currently it’s a coin toss in what they deliver. Canadians unemployment data is expected to be weak, with politicians reminding us at every opportunity, weaker than consensus (-50k). Both the Canadian and US trade balances is anticipated to disappoint. Keep an eye on the US 10-year auction, $18b to be issued, with most people having left for the long week-end to watch Tiger rewrite history (again), it will be interesting to see how well received it will be. Cast your minds back to the long bond Gilt auction in the UK not so long ago.

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

Yesterday, US wholesale sales advanced in Feb. (+0.6%-the1st time in 8-months), helping to establish a record drop in inventories (-1.5% vs. -0.6%). Inventory pileups have be the curse of this recession, it now seems that distributors are beginning to eliminate some of the excesses finally. Analysts point out that it would take +1.31-months for distributors to rid excess stockpiles vs. the +1.34-months in Jan. Weak global and domestic demand has companies continuing to pare back production and by default impeding economic growth even further. However analysts are optimistic that the pace of contraction in inventories relative to sales should eventually lead to positive production figures in the latter half of this year.

The FOMC minutes yesterday held no surprises. Evidence shows that ‘conditions had deteriorated’ across virtually all regions and sectors. ‘Several participants’ were taken aback by the ‘degree and pervasiveness’ of the declines in economic activity overseas. In their discussion of possible policy measures, members unanimously ‘agreed that substantial additional purchases of longer-term assets eligible for open market operations would be appropriate’. This is their attempt to keep the curve flat and promote economic growth. But, excess supply of new issues to finance vs. demand is the biggest concern!

The USD$ currently is lower against the EUR +0.43%, GBP +0.06%, CHF +0.37% and higher against JPY -0.50%. The commodity currencies are stronger this morning, CAD +0.37% and AUD +0.51%. The loonie remained little changed yesterday and continues to err on the side of weakness ahead of this morning employment number (expected -50k vs. -82k) and an expected widening trade deficit (-1.3b vs. -1b). The currency has managed to pare earlier gains during yesterdays morning’s session, where it appreciated on the back of stronger housing starts for Mar. (+155k vs. +136k) as traders speculated that the BOC would delay announcing their use of quantitative methods. The back and forth in the commodity market has persuaded speculators to gravitate towards the greenback as they shy away from riskier assets. Already this week other Canadian data has not helped the currency’s cause; building permits fell by 4-times the expected pace last month, further proof of how weak the housing sector remains north of the border. BOC Governor Carney will announce at the end of this month a plan that would ‘flood banks with cash to halt the hoarding of capital and expand lending’. We have witnessed other currencies depreciate significantly when their governments entertained quantitative easing methods (BOE, BOJ, Fed). Expect this morning’s data combined with the shortened working week to provide for a very choppy session today.

Despite weaker fundamental data down under over the past week, the currency managed to advance as Asian stocks rallied and US futures point to a higher open in the O/N session. This has raised speculation that investors will continue to seek higher-yielding assets on pull backs (0.7122).

Crude is higher in the O/N session ($51.35 up +197c). Crude is such a fickle commodity to trade. Prices advanced yesterday after the weekly EIA report showed a smaller inventory gain than the earlier API industry report. Stocks increased +1.65m barrels to +361.1m last week, while the API report said that stockpiles jumped +6.94m barrels (the highest in 20-years). The bullish report does provide market support but with inventories approaching record levels one cannot get too bullish. It is the 24th gain in 28-weeks. Do not expect yesterday’s bullish movement to be maintained as traders are concerned that the IEA will probably lower its global demand forecast again this month because of slowing world economic growth. Until we see inventories decline substantially, there will not be a sustained gain in prices. Industrial reports continue to show that rising oil inventories and falling demand signal that the worst of the recession may not be over. Gold pared some of its earlier gains in the North American session yesterday as equities rebounded ever so slightly which eroded the appeal of the ‘yellow metal’ as an alternative investment ($886).

The Nikkei closed 8,916 up +321. The DAX index in Europe was at 4,407 up +50; the FTSE (UK) currently is 3,942 up +17. The early call for the open of key US indices is higher. The 10-year Treasury’s eased 2bp yesterday (2.86%) and are little changed in the O/N session. Treasury prices advanced for the 1st time in 4-sessions as the Fed continued it buy-back program, concentrating in the 1-2 year bucket. To date they have purchased $34b worth of product since its inception to keep longer maturities yields lower. All this despite a record issuing of new debt this week Traders have been making the Fed pay up for these buy-backs! With abundance of supply, expect traders to cheapen up the curve ahead of today’s 10-year $18b auction. With the early close it will be interesting to see how this supply will be received.

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