Chrysler out, GM in!

So we discount the South China Sea problems, we buy into ‘THE FORWARD THINKING’ US consumer data, even though spending remains an issue. There is no flight to quality, risk aversion strategies, forget them! The market seems to be using any excuse to liquidate USD currency accounts. All must be right with the world again. The worst of the recession is over! Phew and I thought this was a ‘bear’ market equity rally. Quantified by the ongoing housing slump, pitiful spending, despite the efforts to jump-start lending as the demand for credit remains low due to the fear of further job-losses. The US administration must be happy a weaker USD makes their exports cheaper!

The US$ is mixed in the O/N trading session. Currently it is higher against 9 of the 16 most actively traded currencies in a ‘subdued’ trading range.

Forex heatmap

Yesterday’s Mar. print for the S&P Case-Shiller 20-city house price index was weaker than expected (-18.7% vs. -18.4%). Primarily on the back of foreclosures surging, this is threatening to pro-long this housing slump. The on going erosion of household wealth is hurting consumer spending and the economy. This can only mean that house prices have further to fall. It seems that the yearly rate of decline in US house prices is stabilizing within the narrow band of 18-19% y/y range (based on the past 6-months of data). However, on a cumulative basis, house prices are now down by -32% from their peak in 2006! One can conclude that there is no technical or fundamental reason for a recovery in prices anytime soon.

Surprise, surprise, US consumer sentiment printed its highest reading in 8-months yesterday (54.9 vs. 42.7). The Fed’s marketing and PR machines seem to be working their magic. Consumers believe that the job market will improve as low mortgage rates and smaller NFP print losses are beginning to convince the masses that the US economy will return to growth in the latter half of this year. A tad optimistic, but perception and confidence are the key to recovery and so too is SPENDING, which remains weak. Digging deeper, the spending sub-component to the report is disappointing as the erosion of the wealth effect remains buoyant. Analysts agree that it was ‘the forward looking change in expectations that drove most of the improvement as opposed to what consumers think about current conditions’. The present situation component to this report rose to 28.9 (highest since Jan.), but the expectations component soared to 72.3 (highest since Dec 2007). It’s worth noting that consumers do not anticipate changing their spending intentions over the next 6-months!

More surprises were seen from the Richmond Fed. The steep slide in the district has been done away with and the region now sits in expansion territory (+4 vs. -9). Looking at the sub-components, shipments increased, with new orders in expansion mode for the 1st-time in over a year. Capacity utilization has increased despite manufacturers continuing to lay off workers, but the pace of firings has slowed. Finally, prices paid went up by +1% last month vs. +0.3% m/m.

It looks like GM is heading towards bankruptcy after bondholders did not agree to ‘swap’ their debt to equity. There are reports in this morning’s WSJ that the US government will spend another $50b in various financings to back a GM workout, this of course is in addition to the $36b already spent on the Auto industry. What an investment for something that’s doom to fail on many fronts!

The USD$ currently is lower against the EUR +0.02%, GBP +0.41%, CHF +0.08% and higher against JPY -0.25%. The commodity currencies are mixed this morning, CAD +0.47% and AUD -0.05%. The loonie accompanied most other major currencies and appreciated against its southern and largest trading neighbor again O/N. All of this was on the back of stronger US consumer confidence numbers and commodities having the ability to pare their early morning losses. There is nothing fundamentally supporting the currency, even the Canadian finance minister this week said that the proposed national deficit will balloon much more than originally anticipated in Jan. and will last a lot longer on Federal books. The longer term fundamentals certainly support a much stronger CAD, however investors have plenty of time to add to their positions at more favorable levels.

The AUD has weakened in the O/N session on speculation that their record + 20% gain vs. the USD over the past 3-months was too rapid. It does not help that most investors sold higher yielding assets on the back of North Korea missile testing which is weighing on equities in the region (0.7860).

Crude is higher in the O/N session ($63.29 up +84c). Crude prices continue to feel some pressure as capital markets believe that OPEC will not adjust any production quotas at tomorrow meeting as this global recession curbs fuel consumption. It is anticipated that they will likely keep daily output quotas unchanged at 24.845m barrels. The surprising US consumer confidence report was able to pare all of the black-stuffs early morning losses as global equities advanced. A weaker USD was able to push it higher! Algerian oil-minister, Khelil said ‘the group will be careful about harming the global economic recovery’. Some analysts believe that with record 19-year high inventory levels combined with the contraction in activity in advanced economies, the market should expect another large correction from these elevated prices’. Last week’s EIA report showed that US inventories declined more than forecasted. Stocks dropped -2.11m barrels to +368.5m vs. an anticipated decline of -0.4k, w/w. US refineries are operating at +81.8% of capacity, which is down -1.9%, w/w and is the lowest utilization rate in a month and a half. One can conclude that refineries are nervous about increasing production as global demand remains weak. The 4-week monthly demand is averaging at +18.3m barrels a day, that’s down 8% y/y. Gold has not swayed too far from yesterday’s prices as the uncertainty of the USD continue to influence direction flow. It’s not inflation, nor a technical or fundamental reason that’s influencing prices, but the value of the USD ($949).

The Nikkei closed 9,438 up +127. The DAX index in Europe was at 4,982 down -2; the FTSE (UK) currently is 4,409 down -2. The early call for the open of key US indices is lower. The 10-year Treasury backed up 11bp yesterday (3.55%) and are little changed in the O/N session. With the US treasury having two more auctions this week, 5’s-$35b today and 7’s-$26b tomorrow dealers will be expected to keep the curve cheap to absorb this entire record product. Yesterday the Fed bought-back $1.55b of TIPs, maturing from Jan. 2010 to Apr. 2032 and issued $40b 2’s with a strong foreign Cbank demand.

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