G8 should reconvene at MJ’s ‘Neverland’!

The way the market was trading JPY yesterday, first smelt like someone was in trouble, a hedge fund, a bank perhaps. The massive swing to own JPY was not entirely due to exiting carry trades. Verbal intervention was swift to end the stop loss hunting patters. Japans Chief Cabinet minister said that ‘excessive moves in market rates have a bad impact on the stability of the economy and financial conditions and therefore are undesirable’. Is actual intervention far behind?

The US$ is weaker in the O/N trading session. Currently it is lower against 14 of the 16 most actively traded currencies in a ‘whippy’ O/N session.

They might as well be having the G8 meeting at MJ’s ‘Neverland’. There seems to be a huge chasm in ideas on what the members need to do next. The biggest borrowing and spending spree in half a century is currently having little effect on global unemployment and leaving investors massively unwinding riskier trades as they question the ‘green shoot strength’ of this global recovery. The mass migration into both JPY and USD and a heightened appetite for FI product is powerful evidence that Governments and Cbanks are been questioned about their actions. They cannot afford to take the foot off any peddle and currently have little room to maneuver. The idea of exiting any strategies too soon before the ‘green’ shoots root will only plummet economies into deeper recession. Despite the IMF raising their optimism levels, they maintain that the upturn will be ‘sluggish’ and continue to urge governments to stay the economic-stimulus course. Investor’s actions tell you that they are weary and wary of false promises!

The USD$ currently is lower against the EUR +0.59%, GBP +0.62%, CHF +0.54% and higher against JPY -0.75%. The commodity currencies are stronger this morning, CAD +0.70% and AUD +0.84%. The loonie has faltered, but not at the same pace as other G8 currencies trading vs. the USD. The weakness is playing catch up. The commodity based currency continues to feel pressurized as commodity prices tumble, especially oil, which has lost close to -16% since last week. Expect investor’s to continue to trim bets on riskier assets and carry trades on signs that a global economic recovery may take much longer than originally anticipated. Despite some stronger fundamental data appearing this week, similar to a whitewash rather than a paint job, all eyes are focused on the employment data out tomorrow. Even the IMF upwardly revised growth predictions for the Canadian economy for this and next year (-2.3% and +1.6%) has done very little to aid the currency, like all currencies it’s caught surfing on the wave of negativity fueled by lower earnings. Technically, with the currency printing a 7-week low it has opened up for it to test back towards the 1.1800 handle. Expect the currency to be sold on a USD pull back in the short term as global sentiment seeks that ‘safer heaven’ currency.

The AUD has rebounded from its 3.5% loss yesterday, which was also a 7-week low, after government reports showed that the countries jobless rate rose less than expected last month (+5.8 vs. +5.7%). With global equities retreating, it has dampened the demand for higher yielding assets as investors become risk averse in their trading, if this is sustainable then the currency will once again be in trouble (0.7848).

Crude is higher in the O/N session ($61.14 up +100c). Crude has managed to solidify its longest losing streak since Dec. on the back of equities continuing to plummet and weekly industry reports showing an increase in US fuel inventories. Gas inventories rose +1.9m barrels to +213.1m, w/w, vs. expectations of an increase of +900k Distillates (which include heating oil and diesel), jumped +3.74m barrels to +158.7m barrels. Crude on the other hand came in very close to expectations, falling -2.9m to +347.3m. The market had expected a -2.8m decline. Yesterday was the 7th-consecutive day of declines as the greenback remained firm vs. the EUR (longest losing streak in 9-months) and limiting investor’s appetite for commodities as a hedge against inflation. Recent fundamental data have led to concerns that the US stimulus program may not be working. The commodity has retreated more than 16% from its recent highs last week. Prices had got ahead of fundamentals in a big way over the past few months, and recent movements seem to be filling in that gap. With ‘demand destruction’ come higher inventories and it’s speculated that this week’s inventory reports will further pressurize prices. OPEC also released a report yesterday cutting its 2013 forecast for global oil demand by -5.7m barrels to +87.9m barrels a day and expects developing countries consumption to drop -1%next year to +45.5m barrels a day and remain at that level through 2013. This technical retreat and demand destruction has opened the way for oil to maybe trade down to $55! Similar to other commodities, the ‘yellow metal’ has faltered of late but with the greenback paring losses in the O/N session the commodity has managed to find a little traction ($914).

The Nikkei closed 9,291 down -129. The DAX index in Europe was at 4,634 up +62; the FTSE (UK) currently is 4,166 up +26. The early call for the open of key US indices is higher. The 10-year Treasury’s eased 19bp yesterday (3.32%) and is little changed in the O/N session. Despite the FI market setting it-self up for the last of this week’s auctions (30-years today) investors continue to speculate that the worst recession in 50-years has ‘legs to run’. With advisors telling Obama that the economy is ‘worse than they had forecasted’ and to consider a 2nd stimulus package, investors and Cbanks continue to seek the sanctuary of the FI market. With equities in trouble finding traction this is making bonds more attractive. The market is expecting Cbanks to be around to soak up the record supply. Their appetite for product can only last for so long!

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