China And Japan Go In Opposite Directions!

A JPY positive election win for the Democratic party of Japan, a ‘bloodless revolution’ has taken affect for the 1st-time after a 50-year single party system. A EUR negative may be occurring in Germany this morning. There have been elections in several states (a month before General election). It has resulted in a move towards the left and political pundits believe it may leave some serious doubts whether the expected coalition of CDU/CSU and FDP will run the country for the years after the upcoming general election. The masses are speaking! Danger continues to lurk in China, equities are falling further. They are down another -5.6% so far this morning and down a whopping -23% from this months peak! When is the penny going to drop with the rest of the world? After the labor weekend!

The US$ is stronger in the O/N trading session. Currently it is higher against 12 of the 16 most actively traded currencies in a ‘whippy’ trading range.

On Friday, data confirmed that the US consumer temporarily increased their spending (+0.2% vs. +0.1%, m/m). Consumer spending growth was very much in line with consensus and analysts believe that it will likely post another rise this month before retrenching once again next month. Digging deeper, it was the ‘durable’ spending which led the way in July. It advanced +1.8% real-gains driven mostly by auto sales. On the flip side non-durable goods declined -0.3%, m/m, while the services sub-category posted an advance of +0.13%. The Cash-for-clunkers program managed to persuade the consumer to shy away from other purchases, this is evident from the weaker non-durable and services print. It’s worth noting that the saving ratio fell to +4.2% from +4.5%, but, well below May’s peak of 6%! Perhaps with the cash-for-clunkers program ending, combined with weaker incomes means we could see the pull back in the saving ration being only temporary.

The USD$ currently is higher against the EUR -0.23%, GBP -0.36%, CHF -0.14% and lower against JPY+0.56%. The commodity currencies are weaker this morning, CAD -0.62% and AUD -0.44%. The loonie has depreciated -1% over the past 5-trading days, and it’s the 3rd-week of losses this month as investors speculated that the recent rally for higher-yielding currencies may be overdone. Canadian data on Friday had a mixed response. Firstly, Canadian Producer Prices posted expected declines (-3.8% vs. +6.2%).
However, it is a backward looking report that reflects what happened to oil and the loonie in July. We should now expect price increases for raw materials this month on the back of oil gains. Secondly, the Current account deficit was better than expected on revisions (-$11.2b vs. -$11.2b). While the headline print for the 2nd Q was very much in line, the better than previously reported 1st Q deficit made this a better than expected overall report. The loonie has had the poorest performance vs. the greenback this month compared to the 16 most-traded currencies. Month-to-date it has fallen -2.3% vs. its largest trading partner. The BOC Deputy Governor Timothy Lane and his contradicting comments about ‘maybe’ seeing growth this quarter and at the same time seeing significant upsides and downsides to the economy has capped this months gains. Take your lead from commodities and equities, as that’s what is dictating the direction!

Its official, the AUD is about record the longest stretch of monthly gains vs. the JPY in 20-years. With improving liquidity, good data, proactive Cbank policies and aggressive fiscal policies, has investors coveting the higher yielding currency. It’s expected tomorrow that the RBA will repeat its outlook and state that the economy is recovering. FI dealers are already pricing in a hike by early Oct. The theme remains the same and so does the AUD actions. Like clockwork, up one day and sidewise another! Stronger fundamental data coupled with a tighter monetary policy debate continues to keep the currency somewhat firm vs. the USD (0.8388). But, with China looking to limit the capacity of some of its industries should put pressure on the commodity currency eventually!

Crude is lower in the O/N session ($71.60 down -114c). Crude prices advanced for a 2nd consecutive day of Friday, all on the back of positive equity movement’s that had boosted investor confidence that the global economy will rebound and revive fuel demand. The million dollar question of course is this recovery sustainable? O/N equity movements especially from China are putting renewed pressure on the black-stuff. Both last week’s API and EIA inventory reports, with their unexpected gains, have impeded aggressive upward price movements. The EIA weekly inventories rose +128k barrels last week to +343.8m vs. a forecasted decline of -1.15m barrels. This bearish report was supported by the earlier API release that showed that oil supplies climbed +1.3% (the most in 4-months), to +346.7m barrels. On the flip side, gas stockpiles fell -1.7m barrels to +208.1m vs. an expected -800k decline. Even more surprising, US total daily fuel consumed averaged +19.2m barrels over the last month, down -0.9% y/y. Fundamentals reveal there is a lot of supply in the market with little demand. Technically $75 is going to be difficult to breach and the $70 support saw tough resistance last week. China of course remains the biggest concern. If their economic activity subsides it will definitely put a cap on this market in the medium-term. It has been alarming that we had shifted away from the demand destruction theme. Speculators have bullied crude prices higher. We are now officially over the hump of the US driving season and just about to enter historically a weak demand month of Sept. Despite probably seeing the worst of the recession, global growth should remain subdued. So why are prices higher? Gold prices advanced as investors took last week’s earlier decline as a buying opportunity. The questionability of sustaining economic growth continues to increase the ‘yellow metal’s’ appeal as an alternative investment ($955), mind you a weaker greenback would also helps commodity prices. However, this morning the currency is finding positive traction, not good for prices!

The Nikkei closed at 10,492 down -42. The DAX index in Europe was at 5,473 down -44; the FTSE (UK) currently is 4,908 up +40 (closed). The early call for the open of key US indices is lower. The 10-year bonds eased 3bp on Friday (3.46%) and another 3bp in the O/N session (3.43%). Treasury prices ended up on the week despite a plethora of record supply of new issues. Demand for FI product is being fuelled by investor skepticism about the strength of recent US data and whether high-yielding assets may be a tad overvalued. Dealers have managed to keep yields close to their monthly lows as the market debates also the inflation question.

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