G7 has seen the light, it wants to be the ‘big dollars’ crutch!

Despite month-end required dollar dumping, US data is also starting to leave a sour taste. Yesterday, the Chicago PMI and ADP print has a few dealers nervous for tomorrows NFP number. The Bond market has piled into ‘flatteners’ by buying the long-end of the curve (the spread between 2-yrs and longer maturities narrows), it’s there way to express uneasiness of recent data. The buck is tentatively receiving support, but not with everlasting conviction. Perhaps, things are about to change. Trichet wants a ‘strong dollar’, and now his side-kick Mr. Almunia has come out and stated that they will discuss the EUR appreciation and prepare their position for the upcoming G7 meeting next week. It has not had the immediate impact, unlike the SNB intervention yesterday, but will surely have a few trigger happy dealers wanting to buy dollars soon enough. Quick profit is fine, but, will the USD direction be somewhat sustainable? We are ready, bring on NFP!

The US$ is stronger in the O/N trading session. Currently it is higher against 13 of the 16 most actively traded currencies in another ‘volatile’ trading range.

There was disappointing data all-round yesterday from the US’s perspective. ADP was the early loser. Over the past few months the correlation between ADP and NFP has been somewhat disjointed. Yesterdays headline (-254k) still increases the risks of a larger hit to Friday’s expectations (-180k). Sept.’s decline was an improvement from the previous month and was the smallest drop in 14-months. Perhaps we can declare that the worst of the job slashing is now behind us? Digging deeper, one notices that employment in both the goods and the service-providing sectors continue to decline. In fact, the goods sector accounted for most of the hit to employment, coming in at -151k, while the services fell by -103k jobs. It was not surprising to see that small sized firms continue to slash jobs at the fastest pace (-100k), while medium-sized firms came in at -93k and large business, fell by a more modest -61k. We need the private sector to take the slack if we want to get out of this recession quicker!

Less bad is good in this environment. Market consensus expected a deeper downward revision to 2nd Q Real GDP. Pleasantly surprised, the market got -0.7% vs. -1.2%. Digging deeper, smaller declines to personal consumption, gross private investment and net-exports accounted for most of the improvement. Mind you, the government lent a hand increased its consumption. Analysts expect to see a 3rd Q with positives, which in fact would technically mark the end of the recession in the US! It’s worth noting that investment in inventories showed a greater decline than previous reports. Down the road, will this support future production?

What took US equities on a month end joy ride yesterday? An unexpected Chicago PMI was willing! The ‘business barometer’ unexpectedly fell to 46.1 vs. 52.2 last month (anything sub-50 implies contraction). However, month and quarter end buying of equities has disguised the sour headline somewhat. In the real world, the data captures the action from the auto-sector and shows that since the ending of ‘cash for clunkers’, we should be worried again. With auto-production having such a large influence does not bode well for a ‘smooth’ V-shape recovery.

The USD$ is currently higher against the EUR -0.28%, GBP -0.03%, CHF -0.33% and JPY -0.23%. The commodity currencies are weaker this morning, CAD -0.06% and AUD -0.07%. Analysts are two for two in missing recent Canadian fundamental expectations. Last week, no-one was in the same ball park when trying to predict Canadian retail sales (-0.8% vs. +1.1%). Yesterday we had July Real GDP. Consensus was expecting a positive headline of +0.8%, instead we were fed a flat reading of +0.0%, m/m. With higher auto-production (+17%), it provided some support, but was not enough to offset the weakness in utilities, agriculture, mining, oil and gas extraction. A number like this does not warrant the BOC to rush and hike rates anytime soon. Depending on what the last 2-months bring us, we could be setting up for a tepid 3Q GDP print. Other data showed that Canadian producer prices (RMPI +3.7%) got a boost from rising petroleum prices, with industrial product price gains (IPPI +0.5%) affected by the recent appreciation in the loonie (+3.1%). If we excluded the exchange rate, then IPPI would have gained by +1.3%. Despite all this, the loonie managed to advance the most in 3-weeks after the IMF cut its projection for global write-downs and the continued pressure on a sickly USD managed to drag the loonie begrudgingly higher. On deeper USD pull-backs, speculators are happy to sell the domestic currency.

No big surprises here, the AUD managed to retreat from its 13-month highs on the back of global bourses seeing red. Technically, the relative value of the currency may have overshot its mark in the short term. With equities expected to open the North American session under pressure has persuaded investors to temporarily shy away from the higher yielding asset classes (0.8818).

Crude is lower in the O/N session ($70.01 down -60c). Oil prices ended the month on a high yesterday after the weekly EIA report recorded a large gas drawdown. The weak dollar certainly contributed to its advance. Let’s start with the surprise. The EIA report revealed -1.6m barrel drop in gas inventories, inline with the API print, but against analysts’ expectations of an increase. Over the past month, US gas demand is up +5% and this after the end of the holiday driving season! On the flip side, crude inventories happened to increase by +2.8m barrels, w/w, vs. expectations of a +600k rise. Demand destruction remains, as the increase in distillate inventories was smaller than expected and posted monthly demand down -9% from this time last year. In fact, a closer look tells us that the report remains mixed with a bias towards oil products, like heating oil and diesel, to remain weak. Then why are we once again experiencing elevated prices? Given that overall demand remains weak, the sickly dollar and equities continue to influence price direction. With energy fundamentals remaining unconvincing, it would be a safe bet that the black stuff should be confined to its $10 range of $65-$75. We can never rule out the political influence. The threat of imposing greater sanction on Iran because of its nuclear program has heightened geo-political issues. Technically oil prices are inflated, they are not supported by market fundamentals, but geo-politics will always keep the black-stuffs prices artificially high.

All asset classes are ending the month and Q-end higher. This also includes Gold. Yesterday, with the USD under month end selling pressure, had investors coveting the ‘yellow metal’ as al alternative investment. Mind you, geo-political tensions in the Middle East will always boost the demand for the hard-stuff ($1,008).

The Nikkei closed at 9,978 down -154. The DAX index in Europe was at 5,674 down -1; the FTSE (UK) currently is 5,126 down -7. The early call for the open of key US indices is lower. The 10-year bonds eased 1bp yesterday (3.30%) and are little changed in the O/N session. Treasury prices continue to maintain their bid as investors speculate that the Fed will signal that interest rates will remain at record-low levels for the ‘foreseeable future’ as inflation remains subdued. Dealers will tell you that mid to long-bonds are ending the largest 3-month gain since the 4th Q of 2008. Data this week continues to point to a sluggish growth path. This has even Bill Gross from PIMCO favoring government debt amid deflation concerns. With global bourses under pressure, uncertain NFP data this Friday has risk aversion investors seeking yield.

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