Geithner’s strong dollar policy is a myth.

Geithner ‘believes deeply that it’s very important for the US and the economic health of the US that we maintain a strong dollar’. But which dollar is he referring to? Canadian! Forget the Japanese housewife, it’s the Brown’s, Smiths, Jones etc who have been piling into a global carry trade, similar to Japans’ lost years, using the USD as a vehicle currency. It will eventually end in tears. Is the Obama’s administration policy one of quiet, steady dollar devaluation? With a 26-year high unemployment rate sitting at 10.2%, itching to go higher (real rate supposedly near 17%), is begging Obama to ‘devalue the way to prosperity’!

The US$ is stronger in the O/N trading session. Currently it is higher against 13 of the 16 most actively traded currencies in a ‘subdued’ trading range after the Memorial Day holiday.

Earlier on in the week, Fed voting member Janet Yellen and her dovish comments gave little support to her domestic currency. She stated the obvious when committing the Fed to a tighter monetary mandate ‘at some point’ in the future. She highlighted that US unemployment could stay elevated ‘for years to come’, and that the countries recovery will ‘be gradual and vulnerable’ to shocks. The Fed expects the commercial real estate sector to weigh down this recovery as their prospects are rather ‘worrisome’ to the committee. The Fed’s Bank of Dallas President Richard Fisher said that US economic growth and inflation may persist below ideal levels into 2011, making the central bank’s current interest-rate stance ‘appropriate’. Despite the equity rally going some ways to rebuild household wealth, ‘strength, durability of expansion are in question’, as prospects for ‘consumer spending remain cloudy’. Not a strong endorsement to wear a train driver’s hat Buffett style.

Ok, we all know that the Chinese economy after this week’s data sits upon the 8% growth hurdle. However, analysts are pointing out that there are two facets of concern within the reports. Firstly, there was a marked slowdown in bank lending, which was more pronounced than expectations. Secondly and more importantly, there was the unexpected worsening in deflation. That’s a kinda odd combination when you have a headline growth rate of 8%! Everything not what it seems me thinks.

The USD$ is currently higher against the EUR -0.10%, GBP -0.11%, CHF -0.10% and lower against JPY +0.06%. The commodity currencies are stronger this morning, CAD +0.01% and AUD +0.30%. At 96c or 1.0417 expect the BOC to contemplate drawing ‘their’ line in the sand. Governor Carney has insisted that they will use a combination of currency intervention, credit and quantitative easing options to influence the loonies’ value. The BOC believes that a strong currency is detrimental to economic growth. In the O/N session, the loonie has appreciated to its strongest level in 2-weeks vs. its southern trading partner on the back of the G20 maintaining their economic stimulus measures. Keeping the status quo is boosting speculators risk appetite for the higher yielding asset classes and commodity based currencies. Last week the Canadian economy managed to pare -43k jobs in Oct. (the market was expecting a gain of +10k) and push the unemployment rate up 2-ticks to an unexpected +8.6%. The data provides much stronger evidence that Canada has some ways to go to exit this recession, but, the data will make it easier for Governor Carney to follow through on his pledge to keep borrowing costs at record lows until June of next year to promote growth unless of course the inflation outlook changes materially. For now the loonie remains in a tight 3cent trading range with dealers continuing to play the support and resistance levels until fundamentally or technically told otherwise or commodity prices start to fall off a cliff!

The AUD managed to print its strongest level in over a year after a surprising Oct. employment numbers last night. The number of new employees jumped +24.5k vs. a market expectation of a decline of -10k. The unemployment rate however advanced 1-tick to +5.8%. Other factors this week have also aided the currency. China, their largest trading partner, said that their industrial production (+16.1%) and retail sales (+16.2) accelerated last month. The currency has also climbed on speculation that the Fed will now have to keep its O/N borrowing costs low for a considerable period of time after Friday’s disappointing headlines, thus boosting demand for higher-yielding assets. It’s the same story, but at a different pace! Last week, Governor Stevens indicated that the Aussi economy will expand at more than three times the pace forecasted in Aug., and signaled he and his policy makers will continue to lead the world in raising borrowing costs. The currency is well supported by commodity prices and expects dealers to remain better buyers on pullbacks (0.9308).

Crude is lower in the O/N session ($78.92 down -36c). Crude prices have remained close to home despite API data yesterday showing that weekly inventories had actually advanced w/w (stocks increased +1.22m barrels to +337.5m). This morning we are waiting for the EIA reports. Earlier this week, tropical storm Ida had dragged prices from their one week lows as she entered the Gulf of Mexico and forced both BP and Chevron to cut production and evacuate some staff for safety reasons. It’s worth noting that the Gulf produces 27% of the domestic US Oil production and 15% of its gas output! Not supporting crude prices was rhetoric from an official from OPEC, who said the group is unlikely to change production levels in Dec. Also a hindrance was the IEA cutting its long-term forecast for global oil demand on the back of this economic crisis sapping consumption in developed economies and the uptick in alternative energy use. Last week the black-stuff prices plummeted after the 26-year high US unemployment rate conjured up fears that future fuel demand will once again weaken. To date, it has not been able to retrace all of its 3% losses from last Friday. The commodity is contained within this $7 trading range for the time being, however, support levels are questionable as demand destruction remains strong and healthy in the US. Even last weeks bullish inventory report has provided little support.

Gold rose to a record in London this morning as the greenback is struggling for a 4th consecutive day, thus boosting demand for the yellow metal as a hedge against further currency depreciation. The holiday shortened week had some speculators booking well earned profits earlier, however, disappointing US fundamentals last week has speculators wanting to buy on pull backs to push commodity higher ($1,117).

The Nikkei closed at 9,804 down -67. The DAX index in Europe was at 5,655 down -13; the FTSE (UK) currently is 5,267 up +1. The early call for the open of key US indices is lower. The US 10-year bonds eased 5bp yesterday (3.44%) and are little changed in the O/N session. Treasuries prices rallied this week so far, despite the market setting itself up to absorb another $81b’s worth of US debt. Dovish comments from the Fed’s Lockhart and Yellen gave way to risk reduction strategies being implemented. Money is being taken off the side-lines and been put to work in the FI asset class. The US treasury will issue $16b 30-year bonds today. One would have expected dealers to cheapen the curve a wee bit more, however, demand is there!

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