Obama Dollar Weakens on Fighting Words

[mserve id=”US_President_Barack_Obama.jpg” align=”left” width=”400″ caption=”US President Barack Obama” alt=”US President Barack Obama” title=”US President Barack Obama”]

What are his options? Losing his grip on the health care issue Obama has to pick a fight with someone and the opponents again are the Banks. It’s ‘Main Street vs. Wall street’ round three. Trying to impose new limits on the size of big banks and their ability to make risky bets, a populist view, allowed North American bourses yesterday to record their largest single day drop in three months and erase all of this years gains. Is the Obama news good or bad for the dollar given the fact that the ‘buck’ is still very much used as a funding currency and is being bought back in times of risk aversion? Geithner managed to give us the answer when announcing his concerns about economic policy implications could impact US firm’s global competitiveness. Obama’s proposals will not be limited to the US, expect other economies to follow suit.

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

Analysts do not seem too pessimistic about yesterday’s jump in the weekly US claims report. They explain away the spike in initial claims (+482k vs. +440k) and the emergency claimant’s categories (+5.65m vs. +5m) on technical administrative grounds and have little to do with a sudden further deterioration in job markets. Some are so bullish that they expect the coming weeks to report initial below +400k. Historically, initial jobless claims at this time of year advance on a seasonally ‘unadjusted’ basis. The ‘unadjusted’ number tends to drop over the festive season as state offices shut and claimants wait out the holiday period. Repeatedly, they usually surge in the New Year. Next week’s initial claims could show a large drop off. Why? Firstly, ‘unadjusted’ initial claims always drop after the early Jan. spike once the holiday effect has worked through. Secondly, analysts believe that the seasonal factors will now over-emphasize this effect and likely lead to the impression that claims have improved more than they actually have. Digging deeper, continuing claims were revised slightly higher (+4.599m vs. +4.598m). Disappointing however was the combined extended and emergency benefit recipients who managed to create a huge spike higher because of the emergency benefits. Analysts again are not so worried by the ‘print’. It was, in part, pushed higher because of the recapturing of individuals due to policy changes last Nov. and who managed to lose benefits through continuing claims via program extensions. If one excludes all the noise (seasonal and administration distortions) and focus on the trend, the consensus continues to see much improvement in the US employment situation this quarter. This should bode well for the remainder of the year.

Despite falling m/m, the Philly Fed Index retreated to 15.2 vs. 22.5 in Dec. On paper, manufacturing in the region has expanded for a fifth consecutive month (greater than zero). Analysts anticipate that an increase in exports and business investment will lead to further gains this quarter. The sub-categories were mixed. The employment index rose to 6.1 (the highest level in 2-years) vs. 4.5 in Dec. The new orders measure fell to 3.2 from 8.3, along side a softer shipments print of 11 vs. 14.9. The paid component dropped to 33.2 from 36.6, while prices received advanced to 2.7 from 1.4. However, future optimism remains robust as the next six months expectations increased to 43.3 from 35.9.

The USD$ is currently lower against the EUR +0.32%, GBP +0.44%, CHF +0.17% and JPY +0.12%. The commodity currencies are stronger this morning, CAD +0.38% and AUD +0.52%. The loonies’ actions were not immune to the dollars strength again yesterday. Higher yielding commodity risk currencies felt the full bearish force of the market. The CAD touched a three-week low as equities and oil tumbled, aided by investors speculating that China will need to continue to curb its economic expansion to head off any possible asset bubble. Even governor Carney managed to give the loonie an ‘off side nudge’ by stating that growth will peak in the 2nd Q, hindered by a strong currency, weak US demand and the end of government stimulus. In the BOC MPR yesterday it said that growth will quicken to a +4.3% annualized rate next quarter before gradually slowing to a +2.2% rate at the end of 2011. They anticipate that annual growth will be +2.9% this year and +3.5% in 2011. Other data released yesterday showed that Canadian wholesale sales advanced for a third consecutive month in Nov. (+2.5% vs. +0.5%). Nearly all the sub-categories recorded increases, however, the headline print was dominated by a +7.8% jump in auto sales. Governor Carney must be sleeping a tad easier. For now, any rally by the loonie will be seen as a good selling opportunity.

PBOC comments last night stopped the AUD’s bleeding. Cbank Governor Xiaochuan said ‘policy makers will focus on flexibility, supporting economic growth and controlling inflation expectations’. Basically they are reaffirming their ‘moderately loose monetary policy’, thus boosting demand for higher-yielding assets. The currency’s gains have been restricted due to the Obama’s limiting risk-taking proposals for US Banks which is weighing on global bourses and promoting a degree of risk aversion strategies. Stronger Australian fundamentals have traders increasing their bets that the RBA will keep raising interest rates. They next meet at the beginning of Feb. With the Australian economy well into a recovery phase, there is added pressure on Governor Stevens to increase the O/N borrowing cost to 4% for a fourth straight meeting (0.9076). However, commodities continue to trade under pressure and the AUD will be dragged with it.

Crude is higher in the O/N session ($76.47 up +39c). A number of factors pressurized oil prices again yesterday. The commodity fell to a four-week low after the weekly EIA report revealed that refineries have slashed their operating rates as fuel demand declines. Plants were running at +78.4% of capacity w/w, the lowest run rate in 16-months. Also providing no help was the market having to deal with another weekly build up of gas supplies (the highest level in 22-months). Fuel use over the past month fell -1.8% from a year ago. The value of the dollar and global bourses seeing red continues to pressurize the commodity. Gas stocks rose +3.95m barrels to +227.4m last week vs. an expected climb of +1.75m barrels. While inventories of crude fell -471k barrels to +330.6m vs. a forecasted rise of +2.45m barrels. It was another consecutive bearish report highlighting the strength of ‘demand destruction’. Even China’s stellar growth numbers had a minor positive impact on the commodity class. The market will continue to anticipate that global supply remains sufficient and with the strong ‘buck’ it would continue to discourage investors using the commodity as a hedging conduit. The belief of analysts that the ‘increasing demand in China and emerging markets will not be strong enough to offset declines in the other countries’ may push the commodity down to the $70 level as the continual build up of stocks will give further support to the ‘bears’.

The gold story remains the same. Again yesterday the ‘yellow metal’ fell, printing a three week low as a rising dollar continues to curb demand for the metal as an alternative investment. It is a similar story to last week with the dollar taking center stage and emphasizing that risk aversion remains healthy. To date, the commodity has been top heavy with ‘one direction lemming buying’ after last years 24% rally. Any liquidation with momentum has nervous investors seeking an early exit. With the EUR remaining vulnerable and the dollar the ‘go-to’ currency, expect to see selling on upticks for the time being ($1,096)

The Nikkei closed at 10,590 down -277. The DAX index in Europe was at 5,723 down -23; the FTSE (UK) currently is 5,331 down -23. The early call for the open of key US indices is higher. The US 10-year note eased 5bp yesterday (3.61%) and are little changed in the O/N session. Risk aversion has pushed yields lower. The 2/10’s (276bp) spread narrowed for a third consecutive day as global bourses remain under pressure and yesterday’s US claims produced a softer print than expected. A week ago the curve was at +290bp. The Treasury announced that they will auction off a record tying $118b notes and bonds next week ($44b 2’s on Jan. 26, $42b 5’s on the 27th and $32b 7’s on Jan. 28). The pessimistic view that the rate of recovery may be losing momentum continues to find buyers on pull backs. Next week’s auction should be very interesting.

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