‘Buck’ is terminally ill!

Let’s face it, it’s a USD crisis and we are handling it, that’s the surprising part! This greenback is not just sick it’s terminally ill and in a palliative state. No one wants it and it’s becoming embarrassing as a trader to say you even own some! It’s definitely costing you. This weeks’ move is like driving the car in reverse with no mirrors. Finally, the last piece of the puzzle has fallen into place and that is JPY, aggressively gaining in the O/N session. For the longest time, it lagged, but now it’s even stronger vs. the EUR. Are we handling it? Yep, equities are up, commodities higher, bond yield’s lower and more importantly, volatility abating! No panic here……..yet..

The US$ is weaker in the O/N trading session. Currently it is lower against 15 of the 16 most actively traded currencies in a ‘whippy’ trading range.

Yesterday, both US initial jobless (+550k vs. +576k) and continuing claims (+6.088m vs. +6.247m) improved, beating market expectations. However, the headline print remains high on both counts, which suggests that the labor market, although is still deteriorating (last week’s NFP revisions), but at a slower pace. The real eye opener to the report was the extended benefits programs (the end of the line of continuing claims) continued to increase! This would suggest that more unemployed workers are no longer receiving assistance as they do not qualify anymore. Digging even deeper, one notices that Extended Benefits (EB) moderated slightly w/w, but Emergency Unemployment Compensation (EUC) benefits continued to rise. EB + EUC= net increase in EB, and by default will add further pressure going forward.

Other data showed that the US trade deficit widened (-$32b vs. -$27.5b) on strong import demand more than expected in July (the fastest pace in 10-years). Import growth outpaced a further rise in exports. The real trade deficit widened as well, putting downward pressure on real GDP in the 3rd Q. Some analysts expect the trend to remain in tact for Aug. as the ‘cash-for-clunkers’ program very much supported Toyota (+19.4%) and less so domestically. Exports did grow +2.2%, m/m, (3rd consecutive monthly gain-autos were the bulk of that +24.5%).

The USD$ currently is lower against the EUR +0.14%, GBP +0.17%, CHF +0.16% and JPY +0.84%. The commodity currencies are stronger this morning, CAD +0.06% and AUD +0.06%. No-one came close to predicting the Canadian trade numbers yesterday. In fact the final print blew every prediction out of the water! Canada registered the largest trade deficit on record (-$1.4b vs. $0 m/m) in July. Imports (+8.3%) rose by the largest amount in 23-years! The real-trade deficit also widened as a rise in import volumes (+8.7%) outpaced that of exports (+3.3%). As expected the BOC kept rates on hold yesterday (+0.25%) and there were only a few surprises in their statement, a conditional commitment to keep rates on hold until next June being repeated and no further unconventional policy announcements after July’s step backward in such programs. Governor Carney believes that inflation will climb back to its +2% target by mid-2011, but, that the risks remain ‘tilted slightly to the downside’. The surprising element to the statement was at the end rather than in its most recent position in the 1st-half of the announcement, the BOC noted that persistent strength of the loonie continues to remain a risk to economic growth. The sad part is that a country’s very own Cbank cannot ‘talk’ its currency down! The loonies’ direction continues to be dictated by global risk tolerance and not by its CB. In the short term, dealers continue to prefer to sell USD on rallies. Parity whispers are getting louder!

Again, the AUD is approaching its yearly highs vs. the greenback after Chinese’s industrial reports grew more than expected O/N, boosting Asian bourses and heightening the demand for higher-yielding currencies. Australasian currencies are heading for the largest weekly gain in 2-months on signs that the global economy is recovering. With commodity prices well supported, one should expect AUD to be in demand (0.8627).

Crude is lower in the O/N session ($71.66 down -28c). Crude prices are well supported as the greenback remains under pressure. Earlier this week OPEC held oil production quotas unchanged, as expected, with most members voicing satisfaction with current global crude prices. Interestingly the focus was on persuading members not to sell more oil than their quotas permit. The black-stuff also received support from IEA, who raised its estimate for next year’s global demand for a 2nd-consecutive month. The reason being they predict growth in Chinese consumption and a stronger than expected oil use in the US. Is someone fudging the books perhaps? Do consumers not play a part of the equation? Obviously not! US crude oil inventories posted a much larger than anticipated fall last week on lower imports and higher demand from refiners because of the Labor Day holiday. Both the EIA and ADP recorded larger than expected drawdowns (-5.9m and -7.2m barrels respectively). The EIA also showed that stocks of gas and middle distillates were up w/w. It seems that the market believes that the oil products supply builds likely will be offset by the somewhat bullish impact of a large crude drawdown. According to OPEC, current prices are good for everybody, consumers and producers. Year-to-date, the black stuff is up +62%!

With the greenback continuing to trade near record yearly lows vs. its largest trading partners has boosted the demand for the ‘yellow metal’ as a store of value. Technical analysts continue to want to own the commodity on ‘any’ pull backs ($999).

The Nikkei closed at 10,444 down -69. The DAX index in Europe was at 5,620 up +26; the FTSE (UK) currently is 5,017 up +30. The early call for the open of key US indices is lower. The 10-year bonds eased 11bp yesterday (3.35%) and are little changed in the O/N session. The last of this week’s US Government $12b long bond auction drew the strongest demand in nearly 2-years causing longer maturity yields to plummet. 30-year product rallied the most in almost 6-months. The cause, it’s the market skepticism about the sustainability of the US recovery. Weaker employment data is making longer-dated securities very attractive. Flip-side, the US government is managing to raise cheaper debt! Is it sustainable? Not likely!

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