Yesterday was not a day for the faint hearted. We started off with a long bond Gilt auction failing in the UK and this of course put pressure on the US 5-year auction, resulting in much higher yields (extra 5bp). Supply and demand issues are coming back to haunt us. Traders believe the Fed also paid up for the buy back off-the-run $7.8b issues (3b premium). Makes you wonder after one day, the Fed with such poor implementation and execution, will be able to outstrip any AIG bonuses in no time. And this was only in the FI market. Geithner whose days must be numbered certainly provided some ‘juice’ for forex, his mistakes were that of a rookie, but from a man seeking ‘absolute power’, trader confidence thins quickly…..
The US$ is stronger in the O/N trading session. Currently it is higher against 11 of the 16 most actively traded currencies, in an ‘erratic’ trading range.
A combination of surprises added to volatility in FXland yesterday. Treasury Secretary Geithner initially saying he was open to the idea of a new reserve currency (how else was he going to appease the Chinese?), and then clarifying his comments, reinforcing the USD as the world’s reserve currency and saying it is ‘likely to remain so’ for some time. This was a rookie mistake causing near panic amongst traders. How long has he got? On the fundamental front, US durable goods orders posted a +3.4%, m/m increase last month after falling -7.3% in Jan. (revised down from -5.4%). This is the 1st positive reading in nearly a year and certainly surprised all analysts where market consensus was for another negative reading of -2.5%. It’s worth noting that given the downward revision for Jan. the landscape for the first two Q’s remain bleak. Despite the m/m increase, ‘total-orders’ were down by -29% in Mar. vs. -27.9% in Jan. Digging deeper, ex-transportation, goods were up by +3.9% after falling by -5.9% in Jan. The transportation component advanced a modest +2% after falling nearly -12% last time. Investment spending remains a major drag for growth in the 1st Q, but some analysts are optimistic that the negative contribution will not be as bad as some have predicted. Unfilled orders declined by -1.3% (5th straight month). One expects further declines as companies continue to receive cancelled orders during this ‘downturn of activity’.
Other data showed that purchases of new homes in the US unexpectedly rose last month (+4.7% or +337k units vs. +302k) from its record low as plummeting prices (median prices have dropped -18%, y/y) and cheaper mortgages enticed new buyers. However, inventory levels remain high and record supplies need to be absorbed before we can declare a turn around.
The USD$ currently is higher against the EUR -0.14%, CHF -0.27%, JPY -0.69 and lower against GBP +0.38%. The commodity currencies are little changed this morning, CAD +0.09% and AUD +0.49%. Yesterday was a whiplash trading day that saw the loonie initially gain vs. the USD by default after Geithner’s comments on ‘new reserve currency’ and quickly give it back as the greenback rebounded by late afternoon. The loonie remains range bound. This week, the currency has been driven by the strength of commodity prices (50% of Canada’s total export revenue is commodity based). It has soared over the last couple of trading sessions as the USD$ plummeted vs. its largest trading partners. Canadian fundamentals remain weak, according to ex-BOC governor Dodge ‘even if everything is done right, it is going to be well into 2011, 2012 and 2013 before we see the level of output and the rates of growth return to something approaching capacity in Canada’. To think that Canada is one of the stronger global economies! It’s all about the big dollar, for now look to buy USD$ on pull backs as Canadian fundamental data does not support a stronger loonie. Capital markets seem to have got ahead of the curve with the ‘euphoric’ announcements this week.
The AUD$ advanced, hand in hand with Asian equities, all on the back of greater risk tolerance by investors who seek higher yielding assets for now. Rio Tinto (the world’s 3rd-largest mining group) believes that the metals markets will recover in the 2nd-half of this year. Commodities similar to Canada account for 55% of total exports. Traders are looking to buy on dips (0.7017).
Crude is higher in the O/N session ($53.48 down +71c). Demand destruction remains healthy. Yesterdays EIA report showed that US inventories climbed to their highest level in 16-years as demand wanes. Inventories rose +3.3m barrels, w/w, vs. an expected rise of +1.1m. This is another bearish report that requires demand to move higher for prices to at least stabilize, it will once again shift focus towards OPEC and further production cuts scenario. However, supplies of gas and distillate fuel (includes heating oil and diesel) dropped as refineries cut utilization rates. Combine this with Japan’s crude imports falling for a 4th –consecutive month last month on the back of weaker industrial output and Europe’s 3rd-largest producer (TOTAL) cutting its out put in the US just vindicates how weak the market has become. The fundamentals of supply and demand do not justify oil penetrating that psychological level of $60 a barrel anytime soon. Global demand destruction remains a concern; there is nothing to suggest that demand will increase in the short term. Crude prices could remain vulnerable unless the greenback continues on this path of weakness. The fear of inflation occurring on the back of the Fed’s plans to buy debt has investors wanting the ‘yellow metal’ as an alternative form of investment on pull backs ($937).
The Nikkei closed 8,636 up +156. The DAX index in Europe was at 4,236 up +13; the FTSE (UK) currently is 3,901 up +2. The early call for the open of key US indices is higher. The 10-year Treasury backed up 10bp yesterday (2.80%) and are little changed in the O/N session. Treasury prices eased as a failed long Gilt auction in the UK added pressure to the US sale of $98b notes this week. Traders remain concerned that government supply will exceed demand going forward. All this occurred despite the Fed buying back $7.5b off-the-run maturities. Policy makers are determined that yields will not aggressively rise given the current economic environment. The Fed continues to manipulate and flatten the curve.
