It makes a change to say that the USD was the dominant currency O/N and not the whipping boy! ItÃ¢â‚¬â„¢s been awhile! Welcome back, temporarily at least. ItÃ¢â‚¬â„¢s been pointed out on many occasions that the G-20 policy makers have Ã¢â‚¬Ëœgone to great lengths to inform the public that rates should stay low for an extended period of timeÃ¢â‚¬â„¢. Why? Obviously they are concerned about tightening liquidity to soon and its effect on various asset classes. So instead, they are happy to have pumped so much cash into the system that is now Ã¢â‚¬ËœartificiallyÃ¢â‚¬â„¢ holding up most asset classes (equities, bonds, commodities) and resulting in a Ã¢â‚¬Ëœsell the dollar mentalityÃ¢â‚¬â„¢ (ThemÃ¢â‚¬â„¢s bad Bankers!). This is impossible to maintain, the liquidity will have to vanish some time and return us to reality. Do not get giddy at the top!
The US$ is stronger in the O/N trading session. Currently it is higher against 15 of the 16 most actively traded currencies in a Ã¢â‚¬ËœwhippyÃ¢â‚¬â„¢ trading range.
YesterdayÃ¢â‚¬â„¢s US jobless claims remain stuck in a narrow range (+545k vs. +557k), the headline remains high, while total benefit recipients continue to head higher, obviously due to the ongoing increase in emergency benefit recipients (+10.35m). Yes we can say that the w/w headline print has improved, but, still above that psychological -500k print! Digging deeper, the continuing claims again disappointed and penetrated that +6.2m benchmark. ItÃ¢â‚¬â„¢s noticeable that the improvement in the trend we had witnessed in May and June has obviously stalled. The meat of the report which many tend to glance over, the extended benefits category advanced and shows no signs of cooling. Analysts will tell you that the rise in this category should explain most of the decline thatÃ¢â‚¬â„¢s occurring in continuing claims. So, Initial + Continuing + Extended and Emergency claims=10.35m jobless Americans! And this number excludes any other smaller federally funded programs.
On a positive note, US housing starts continue their upward trend (+598k vs. +589k). This does include revisions and was +1.5% stronger than the previous month. Can we safely say that the housing market is on the road to recovery? Perhaps not just yet, most of the headline gains were in the historically volatile multi-family segment (+25.3%, m/m-1st gain in 2-months) while single starts posted the 1st-monthly decline in over a year (-3.0%). ItÃ¢â‚¬â„¢s worth noting that the market is starting to witness a decline in both new and existing home inventories, however, the levels remain extremely high. The million dollar question, will the US government extend the 1st-time home buyers program which is scheduled to expire on Dec. 1st? In reality, the program has supported the housing market and without it, well a new landscape would appear! Finally, building permits also gained last month (+579k vs. +564k) and keeping their upward momentum in tact!
Be weary, yesterdayÃ¢â‚¬â„¢s Philly Fed headline print was not as strong as we are led to believe. Yes it did advance 10 ticks to a new 2-year high of 14.1, the ISM-weighted index declined -1.5 to 47.0. Digging deeper, orders remained positive and shipments climbed to a new 2-year high of 8.2. However, the biggest Ã¢â‚¬ËœdragÃ¢â‚¬â„¢ on the overall index was an -18 tick decline in the inventory index! This weeks Empire and Philly surveys suggest that additional progress in the manufacturing sector may turn out to be somewhat mute this month. The labor market remains the exception as the report showed more firms cutting back this month. The index fell to -14.3 from -12.9. Not an encouraging sign!
The USD$ is currently higher against the EUR -0.45%, GBP -0.78%, CHF -0.45% and JPY -0.09%. The commodity currencies are weaker this morning, CAD -0.64% and AUD -0.47%. The loonie managed to print an 11-month high yesterday as both global equities and commodities pushed the currency to dominate its southern neighbor. Investor are speculating that the global recession is Ã¢â‚¬ËœoverÃ¢â‚¬â„¢ has boosted the appetite for higher-yielding assets including commodity-linked currencies like the CAD and AUD. Investors are once again embracing risk and covet the loonie. Is it sustainable? Technically we have seen no retracements over the last week, which in itself is not good for the market. Rumors were rife yesterday that the BOC was checking rates and gave the illusion that they would enter the fray. It was exactly that, just rumors. Do not expect them to waddle in Ã¢â‚¬ËœWilly-nillyÃ¢â‚¬â„¢! Year to-date the loonie has appreciated +15% vs. its southern trading partner, last year it depreciated -18%! This week Canadian data showed that JulyÃ¢â‚¬â„¢s factory sales advanced +5.5% vs. +2.4% (fastest gain in 12-years), fuelled by autoÃ¢â‚¬â„¢s output jumping +48%! Any sustainable signs of Canadian growth and no BOC interference will have the loonie trading at a premium vs. the buck sooner than we think. Dealers continue to play the range and will take their cue from commodities and equities.
The AUD temporarily surged to New Year highs on the back of US reports showing that their fundamentals are stronger, and in turn boosting the demand for higher-yielding assets. With commodity prices moving upwards hand-in-hand with Asian bourses had encouraged Ã¢â‚¬ËœnewÃ¢â‚¬â„¢ risk appetite. However in the O/N session with Asian stocks paring their gains, it revived the demand for the relative safety of the USD. Dealers are looking to buy the currency on pullbacks (0.8700).
Crude is lower in the O/N session ($71.63 down -84c). This weekÃ¢â‚¬â„¢s EIA report favored higher crude prices. Mind you the weak dollar continues to provide never ending support. US oil stockpiles fell much more than expected last week as imports continued to decrease while inventories of refined fuels increased. Crude inventories fell by -4.7m barrels w/w to +332.8m, beating analysts’ forecasts of a drop of -2.4m. Imports fell -192k barrels per day. ItÃ¢â‚¬â„¢s worth noting that refiners cut crude runs by -56k bpd as refinery utilization was off -0.3% to 86.9% of capacity. The market was anticipating a -0.5% fall. Inventories of distillates fuels (heating oil and diesel) were up +2.2m barrels at +167.8m, vs. forecasts for a rise of only +1.3m. On the flip side, gas supplies increased +500k barrels to +207.7m, w/w. The data would have included the Labor Day holiday, which historically marks the end of the US summer driving season. Earlier this week, the API report painted a slightly different picture. Crude stocks gained +631k barrels last week as refiners slowed run rates by -146k bpd. Inventories of distillates rose +5.2m barrels and gas inventories were up by +1.3m barrels. Stronger US fundamental and Governor BernankeÃ¢â‚¬â„¢s belief that worst of the recession is over will provide further support on pull backs in the short term. Last week, we were subjected to the Ã¢â‚¬ËœweakÃ¢â‚¬â„¢ dollar boosting the appeal of commodities to investors as an inflation hedge, this week we continue to witness a Ã¢â‚¬ËœsicklyÃ¢â‚¬â„¢ greenback. Currently there is nothing to dissuade investors from this conviction. Least we forget, demand destruction remains healthy no matter what the USD is doing!
This week the weak dollar scenario remains the same with the Ã¢â‚¬Ëœyellow metalÃ¢â‚¬â„¢ well sought after on pull backs as investors buy the commodity as a hedge against inflation ($1,012). Follow the USD that will validate current metal prices. The market does feel slightly squeezed at these elevated levels!
The Nikkei closed at 10,370 down -73. The DAX index in Europe was at 5,719 down -12; the FTSE (UK) currently is 5,155 down -9. The early call for the open of key US indices is lower. The 10-year bonds eased 7bp yesterday (3.39%) and are little changed in the O/N session. Treasury prices got a boost yesterday from the Philly Fed report which showed a decline in the indexÃ¢â‚¬â„¢s employment sub category (-14.3-see above). Despite a strong headline print, weaker sub-categories had investors seeking yield. Yesterday, Treasury also announced another $112b refunding program next week. The US will sell $43b in 2Ã¢â‚¬â„¢s, $40b in 5Ã¢â‚¬â„¢s and $29b in 7-years. I wonder if we will see Chinese demand again, it was rumored that they scooped last weeks LB auction!