The US $ is stronger in the O/N trading session. Currently it is up against 11 of the 16 most actively traded currencies, in a ‘subdued’ trading session ahead of today’s US Consumer Sentiment. Yesterday, FED Chairman Bernanke said the US economy would be seriously ‘weakened’ unless fiscal reform is implemented. Strong economic growth is unlikely to solve these problems. Taxes must be set at levels that can balance spending and revenues. Benanke believes that if meaningful action is not taken soon, the U.S. economy could be seriously weakened with future generations bearing much of the cost.
The US $ currently is trading higher against the EUR -0.03%, GBP -0.13%, CHF +0.19%, and JPY +0.04%. The commodity currencies are mixed with AUD -0.15% and CAD +0.25%. The ‘loonie’ continues to trade under pressure as the price of oil eases and the BOC lowered its 2007 economic growth forecast. Traders see short term US $ gains limited to around the 1.1800 mark and prefer to sell CAD on any US $ pull back. The AUD $ continues to appreciate vs. JPY (95.78) as traders speculate that investors will keep putting money into the nation's high yielding assets (6.25%) after the BOJ kept rates on hold yesterday (0.25%). Foreign investors will continue to be attracted to the higher yields offered by the nation's debt for some time.
Crude is little changed ($50.49 up 2c) O/N. Yesterday, the EIA reported stockpiles of gasoline and distillate fuels rose last week. Crude oil stockpiles jumped +6.7m barrels to 321.5m and gasoline stockpiles jumped +3.5m barrels to 216.8m. According to the National Weather Service yesterday, oil demand should rise next week because of cooler temperatures in the eastern part of the US. They expect below normal conditions from Jan. 23 through Jan. 27. Gold rose ($628 up $1.10) O/N, as the weaker US $ should increase the demand for the ‘yellow metal’ as an alternative investment.
The Nikkei closed at 17,315 down -55. The DAX index in Europe was down -20 points at 6,669; the FTSE (UK) currently is 6,187, -22 points. The early call for the open of key US indices is lower. Yields of the US 10-year note were little changed yesterday (4.76%), as housing starts in the US unexpectedly rose last month (1.64m), coupled with the stronger CPI number (+0.5%, core +0.2%) should provide further evidence that the US economy is strong enough to allow the FED to keep interest rates on hold short term. The consumer confidence number may put pressure on treasuries.
UK retail sales rose last month (+1.1 vs. 0.5) the most in 18 months as faster economic growth spurred shoppers to increase spending on electrical goods. This data provides further evidence that consumer spending has survived two interest rate increases last year; it may also convince the BOE to raise borrowing costs again (5.25%). Inflation reached 3% in Dec., the highest in almost 10 years and 1 % above the CB target. Futures traders have priced in one more rate hike by April.
European member’s ‘hawkish’ rhetoric has supported the EUR this week. ECB member’s Weber and Bini Smaghi yesterday said rate policy was ‘very accommodating’ reiterating Trichet views from last week. The ECB is worried about inflation and there's a tightening cycle in place, so expect rates to go higher and the EUR appreciate further (1.2960).
Analysts expect JPY to depreciate another 3% to 125 after the BOJ voted 6-3 to keep rates on hold at 0.25%. The bigger issue is the BOJ’s credibility, some investors may view that the BOJ buckled to political pressure and this, not fundamentals will weaken ‘Yen’ further. Policy board members are questioning Governor Fukui's leadership and decision making (121.30).
CHF is set to fall for a second week against EUR as investors take advantage of the carry trade. Swiss interest rates are the second lowest among the world's industrialized nations after the BOJ. Low interest rates make the CHF and JPY the favorite currencies for investors to put on the carry trade (by selling the ‘funding currencies’). The NZD, AUD and ZAR have been the best performers against the US $ this week.
On Tap:
8:00 am USD Richmond Fed President Lacker Speaks
8:30 am CAD Wholesale Sales m/m 0.5% vs. -0.2%
8:30 am CAD Wholesale Inventories m/m 0.3% vs. 0.7%
10:00 am USD Consumer Sentiment (p) 92.5 vs. 91.7
1:15pm USD Kansas City Fed President Hoenig Speaks
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