The US $ is lower in the O/N trading session. Currently it is weaker against 11 of the 16 most actively traded currencies, in a ‘whippy’ trading range. Yesterday, US pending home re-sales rose 0.7% to 109.3 (after a revised 4.2% drop in Jan.), and it was down 8.5% y/y. Analysts believe rising incomes and lower prices are making homes more affordable, thus offsetting some of the concerns that sub-prime mortgage defaults could add to the properties already on the market. Fed policy makers believe the damage to the economy from the housing ‘slump will be contained’, allowing the expansion to proceed at Bernanke’s ‘moderate’ pace. Some analysts believe that this data suggests a ‘floor’ is taking place in the housing market, but it will take another month or two months of reports to clarify this position. Traders are turning their focus to NFP numbers for this Friday. It is a shortened week due to the Easter holidays but that should create greater volatility.
The US $ currently is trading lower against EUR +0.16%, GBP +0.06%, CHF -0.20% and JPY -0.12%. The commodity currencies are stronger and the overall sentiment remains positive, AUD +0.04% and CAD -0.10%. Stronger commodity prices coupled with some M&A activity continues to support the ‘loonie’ in a tight range. Recent fundamental data further support the currency, and traders continue to look for levels to buy on USD$ strength. Last night the RBA stood firm and kept key O/N cash rates on hold at 6.25%. The decision has surprised many traders, particularly after recent strong fundamental data. A rate hike is still on the cards and expect the AUD$ to remain well supported as the ‘interest rate differential debate’ continues to be positive.
Crude is little changed ($64.15 down -50c) O/N. Oil continues to remain range bound as the concerns over Iran's detention of British servicemen have not eased, thus disrupting supplies from the Middle East. Iran has the second largest oil reserves in the world and is the second biggest producer in OPEC. Nearly 25% of the world's oil is transported through the Strait of Hormuz, a narrow waterway between Iran and Oman at the mouth of the Persian Gulf. The Iranian situation will be a major driving force for oil prices in the short term. There continue to be numerous rumors that positive action may be undertaken by both sides soon. Gold ($670) rises O/N. Higher crude prices have increased the appeal of the ‘yellow’ metal as a hedge against inflation.
The Nikkei closed at 17,544 up +300. The DAX index in Europe was up +13 points at 7,057; the FTSE (UK) currently is 6,352, -15 points. The early call for the open of key US indices is higher. Yields of the US 10-year bond backed up 1bp yesterday (4.65%) and are little changed O/N. Treasuries fell as recent government reports show that the economy remains healthy, thus leading traders to reduce bets that the Fed will ‘cut’ interest rates.
JPY continues to stumble against most of its major trading partners. Recent BOJ official’s rhetoric implies that they will not rush to ‘hike’ interest rates (0.05%). Deputy Governor Muto today said the BOJ will keep its benchmark ‘very low’ for some time. (Currently their key rates are the lowest among major economies). Some analysts are predicting that the currency will slump 5% this quarter, making it the worst start to a fiscal new year since 1989 (USD/JPY at 125). Global Investors' risk appetite has returned as Equity indexes have recouped their losses from the Feb. Traders continue to ‘pile’ into the carry trade applying further pressure on the ‘yen’ (118.90). Expect the Yen to be a topic of concern at the next G7 meeting in Washington.
INR continues to strengthen and currently trades at its strongest level in eight years (USD/INR +0.2%, 42.93 O/N). Domestic Banks continue to sell the ‘greenback’ to avoid borrowing rupees in the O/N market, where interest rates have surged. Banks must set aside as much as 6% of their deposits and this will rise to 6.5% at month end. The value of the INR is been driven by ‘liquidity’ factors and not ‘genuine’ demand. Analysts anticipate that the Central Bank will intervene shortly; its appreciation continues to hurt its exporter’s earnings.
Cable strengthens as gains in global equities has prompted the buying of high yielding currencies (1.9750), and with UK consumer confidence rising to its highest level in four months (an index of UK sentiment rose 3 points to 88), it continues to be in favor for ‘carry’ trading. Most analysts anticipate that the MPC committee will not adjust O/N rates tomorrow (5.25%), but after Jan. surprise decision, traders continue to error on the side of caution as sterling should remain better bid until the announcement.
On Tap:
8:15 am USD ADP Non-farm Employment Change 125k vs. 57k
8:30 am CAD Building Permits m/m -8.5% vs. 11.3%
10:00 am USD ISM Non-Manufacturing Index 54.8 vs. 54.3
10:00 am USD ISM Non-Manufacturing Prices 53.0 vs. 53.8
10:00 am USD Factory Orders m/m 1.9% vs. -5.6%
10:30 am USD Crude Oil Inventories -0.9m
Jim
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