Investors desires for a safe heaven outside of the Euro-zone and US debt dramas is producing massive gains for CHF against other majors. Reason enough for authorities to step up their efforts to cool ‘the’ move. The SNB this morning announced that it would rapidly expand banks’ most readily available deposits from CHF80b to CHF120b, and would conduct FX swap transactions. Last week, the SNB cut its three-month Libor rate target to zero in another effort to curb the CHF appreciation.

Looking at the post price action, this ‘symbolic’ act by the SNB is having limited reaction. Their measures are a repeat of earlier actions. The fact that they have failed to intervene and sell francs is again giving the market the green light to proceed, but, with caution!

The US$ is mixed in the O/N trading session. Currently, it is lower against 11 of the 16 most actively traded currencies in a ‘subdued’ session.

Markets were probably looking for lies or half truth, instead, they got a Fed giving us the raw truth. Policy makers painted a dour picture of the US economy, going beyond the simple transient factors. Ben and company pledged for the first time to keep benchmark rates at a record low, at least through mid-2013, to revive a recovery that’s ‘considerably slower’ than anticipated. They were vocal about a range of policy tools in their armory to boost the economy and said it is ‘prepared to employ these tools as appropriate’. With these promises they stopped short of initiating a QE3 package of large-scale asset buying. Fed expect a ‘somewhat slower pace of recovery over the coming quarters and that downside risks to the economic outlook have increased’.

Interestingly the vote was 7-3. Dissent suggests that the Fed is still a long way off from providing ‘dramatic new support for an economy that even policymakers acknowledge has taken a turn for the worse’. However, in five months the dissenters become nonvoters at the Fed.

The dollar is lower against the EUR +0.06% and JPY +0.47% and higher against GBP -0.33% and CHF -0.25%. The commodity currencies are mixed this morning, CAD -0.47% and AUD +0.21%.

After printing parity in the previous session of panic liquidation, the loonie has found firmer footing, rising for the first time in eight days as an advance in ‘stateside’ equities reduced demand for a refuge in the greenback. Because of the stronger Canadian fundamentals, investors will want to divest away from the EUR and USD. Currently, there is an appetite from investors for a second tier reserve basket. Most commodity and interest rate sensitive currencies certainly belong to this basket.

Yesterday, Canadian housing starts climbed last month at the fastest pace in 15-months, proof that Canadian real estate remains buoyant as borrowing costs stay low. Work began on +205k units on a seasonally adjusted annual basis. Previously, the loonie has been trading on the back foot on concern slowing global economic growth will weigh on demand for raw materials and increase risk aversion trading strategies.

Last week’s historic S&P’s downgrade is creating a new financial and trading environment. For the time being in a while, the loonie will remain at the mercy of risk aversion trading strategies and commodity prices. In the O/N market, investors look to be better sellers of dollars on rallies (0.9810).

The wild ride for commodity currencies continues, with the AUD being the prime example. A matter of day’s ago, the market was happily singing its praises, witnessing the currency breach the 1.10 barrier, some weaker global data and a credit downgrade later and this growth and interest rate sensitive currency is bouncing back from the USD trading premium a couple of sessions ago.

Recent domestic data is providing little support. In the O/N session, the market witnessed Aussie consumer confidence deteriorating for a fourth consecutive month, to the lowest level in more than two years (-3.5% to 89.6) and with no expected turnaround soon.

Big picture, the currency continues to find the going tough, as concern that the global economy is slowing is sapping demand for higher-yielding assets. The US credit downgrade has been pressurizing commodities, which in turn is negative for all growth sensitive currencies. In one session, the currency breached all major key support levels that resulted in parity again being printed, first time in five month. This new range now depends on how the market is digesting yesterday’s FOMC statement. In current climate conditions, investors remain better sellers on upticks (1.0355).

Crude is higher in the O/N session ($82.17 up +$2.87c). The decline of crude prices took a breather before the Fed’s communique. They rebounded from their ten-month low as US equity indices stopped the bleeding and on the belief that the earlier price rout was excessive. The market expected that the Fed’s commitment to monetary stimulus would help fuel demand in the world’s largest economy, however, the new ‘raw’ Ben soon put a stop to that. The Fed stating that risks to the economic outlook have increased and stopping short of initiating QE3, again put the black stuff under pressure. Investors are now betting fuel demand will increase amid shrinking stockpiles.

OPEC cut its oil demand forecasts for the remainder of this year and next as the global economic recovery loses momentum. They have reduced global consumption estimate for this year by-150k barrels a day. The organization is obviously worried about the global economy and falling demand. To date, they do not have a specific price target that would trigger member action.

Today we get the weekly inventory number and analysts expect another small build in the EIA report midmorning. Last week, US gas stockpiles rose sharply and demand over the past four-weeks fell-3.6% compared with a year-ago, adding to concerns about tepid consumption in the midst of the peak summer demand period. Currently, crude is straddling strong support levels and is in danger of penetrating the psychological $75 barrier medium term.

Gold has surged to another new record high, breaking through key psychological barriers, after a US downgrade and on escalating concerns that global economies are losing momentum. The yellow metal continues to be a recipient of safe-haven flows. The metal’s price has more than doubled since the recession began in late 2007. This summer, its climb has accelerated because of the US Congress inability to stabilize the government’s ‘medium-term debt dynamics’, and on the back of Europe’s debt crisis threatening to spread to two of its biggest economies, Spain and Italy. The Fed’s efforts to drive interest rates lower to support lending are curtailing the dollar’s appeal as a safe haven.

With global bourses on the back foot, liquidation of the metal to cover margin calls in other asset classes could pare some of these sharp gains. Investors have bought more gold in the last month than in the prior six months according to CFTC data last week.

Year-to-date, the yellow metal has advanced +24.3%, heading for its eleventh consecutive annual gain. This ‘one directional trade’ is far from over, with speculators continuing to look to buy the metal on pullbacks until proven wrong. There remains a demand for the commodity for insurance purposes as alternative asset class. In this environment $2,000 is very much in the realms of possibility over the next six months ($1,759 +$59).

The Nikkei closed at 9,038 up+94. The DAX index in Europe was at 6,003 up+86; the FTSE (UK) currently is 5,199 up+34. The early call for the open of key US indices is lower. The US 10-year eased 28bp yesterday (2.27%) and is little changed in the O/N session.

Treasuries are rising, pushing 10’s and two-year note yields to an all-time low after Ben promised to keep benchmark rates at record lows for two more years in a bid to revive economic growth. Yesterday’s government sale of $32b three-year notes drew stronger-than-average demand in the first note sale since their debt rating downgrade. Demand for US debt has surged in the last few sessions, as plummeting global bourses boosted the demand for the safety of US product.

The notes drew a yield of +0.50% with a bid-to-cover ratio of 3.29, compared with an average of 3.15 for the past 10 sales. Indirect-bidders took down +47.9% of the notes, compared with an average of +33.9% for the past 10 sales. Direct-bidders received +11.1% of the notes compared with an average of +13.2% for the past 10 auctions.

Today dealers get to take down +$24b of 10’s and +$16b of 30-year bonds tomorrow. Yield is hard to find.

Portugal selling 1b+ bills this morning is considered a success under the circumstance. With an aggressive rise in yield (+5.902%) things could have been worse, the auction may have failed.

The success supports the sovereign’s ability to meet its 15 April bond maturity, but does not undermine expectations that Portugal will have to eventually seek EFSF funding. The IMF stating that Spain did not need financial support reduces the systemic concerns and gives the EUR the green light to test 1.44.

The US$ is mixed in the O/N trading session. Currently, it is higher against 10 of the 16 most actively traded currencies in an ‘orderly’ session.

Yesterday’s US data showed that the service sector is expanding at a ‘moderate’ clip. The headline ISM non-manufacturing index eased to 57.3 from 59.7. Despite being the softest reading in four-months, analysts note that the print still remains above its long-run average of 53.8. Digging deeper, even with the underlying details being softer, they remain supportive of continued recovery ahead. Of note, was respondent’s concern of a possible spillover effects from Japan, specifically with the supply chain.

Six subcategories posted declines, current ‘production’, imports, employment, prices paid, supplier deliveries and new-orders. Inventories remained unchanged, while new-export orders, the backlog of orders and inventory sentiment experienced improved further. Prices paid climbed at a slower pace, but remains above their six-month average. Similar to most consumers concerns, respondents are worried by rising fuel costs and the renewed sluggishness and lack of any signs of recovery in the housing market. It worth noting that some of the categories are not seasonally adjusted.  

There were no surprises from the FOMC minutes. The meeting highlighted the dichotomy amongst the members on timing of exit. This certainly evident from the independent rhetoric jousting of late by various Fed speakers. The minutes reiterated that the FED would be hands off with QE2.

The USD is lower against the EUR +0.48% and CHF +0.82% and higher against GBP -0.14% and JPY -0.23%. The commodity currencies are stronger this morning, CAD +0.27% and AUD +0.51%.

The loonie precedes to want to edge higher despite a PBoC rate hike. In times past, a tighter Chinese rate policy would have hurt all risk sensitive currencies. The CAD continues to gather support from commodities and the overall general recent positive sentiment and is set for slow methodical gains, nothing out of the ordinary in these tight ranges.

After printing three year highs and appreciating +1.8% last week outright, it was only natural that some profit taking was required. Even news of possible M&A activity has been slow to lend the loonie a hand.

The ‘hawkish’ tone coming from Governor Carney about how the elevation in commodity prices generally leads to higher interest rates will again give the loonie its bid tone with traders happy to sell historical funding currencies against CAD.

With ‘carry’ historically the go to trade this month, has investors looking to buy the currency on dollar rallies. The Federal political uncertainty is expected to have a limited affect on the currency strength. The loonie will be supported in the long term by its fundamentals, a sound financial system and a strong job environment (0.9610).

Down-under is trying to lead the G10 rally, showing no lasting ill-effects from yesterday’s decision by the PBoC to hike policy rates +25bp. The Aussie is back above 1.035 despite a larger than expected (-5.6%, m/m) contraction in new home-loans in February. Analysts note that this is probably due to the disruption to the housing market from the recent floods.

The currency has printed a 30-month high versus JPY on the back of higher yields enticing investors wanting to own some of that premium. The market is back ‘in yield-chasing mode’. Growth and higher yielding currency’s will benefit. With Japan’s loose monetary policy, the yen is expected to continue to weaken further with Japan lagging any significant recovery.

Earlier this week Governor Stevens left interest rates on hold (4.75%) for a fourth meeting and indicated that the currency’s recent strength was helping to control prices, damping the need for further rate increases. Their levels of yields are still the highest in the G10 and continue to attract regional investors en masse (1.0382).

Crude is little changed in the O/N session ($108.49 +15c). Oil prices continue to trade close to its two and half year high, despite reports that two of Gadaffi sons are seeking his ouster. The commodity has found resistance ahead of today’s inventory report where it’s expected that inventories have increased. Pull backs in the commodity are supported by contagion fears in the Middle-East and on the back of Libyan forces renewed aggression raising concerns about oil supplies for the near-term.

Last weeks EIA report showed crude stocks climbing +2.95m barrels to +355.7m. The market had forecasted a rise of only +1.5m barrels. At the other end of the pendulum, fuel demand fell to its lowest level since November with gas softening -2.3% to +8.87m barrels a day. That is -2.1% less than a year ago. Gas inventories were down -2.7m barrels, while distillate (heating oil and diesel) were up +710k barrels.

Recent events will make it unlikely that investors will see a ‘swift normalization’ of crude-oil production in the region. On any pull backs the Middle-East and North African situation will continue to dominate in the event risk category.

Gold has managed to print a new record high as sovereign-debt concerns boosted demand for the precious metal as an alternative asset. The spiraling Portuguese debt costs, the conflict in Libya and the nuclear crisis in Japan have increased the demand for yellow metal as an investment haven. The metal commodity has jumped +28.5% in the past year.

These geopolitical reasons continue to provide support on pull backs for this ‘lemming’ trade, justifying consumers wanting to own some of the asset in their ‘own’ portfolios. Despite last weeks softening of prices, the commodity has preserved its tenth quarterly gain, its longest winning streak in over 35-years, as low interest rates and event risk provide support. It’s difficult to find a reason not to own some of the commodity.

The metals bull-run is far from over with investors continuing to look to buy the commodity on dips. Any price pullbacks are viewed as favorable opportunities for investors to continue to diversify into safe-haven assets, especially metal being used as a store of value. However, rising interest rates increase the opportunity cost of holding non-interest-bearing bullion ($1,456 up+$3.70).

The Nikkei closed at 9,584 down-31. The DAX index in Europe was at 7,168 down-7; the FTSE (UK) currently is 6,017 up+11. The early call for the open of key US indices is higher. The US 10-year backed up 4bp yesterday (3.42%) and is little changed in the O/N session.

The US curve suffered the full weight of the push-pull effect before the minute’s release. Bernanke’s stating that inflation may be transitory pushed bonds higher, speculation that the Fed minutes were to indicate that policy makers would be debating the end of stimulus measures pull them down again.

The pull effect won as treasuries fell after the minutes showed policy makers differed over whether to begin removing stimulus, fueling concern that interest rates will increase. The market remains cautiously short on the back of inflation threats and dissension within the Fed.

This week is an important week for global yield curves, especially for the ECB and the reason investors are reluctant to take on big bets even with event and geopolitical risk in abundance.

The US$ is weaker in the O/N trading session. Currently, it is lower against 12 of the 16 most actively traded currencies in a ‘whippy’ European trading range.

With the lack of US data to focus on yesterday, the market found other reasons to want to sell the dollar outright. China refraining from tightening monetary policy at the weekend after inflation surpassed +5%, y/y triggered risk appetite, curbing demand for the dollar. Moody’s warning that there is a higher chance of a negative outlook for the US following the extension of the Bush-era tax cuts has also pressurized the dollar. The EUR is also being supported by the possibility of the EU/IMF fund being extended in order for it to have enough room to accommodate Spain. Even Trichet is doing his bit by raising the Cbank’s bond buying program significantly from previous weeks. Finally, the EURO diplomats are singing the currency’s praises by stating that investors should not bet against the EU countries determination to defend their common currency. The year-end short squeeze has begun. With liquidity becoming more of a premium as the turn draws closer and with the market anticipating that helicopter Ben will defend his policy makers QE2 intentions, the dollar will continue to have choppy waters to navigate as 2010 draws to a close.

The USD$ is lower against the EUR +0.38%, GBP +0.07%, JPY +0.21% and CHF +0.40%. The commodity currencies are mixed this morning, CAD -0.05% and AUD +0.15%. Month-to-date, the loonie has gained +1.8% outright vs. its largest trading partner down south. Yesterday, the currency advanced for a fourth consecutive day, the longest winning streak in more than a month, as gains in commodities and stocks make currencies related to economic growth more attractive. The dollar index has suffered ‘across the board’ on renewed risk appetite after China refrained from hiking rates, pushing the CAD towards modest gains as it still underperformed other growth sensitive currencies. Governor Carney fired a warning shot in a prepared speech yesterday, stating that ‘the refusal by some countries to let their exchange rates float is slowing inflation in advanced economies, which may spark additional loosening of policies globally’. The loonie continues to struggle within striking distance of parity because of good corporate interest to own dollars there. The market expects support for the loonie from the Russian Cbank on dollar rallies because of their appetite to convert approximately 1-2% of their reserves into the CAD. Some of the loonies shine has been taken away with Governor Carney’s comments after the BOC kept rates on hold last week. Carney acknowledged economic growth in the second half of this year is weaker than previously anticipated and expressed concern about the expected recovery in net exports (that’s a strong loonie problem). The market has taken this as a dovish sign for rates. Corporate dollar interest near parity should provide resistance for the loonie until year-end.

Now that China has refrained, temporarily at least, from tightening monetary policy, is giving growth and interest rate sensitive currencies a helping hand. The AUD is again on course to challenge its psychological resistance level of parity today vs. the dollar outright. With China on hold, the Aussie has rallied against most of its trading partners on the back of stronger commodity and equity prices as investors close out the year embracing risk. The AUD has climbed +9.8% this year (second biggest winner after JPY), on prospects for commodity-driven economic growth and the yield advantage of the nation’s debt compared with other developed markets. Domestic data remains strong, this months employment data blew all analysts expectations out of the water and supports the currency on pullbacks. Not aiding the currency is the concerns for long dated interest rates in the US. Analysts are beginning to agree that the tight labor market will bring the RBA back into the picture, but believe that Governor Stevens is not behind the curve just yet and will not be required to hike rates in February. With consumers boosting their savings significantly in an environment of rising job and wage growth, suggests that the RBA is still ahead of the curve. Governor Stevens has also mentioned that rates are ‘appropriate’ for the economic outlook. Investors remain better buyers on dips, planning an assault on parity again (0.9977).

Crude is lower in the O/N session ($88.47 -14c). Crude found its second wind yesterday. Reports over the weekend revealed that China’s refiners increased their processing rate last month. The worlds biggest energy consumer boosted their net imports of the black stuff by +26%, m/m, and increased their processing rates to ease a diesel shortage. Coupled with OPEC announcement to maintain their production quotas and the PBOC refraining from tightening monetary policy is supporting the market, probably to the year end at least. OPEC believes that supply and demand are ‘in balance,’ and expect demand growth will slow as the global economy struggles to recover, amid ample supplies. Recent prices have already been elevated on the back of last week’s large fundamental drawdown of inventories and not on the strength of the dollar. The EIA inventory crude headline fell -3.82m barrels to +355.9m. Supplies were forecasted to drop by -1.4m barrels. Technically, the rise in these categories confirms there is nothing wrong with supply, but the demand picture in the US is not that robust. This is certainly in contrast to the stronger fundamentals that is occurring in Asia. Technically, expect the market to meet resistance again at the $90 high printed earlier this month.

Gold prices have found support from China refraining to hike interest rates over the weekend. The muted response to the PBOC decision to raise banks reserve requirements to +18.5% gave investors the green light to strap on some risk. Market fears that China would tighten monetary policy had eroded the demand for precious metals for most of this month. Bottom feeders have managed to stem the slide, believing that the $60 fall from its highs last week was a good opportunity to own a store of value as an alternative investment. It was only natural to see some profit taking after gold surged to a new record ($1,432.50). The commodity remains supported by the persistent concern over Euro debt levels. To date, debt contagion has driven investors into the third ‘reservable’ currency as they seek a store of value. Despite the fear that China will tighten their monetary policy, most likely in the New-year, a move to curb speculation and dampen inflation, global demand remains robust. Even though the one direction trade feels overdone, investors continue to hold gold as a hedge against currency debasement and long-term inflation. The Euro-zone backdrop is trying to put a floor on metal prices on demand for a haven. Year-to-date, the metal is up + 28% and is poised to record its 10th consecutive annual gain ($1,403 +$5.20c). Technical analysts believe that gold will outshine other precious metal in 2011 and peak somewhere above $1,600 in 2012.

The Nikkei closed at 10,316 up+23. The DAX index in Europe was at 7,022 down-7; the FTSE (UK) currently is 5,849 down-11. The early call for the open of key US indices is higher. The US 10-year eased 3bp yesterday (3.29%) and is little changed in the O/N session. Treasury prices rose, pushing yields down from a six-month high on a combination of factors. First, there was some natural profit taking as the US yield curve shifted aggressively higher over the past five-trading sessions. Second, a federal ruling against the Obama healthcare overhaul has eased concern that the government will struggle to tackle the US record deficit and finally on speculation that helicopter Ben and fellow policy makers could indicate that they may purchase more bonds in their QE2 program to boost the economy. The current high yields point to higher costs for consumers and certainly defeats Bernanke’s objective at the moment. With no Government supply coming down the pipe for a couple of weeks, one would expect some support for yields at these levels.

The US$ is mixed in the O/N trading session. Currently it is higher against 11 of the 16 most actively traded currencies in a somewhat summer ‘subdued’ trading range.

With the EUR testing session lows, there is chatter that the currency is losing its momentum to the topside, what else can one say? And that through the 1.2785 all bets are off. Remarkably, the currency is swaying on such little volume. In the big picture, the impact of the ‘fiscal adjustment in Europe is real and will be felt for years’ should hinder the EUR’s climb. Its highs are beginning to be dragged lower and lower. Now, with the belief that the Euro-zones economic recovery is waning should dampen further the demand for the single currency. Sellers are beginning to line up top-side. Maybe today’s data will bring some much needed volatility.

The USD$ is higher against the EUR -0.51%, GBP -0.50% and JPY -0.34% and lower against the CHF +0.06%. The commodity currencies are weaker this morning, CAD -0.08% and AUD -0.25%. The loonie is a funny animal, or perhaps I should say, the dealers are a breed apart. It seems that the forex spot market is pricing in the BHP Billiton/Potash deal and the herd is following them. Equities and commodity prices would have you wanting to lighten your CAD long load, not in this case, dollar rallies are been sold and dealers are content to keep the currency in the limelight until they get the green light to ‘execute’ any such deal. This is in contrast to other growth and commodity sensitive currencies paring most of this weeks gain. Stronger manufacturing shipments data this week (+0.1% and +0.7% in real-terms) is also providing some distant support. Fundamentally, Canada remains somewhat of a safer heaven globally. However, their economy cannot be immune to a US slowdown. It happens to be its largest trading partner with 70% of all exports heading south. Sloppy trading and lack of interest because of the summer doldrums has meant that many have missed the buying boat opportunity that they had hoped to witness on the last ‘risk aversion’ go-around. BHP Billiton hostile bid takeover of Potash in Canada will keep the loonie firm, no debt involved. Perhaps parity is on the cards again, aided by Carneys ‘normalizing’ rates next month.

There has been quite a bit of AUD/CAD cross selling, front running M&A speculation that has pinned down the AUD for the time being. Over the past 2-trading sessions the AUD came under pressure vs. the JPY on speculation that the BOJ are not ready to intervene on behalf of their currency, thus dampening the demand for some of the higher-yielding assets. Government data has also happened to put a lid on the recent rally. Reports, earlier this week, showed that skilled vacancies declined this month and wage growth slowed in the 2nd Q. Net result traders are adding to their bets that the RBA will leave interest rates unchanged for the next 12-months. Interest rate differential continue to play a big part of the currency’s attractiveness. No currency is immune to this ‘questionable growth’ environment. Risk aversion will likely force the bull’s hand this week, capping rallies, as equities find it difficult to maintain traction at the moment. In reality with the outlook for both the US and Chinese economies becoming uncertain, growth-sensitive currencies like the AUD, CAD and KIWI, are unlikely to continue to draw strong buying interest from speculators (0.9002). Follow the Asian bourses for guidance or wait and see what China’s diversification plan is made off. Perhaps the outcome of the Aussi election will push the currency to test new highs by weekend.

Crude is higher in the O/N session ($75.81 up +39c). Crude prices continue to trade near their one month low as mixed global bourses have ignited concerns that the recovery will not be strong enough to revive fuel demand. Even yesterday’s weekly EIA report provided fodder for the ‘bears’, aided by some ‘dubious’ hefty predictions for increased supplies in various categories for the week. Oil stockpiles declined -0.8m bpd vs. a market expectation of a -1m barrel print. Inventories fell to +354.2m barrels w/w. Not to be left out, gas stocks dropped -39k barrels to +223.3m. On the flip side, distillate supplies (heating and diesel) climbed +1.07m barrels to +174.2m. With this bearish report successfully penetrating the $75 support opens up the way to test the $72 surroundings. Prices have also gravitated towards these lows on the back of data showing that economic growth in both China and the US is slowing. The demand for oil products also fell, as gas demand hit a 2-month low, while demand for distillates is close to its lowest level in 10-months. The report re-confirms the IEA conclusion earlier this month that ‘oil demand could take a substantial hit should economic growth continue to falter’. It’s no wonder that the market continues to pressurize commodity prices. Speculators remain better sellers on up-ticks in the short term.

Gold prices are little changed in the O/N session, managing to pare some of the yesterday’s earlier declines as weaker global equities boosted investor support for various safer heaven assets. With a lack of meaningful direction in the dollar, gold prices remain in the ‘relative pause mode’ or tight trading range. Big picture, the market continues to require safer assets at the expense of equities and other commodities. With a genuine fear for global growth, by default, is boosting the demand for the metal as a protector of wealth in the grand scheme of things. Year-to-date the metal has risen +11.5%. With treasury yields expected to remain low for sometime and with the Fed announcement last week of their intentions to buy bonds, could promote a quickening inflation rate, which would promote pushing commodity prices higher. For most of this year, we have witnessed a gold rally on the back of a weaker EUR ($1,231 +50c). The dollar strength is under scrutiny and the historical negative correlation is not holding true at the moment. It’s about preserving wealth that is driving metal commodity prices big picture.

The Nikkei closed at 9,362 up +122. The DAX index in Europe was at 6,171 down -15; the FTSE (UK) currently is 5,294 down -8. The early call for the open of key US indices is lower. The US 10-year eased 3bp yesterday (2.59%) and has backed up 5bp in the O/N session (2.64%). Treasuries prices had rallied Wednesday, clawing back all of the previous day losses as equities came under renewed pressure. Also providing support was St. Louis Fed Bullard stating that the Fed may need to purchase more bonds if inflation happens to remain low. Investors are still concerned on the strength of the recovery. If the Fed does expand its balance sheet then the curve should flatten to analysts medium term projections of +200bp 2’s/10’s. The market seems content in owning longer dated product on these deeper pull backs. Perhaps this morning Philly Fed will cause another manufacturing stir!

The US$ is stronger in the O/N trading session. Currently it is higher against 13 of the 16 most actively traded currencies in another ‘subdued’ trading range.

Surely with the EUR weakening -6% against the dollar this year and a Chinese Yuan rallying +6.2% benefits the European economy? Who is kidding whom? These are questions posed by former EU commissioner Romano Prodi. He believes the Greek problem ‘is completely over’. There are no other sovereign issues in Europe. Speculatively, everything has been blow out of proportion. One wishes that could hold true for the UK economy. Their ‘fragile’ scenario remains however, especially after this mornings plummeting manufacturing production data (-0.9% vs. -0.3%). It seems that Sterling has legs for one direction and that’s down. It’s only when the EU gains momentum can the UK economy find some traction. The general election supersedes everything at the moment. Their economy will provide enough political copy for fodder in the run-in.

The USD$ is stronger against the EUR -0.23%, GBP -0.48%, CHF -0.20% and JPY -0.25%. The commodity currencies are mixed this morning, CAD -0.04% and AUD +0.24%. The loonie remains the darling of currencies. Even with commodities weakening there is an appetite to own the currency as speculators gamble on ‘growth’ prospects. The currency continues to congest vs. its southern partner and certainly outperform on the crosses. Traders are waiting for tomorrow’s trade numbers and Friday’s employment report to solidify their market positioning. Technically, the currency is on course to test the USD support levels close to 1.0200. Depending on this week’s data, the domestic currency may have the momentum to provide another parity onslaught where it should run into strong opposition. Last week, the BOC did what was expected of them, by keeping rates on hold. It seems that they are potentially ‘behind the curve’. Their communiqué was hawkish in nature, leading to somewhat predictable rate increases for the second-half of this year. The BOC must b concerned about the loonies’ strength of late. However, it has occurred in an orderly fashion and rapid appreciation for speculative reasons would have sent alarm bells ringing. The trend remains your friend. Expect better buying of the domestic currency on USD rallies in the medium term.

The AUD managed, at one point, in the O/N session to print a seven-week high. There is speculation that this evening’s Australian employment report will again provide strong evidence that the RBA will require another rate hike next-month. Robust Chinese export numbers has investors demanding higher yielding growth currencies. To top all the support variables for the currency was the RBA’s deputy governor Lowe comments that growth will be likely at or above average for the next couple of years. Last week the RBA hiked rates by +25bp to +4%. Governor Stevens said ‘rates should be closer to average’, which policy makers have indicated may be 75bp higher than the current +4%. Analysts believe that the ‘the biggest jobs boom in more than 3-years and a surge in business confidence suggest Australia’s economy is already growing at or close to trend, after escaping recession during the global crisis’. Reading between the lines, we should expect the RBA to hike with a ‘gradual approach’. Continue to expect better buying on deeper pull backs (0.9163).

Crude is lower in the O/N session ($81.37 down -12c). Crude was little changed yesterday, in fact another dull day of trading for the black-stuff, especially after last week’s late surge on the back of stronger than expected employment data. Traders are wary about this morning’s inventory report. Analysts expect another build in stocks, a sixth consecutive rise, on the back of imports edging up and refinery utilization remaining flat. Global optimism that fuel demand will climb in the world’s biggest energy consuming country has helped push the commodity to its recent highs. Now that we have firmly broken the psychological $80 a barrel, some technical analysts believe this opens the way for a $90 print. OPEC meets next week and already the Saudi’s King Abdullah has said that they target $75 as a fair price for consumers and producers. Last week’s EIA report showed that refinery utilization rates are at their highest since Oct., a sign that gave the bulls the green light to keep the commodity’s prices somewhat elevated. Utilization rates increased +0.7% to +81.9%. The market is expecting the higher utilization rate to quickly ‘mop up excess supplies’. With momentum and an investor attitude that the economic situation will not get much worse will support commodities on pull-backs. Perhaps this morning weekly reports may surprise.

For a second consecutive trading session this week the ‘yellow metal’ has struggled. It managed to print new weekly lows as the dollar strengthened vs. the EUR, thus reducing the demand for the metal as an alternative asset. Comments from China also managed to weigh on the commodity. Authorities indicated that ‘bullion probably will not be the country’s main reserve investment’. Technically that means they will ‘have to hold dollars’. This action, by default, will weigh on all commodities. Earlier this week investors were happy to cash in on their profits that were booked using other G7 currencies. Forgetting Greece, it’s all about the performance of the dollar. Currently, any signs of weakness and we will have buyers happily enter the market. Until then, the bulls are the unlucky investors. Last month the commodity managed to print its first monthly gain since Nov. European sovereign debt issues and a ballooning UK deficit with the potential of ‘hung’ parliament after the next general election had investors seeking some sort of portfolio surety back in Feb. Will we see the same interest at lower levels ($1,125)?

The Nikkei closed at 10,563 down -4. The DAX index in Europe was at 5,895 up +10; the FTSE (UK) currently is 5,607 up +4. The early call for the open of key US indices is lower. The US 10-year eased 1bp yesterday (3.70%) and is little changed in the O/N session. There was a demand for bonds despite the plethora of product to be issued this week. The appetite was aided by the Chicago Fed Evans stating that ‘low interest rates are likely to be needed for some time, as high unemployment lingers and inflation stays below target’. We have contagion issues on one hand, questionable global growth and hyping policy maker’s rhetoric providing the tug-of-war for product. Until the market gets some concrete data to chew on, one can expect various asset classes to trade in ‘limbo’. Yesterday’s 3-year auction ($30b) was well received. The bid-to-cover ratio was 3.13 compared with 2.83 in Feb. and 2.98 in Jan. The average has been 2.89 from the past 10-auctions. Today we get to bring down 10’s ($21b) and tomorrow long-bonds ($13b).

The US$ is weaker in the O/N trading session. Currently it is lower against 13 of the 16 most actively traded currencies in a ‘whippy’ trading range.

We do have an event packed week planned, but yesterday’s ‘twiddling thumbs’ does not register on any scale of enjoyment. The rest of this week will pack a punch and is very much open to interpretation. The next two days, Bernanke will be giving both the House and the Senate ‘his’ monetary policy report. With his ‘dovish’ attitude he is expected again to reiterate his ‘low interest rate policy’ before the panels. He will explain away the rise in the ‘discount rate’, indicating that it was a technical step in phasing out several other extra-ordinary measurements taken during the financial crisis. Its has been noted on several occasions that the Fed and its policy makers are ‘cleverly separating this announcement from the regular FOMC meeting cycle in order to not confuse markets what their monetary goals are’. Let’s assume that gentle Ben delivers the above recipe, markets are free to return to their previous ‘discount interest’ rate levels. The dollar in theory could again be under pressure. It seems that volatility is in store!

The USD$ is currently is lower against the EUR +0.64%, GBP +0.43%, CHF +0.39% and JPY +0.27%. The commodity currencies are stronger this morning, CAD +0.33% and AUD +0.68%. Yesterday, the loonie managed to retreat from its 4-month high as the lack of enthusiasm with global equities and especially commodities had investors shying away from owning the currency. Tomorrow is ‘oil day’ and the monthly seasonal’s are expected to cap any serious attempt for the dollar to rebound into mid-week. Technically there remains strong demand (1.0300) from long term hedgers and corporate Canada, however, on the top side there is very little interest from these types until we approach 1.8000 again. Governor Carney has pledged to keep O/N lending rates at a record low (+0.25%) through June this year, unless the country’s inflation outlook shifts. Last week’s TIC data showed foreigners buying +$104b’s worth of Canadian securities last year (double the previous record).Their appetite for Canadian securities has certainly influenced the currencies value over the past 12-months.Year-to-date, it is the fourth best currency vs. its southern neighbor. On a cross related basis it has outperformed most of its major trading partners. Whether it’s an increased risk appetite or acting as a surety currency, the loonie by default has remained well sought after. Technical analysts expect to see consolidation at these elevated prices until capital markets get to witness a strong transparent message from the EU on the woes of sovereign debt. Governor Carney will be patient and absorb how ‘his’ currency reacts to the hawkish Fed movement of last week.

The AUD continues to trade near its decade high vs. the EUR on speculation that Greece’s fiscal deficit is set to widen and on the belief that the RBA will manage to keep their interest rates above most of their competitors. Again this morning the BOJ announced that they will keep rates low. Earlier last week, the AUD rallied to its strongest monthly print after the RBA said that further ‘increases to the benchmark interest rate are likely if the economy improves’ (3.75%). Futures traders continue to bet that the RBA will hike rates early next month. It’s difficult to bet against the currency. According to the RBA, ‘the economic situation is stronger than expected and it is natural for monetary tightening’ to take place currency. The currency declines have been tempered by Governor Stevens’ remarks that the Australia’s benchmark rate was below normal. He said borrowing costs for ‘businesses and households were still about 50 and 100 basis points below average’. The rhetoric looks like its giving the green light to Capital Markets to expect another hike. So far, the futures market is pricing in a 44% chance of one at the Mar. meeting. On pull backs, expect better buying of the currency (0.9020).

Crude is lower in the O/N session ($79.87 down -48c). Yesterday, Oil fluctuated near $80 a barrel as the dollar strengthened vs. the euro, making crude less attractive as an alternative investment. Lethargic trading again put equities under pressure, giving little overall support to commodities. Technical analysts are salivating as the recent upward trend. Chartists are plotting another move higher for crude after last week’s bullish closing price. Currently, it seems that $80 is the first strong psychological resistance level. The commodity managed to temporarily print, in yesterday’s morning session, a new five-week high after the Fed’s discount-rate increase last week signaled an extended economic recovery. A strike at a French refinery has cut global fuel output. Expect this to directly affect the US’s import numbers. Last weeks EIA inventory data also supported prices. It showed that distillate stocks fell more than anticipated. Distillate stocks, diesel and heating oil, fell -2.94m vs. a market expectation of only -1.5m barrel drawdown. The gains were somewhat tempered by the crude print climbing +3.1m barrels, much more than the +1.8m barrels that had been expected. A build in gas stocks of +1.62m barrels was in line with market expectations. Refinery utilization rates grinded higher on the week, up +0.7% to +79.1% of capacity. For market direction, we are now depending on equities and investors ‘on’ again ‘off’ again risk appetite. With the dollar reigning supreme this quarter, commodities may find it difficult to maintain their recent upward momentum.

Yesterday was not the time to ‘diddle in the middle’. Trading days like that end up eroding some of our hard earned capital. Last week, speculators happily booked profits accumulated during this month’s 3-month high gold rally. The big picture concerns about deepening EU deficits becoming contagious should continue to support the yellow metal on much deeper pull backs. Yesterday’s trading session was about leakage. With the dollar climbing, and with its negative correlation relationship with commodities, lack of interest and volume, had the ‘weak’ longs exiting the market. Various think tanks believe that with the sovereign-debt problems coupled with Cbanks printing money, in the end, gold will be the only hard asset speculators will want. Currently, perception believes that the IMF may end up being the bull’s party spoiler. Late last week they indicated that they will shortly begin ‘on-market’ sales of 192 tonnes of gold ($1,114). Continue to watch the dollar for direction.

The Nikkei closed at 10,352 down -48. The DAX index in Europe was at 5,700 up +12; the FTSE (UK) currently is 5,380 up +28. The early call for the open of key US indices is higher. The US 10-year backed up 1bp yesterday (3.79) and are little changed in the O/N session. Supply and fears of supply has both dealers and investors cheapening up the US curve aggressively. The Treasury Department said it will sell another +$126b’s worth of notes and bonds this week ($8b TIPS, $44b 2-yeras, $42b 5-years and finally $32b 7-years). Again, this is a record amount of product to absorb, especially with China putting the brakes on their requirements for US issues. Mind you Japan is stepping into their shoes, increasing their own interest. That’s impressive coming from a country that has lived through a decade of recessions and deflation. From their perspective, dominated by low rates, US Treasuries remain a bargain at these elevated yields. I wonder what sort of tails we will witness this week.

The US$ is stronger in the O/N trading session. Currently it is higher against 13 of the 16 most actively traded currencies in another ‘whippy’ trading range.

There were mixed results with yesterday’ US data. Firstly, we were treated to a better than expected consumer confidence number (55.9 vs. 53.6), followed by a disappointing Richmond Fed manufacturing index (-2 vs. 0). The confidence index was stronger than expected in Jan. on gains in both the present situation and expectations components. A positive Dec. revision also gave support to the final headline print. Digging deeper and on a positive note, individuals claiming that jobs were ‘plentiful’, increased to the highest level in 5-months, while those claiming that jobs were ‘hard to get’ fell to the lowest level in the same time period. This is proof that we should continue to see an up swing in the labor markets. Now that the fiscal stimulus is finally filtering down, capital markets should expect to witness signs of progress in the next NFP release. Business conditions were mixed as those claiming that conditions are ‘good’ moved higher. The present situation component increased to the highest level in 6-months. While the expectations component also gained on the month, the details were mixed as consumers expecting better business conditions over the next 6-months declined to 20.9% while those expecting worse conditions increased to 12.7%. However, employment expectations improved modestly as those expecting fewer jobs fell to 18.9% from 20.6% (the lowest level in 15-months). Manufacturing should be happy as consumers are planning to buy more cars, homes and major appliances. The initial reaction from the report gave equity indices a ‘warm and fuzzy feeling’, but it did not last that long.

For a fifth consecutive time the Richmond Fed Index managed to disappoint the masses (-2 vs. 0). Analysts had expected it to claw its way out of negative territory. Digging deeper, we witnessed improvements in the shipment numbers, however, unlike the confidence index, employment and average workweek deteriorated over the last 4-weeks, causing another negative headline print. We should not despair as new orders are showing signs of life and rebounded back into expansion territory. The prices paid and received component rallied this month, while inventory levels of both finished and raw material goods softened slightly. Future expectations look positive, with most components relatively unchanged.

The seasonally adjusted 20-city index in the Case-Shiller report posted its six consecutive gain in Nov (-5.3% vs. -7.3%). The increase was partially offset by a downward revision spread over the previous two months. Analyst’s initially believed that the summer bounce was due in part to seasonal forces and did not expect the headline print to be sustainable. The past couple of reports suggest that seasonal forces were only ‘part of the overall story’.

The USD$ is currently higher against the EUR -0.36%, GBP -0.14%, CHF -0.26% and lower against JPY +0.22%. The commodity currencies are weaker this morning, CAD -0.34% and AUD -0.92%. With global equity indices and commodity prices fluctuating yesterday happened to push the loonie to print a new 5-week low. After experience a -3% drop last week vs. its largest trading partner, mostly on the back of a vocalized Governor Carney expressing his concerns of a strong domestic currency’s role on future growth, had futures traders paring their bets on when interest rates hikes would occur. Similar to the Fed’s policy, rates will remain low for an extended period of time. Technically, the currency is underperforming in the crosses and this is directly pressurizing the loonie. The market seems to be caught long the CAD and is eager to pare some of these positions. Depending on equities and commodities, any CAD rally will have investors looking to sell some of their long positions. In the short term, analysts believe the CAD is still overvalued and are targeting 1.0750 near term.

The AUD rose from near a 1-month low after a government report last night revealed that consumer prices gained more than the market had expected (+0.5% vs. +0.4%), giving the RBA and Governor Stevens the green light to raise interest rates next week (3.75%). The IMF added weight to the argument by stating yesterday that the Australian economy will outpace other advanced economies and expand +2.5% this year and +3% next year. Analysts believe with such a robust and stellar economy there is no reason to keep rates as low as they are. With regional bourses accelerating their losses, has reduced the general demand for higher-yielding assets. Any hint of Chinese tightening will always be a negative on the Australian economy and commodities. However, stronger Australian fundamentals have traders increasing their bets to a +76% chance that the RBA will hike another +25bp on Feb. 2nd. It’s expected to be their fourth consecutive hike (0.8995). Despite this, commodities continue to trade under pressure and possibly drag the AUD with it.

Crude is little changed in the O/N session ($74.71 down -1c). Yesterday, crude managed to print a 5-week low ahead of this morning’s inventory report where w/w stocks are anticipated to rise again. Mind you, the big dollar showing symptoms of strength has investors shying away from the black-stuff as an alternative investment. The commodity has clawed its way back from its low despite last week’s EIA report revealing that refineries have slashed their operating rates as fuel demand declines. Yesterday with the dollar giving up its earlier gains has ‘tempered the commodity selling for now’. Last week, plants were running at +78.4% of capacity, the lowest run rate in 16-months. Not unlike last weeks inventory build up, analysts are forecasting a similar scenario with this morning’s EIA report. This will only add fuel to the ‘bear strategy’ for commodities. Fuel use over the past month fell -1.8% from a year ago. There are concerns amongst analysts that the ‘increasing demand in China and emerging markets will not be strong enough to offset declines in other countries’ and technically may push the commodity down to the $70 level. The market has sellers on upticks for now.

Witnessing the selling of bullion to cover losses in the equity markets is likely to increase over the coming weeks. Global bourses are finding it difficult to hold onto any significant gains. From this week’s lows, the metal has rebounded as traders speculate that a weaker dollar should boost the appeal of the precious metal as a temporary alternative investment. The market is expected to remain contained until we get more clarity on interest rates later today. To date, the commodity has been top heavy with ‘one direction lemming buying’ after last years 24% rally. During the same period, the dollar has only fallen -8.5%. After last week’s -3.5% trading loss, any liquidation of the metal with momentum will have nervous investors seeking an early exit. With the EUR remaining vulnerable and the dollar the ‘go-to’ currency, expect to see selling on upticks for the time being ($1,094).

The Nikkei closed at 10,252 down -73. The DAX index in Europe was at 5,622 down -47; the FTSE (UK) currently is 5,223 down -53. The early call for the open of key US indices is lower. The US 10-year note backed up 2bp yesterday (3.62%) and are little changed in the O/N session. It is only natural to cheapen up the curve to absorb product as treasury prices came under pressure ahead of the 2-year auction. The 2-year note yielded 0.88% vs. 0.872% trading ahead of the auction. The bid-to-cover ratio was 3.13 compared to 2.91 in Dec. and 3.61 in Nov. The average over the past 4-auctions was 3.23. We now only have a further $74b worth of product to contend with this week. Despite a plethora of product coming to the market, yields continue to trade on top of their 5-week lows. The Treasury Dept. will auction off $42b 5’s today and $32b of 7’s tomorrow. This afternoon we have the Fed rate announcement and the market ‘can’ only expect rates to remain on hold.