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G20's pledge to avoid competitive devaluation failed to halt the slide in USD. Indeed, the market realized the agreement may only calm fears of currency tensions temporary while, in the long-term, global economic imbalances persist. The focus has turned to the upcoming FOMC meeting which will be held on November 2-3. Announcement of some sort of easing measures has been priced in. The unknown is how aggressive the Fed will restart QE2. As the dollar weakens, commodities advance with gold rising to 1339 after plunging to as low as 1315.6 last Friday. Crude oil strengthened for a second day to 82.5 as strikes in France continue and tropical storm threatens.
There are few catalysts stopping the market from selling USD even after the G-20 meeting. While member countries agreed to 'refrain from competitive devaluation of currencies' and to move towards 'more market determined exchange rate systems that reflect underlying economic fundamentals', there's no proposal on how to reduce international trade imbalance between countries. It's only stated in the communiqué that 'persistently large imbalances, assessed against indicative guidelines to be agreed, would warrant an assessment of their nature and the root causes of impediments to adjustment as part of the Mutual Assessment Process'.
The US has also made no commitment to refrain from further quantitative easing in the fact of criticisms by other member countries. German Economy Minister Rainer Bruederle said 'it's the wrong way to try to prevent or solve problems by adding more liquidity…Excessive, permanent money creation in my opinion is an indirect manipulation of an exchange rate'. Canadian Finance Minister Jim Flaherty also agreed with the notion that 'aggressive quantitative easing in the US would create devaluation pressure on the U.S. currency'.
The market continues to sell the dollar in Asian session today. While the sentiment has been dominated by further QE in November, risk appetite has been also boosted by M&A news in the stock market. Singapore Exchange agreed to buy 37% of ASX, Australia's main stock-exchange operator, for AUD8.4B. This would be the first deal between two exchange companies in the Asia- Pacific region and the merger would make it the 5th largest exchange company in the world by market value. The MSCI Asia Pacific Index rose almost +1% with the S&P/ASX 200 Index gaining +1.4% in Asian session.
Later in the US session, Fed Chairman Ben Bernanke will speak at Housing Conference in Virginia. We expect to get more guidance on the Fed's monetary stance.
Speculators turned bearish on the energy complex in the week ended October 19. Net length for crude oil futures plunged -28 496 to 100 830 contracts after rising for 3 consecutive weeks. Net length for heating oil futures fell for a second week, by -10 783 to 28 642 contracts, while that for gasoline futures slipped -2 796 to 62 087 contracts, following a rise to a 5-month high in the prior week. Net shorts for natural gas futures unexpectedly dropped, by -1367, to 173 874 contracts.
The situation in precious metals was mixed. While liquidations were seen in gold and silver, the market remained bullish on PGMs. Net length gold futures slid -6 122 to 249 752 contracts while that for silver futures dipped -2 055 to 43 297 contracts. Net length for platinum futures soared for a 7th week, by +315, to 25 562 contracts while that for palladium futures increased for the first time in 3 weeks, by +117, to 15 283 contracts.
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