BMO Capital Markets - Busch Update

Good morning,

With weak output numbers in Germany and the UK, the greenback is rallying against most major currencies. The exception is the South Korea won after that country's finance ministry and central bank issued a warning that they would take strong concerted action and sell dollars when necessary to stabilize the foreign exchange market. Steve Forbes suggests that South Korea has been hurt by the disagreement over trade with the US, but that this could change. US dollar index is up .29 at 73.02. The European Crossover ITRAXX is down 3 at 538.85 and the Japanese ITRAXX 5 yr is down 1.5 at 145.50. Overnight Libor rates are lower: UK is at 5.0625%, Euro at 3.92125%, and US at 2.3900%. The spreads from 3mth Libor to 3mth OIS are mixed, but elevated: in the US is at 74.325 bp, in the EU is at 65.238 bp, and in the UK is at 79.175 bp.

Global stock markets are higher with the Hang Seng rising 2.28% and the S&P 500 futures index up 1.0. The US Treasury 2yr note yield is at 2.524%. The US 10yr is yielding 3.973% as the 2s/10s spread has widened to 144.9. With OPEC head saying crude to $170 and the WSJ reporting $200, crude is ......bit softer after Iran signaled they may consider a compromise with their nuclear program. Oil is at $143.16, nat. gas is at $13.326, and home heating oil is at $4.02. The CRB index is at 467.96, grains are soft wheat at 861 (-2.9%), and corn is at 747.00 (-3.85%). Precious metals are softer with gold down $10 at at $922.85 and silver is at $17.955.

Prisoner $ Dilemma Solved?: Over the weekend, the FT reported that the United Arab Emirates may break its fixed peg to the US dollar. Apparently, the the Abu Dhabi department of planning and economy floated the idea of tracking a basket of currencies in advance of formation of a currency union in the six-member Gulf
Co-operation Council. This could potentially lead to other Arab nations breaking their peg as well. However since the Middle East is one of the world's main holders of dollar-denominated assets, they have have a dilemma that when they revalue their currencies, they will also be devaluing their US holdings. Let's see if they remain prisoner to this construct.

What A Weak Currency Should Do: The WSJ repots that Fresenius SE, a German global health-care group, said it will buy APP Pharmaceuticals Inc. for $3.7 billion plus the assumption of $940 million in outstanding debt in a deal that highlights international interest in the U.S. pharmaceutical industry. To me, the only thing that's not surprising is that there hasn't been more foreign interest for US takeovers. A key turning point for the US dollar would be when we see more and more of these type of deals as it would signal that foreign companies view US competition as cheap and worthy of purchase. Maybe that's why the UAE is thinking of revaluing their currency to buy US assets cheaper?

McTeer on CNBC: Two interesting comments from the former Dallas Federal Reserve governor. One, the last two months downward revision was more disconcerting than this month's -62k. Two, if the US dollar begins to go up, it will likely go up very fast. The strong Euro has been very helpful for the Europeans in regards to keeping the price of oil under wraps, but this could unwind should the US dollar rally.

Very quiet day with no US data out. Canadian building permits better than expected, but little reaction to the news. G8 meeting should produce a line or two on global warming and energy, but not much more. Bloomberg reports what we are already seeing in the equity markets: profits at US companies probably shrank from the 4th consecutive quarter with expected earnings supposedly dropping 11% in Q2. The streak is -2.5% in Q3 2007, -23% in Q4 2007, and -16% in Q1 2008. The ? is whether we're so far down that everything looks up from here. For the US dollar, it's a question of a global economic race to the bottom between Japan, Europe, and the US. Whoever hits first and bounces, wins.

Andy

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