EURO Panic Attack is Only a Step Away

The big dollar has traded surprisingly poor despite the lukewarm news on Greece and global equities just about finding their feet in the overnight session.

This morning the market has already been exposed to a dismal ZEW headline. The sentiment index fell-9 versus a more modest drop to-2. Even the current conditions fell significantly and hit 87.9. Thus far, it has not been enough for the EUR to shift into reverse. This EUR recovery could falter into the upcoming Greek vote and should prompt fresh sales into strength as the dollar looks to the FOMC for inspiration.

Any negative news from the ‘vote’ or the EU Leaders Summit later in the week will trigger a strong wave of selling and risk aversion driving markets into a new selloff. The panic attack is only a step away.

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

The Greek government faces a vote of confidence this afternoon in Athens. The market is ‘cautiously optimistic’ that the government will survive (Prime Minister Papandreou has told us so!). What about a no confidence vote? If that does happen, all hell will break loose. It will begin the countdown to a general election and certainly throw into doubt the IMF/EU’s willingness to disburse the Eur12b aid earmarked for next month under the loan agreement. It could lead to a messy default, a fallout in the financial system, crumbled banks and the inevitable contagion from Europe to the globe. Let’s say Papandreou get his vote of confidence, what then? The market will again be second guessing if the socialists can get the required number of votes to push through its ‘new’ fiscal austerity measures (further budget cuts and selling of state assets) on June 28-30.

This week’s Euro leaders meeting is been seen as ‘the’ forum for finalizing plans for the new support package’, including agreement on the nature and degree of private investor participation. The market does not expect ‘conclusive agreement’ to be reached. The IMF on the other hand may release its July funding to Greece without an agreement. This will obviously take some of the heat off policymakers to finalize a solution. It seems that Euro policy makers need pressure applied to come to some sort of agreement, other wise capital markets will do that for them.

The dollar is lower against the EUR +0.16%, CHF -0.15% and JPY +0.07% and higher against GBP -0.15%. The commodity currencies are mixed this morning, CAD +0.14% and AUD -0.20%.

The CAD continues to fluctuate nears its lows against the greenback despite news of an assurance from Greece to the EU that they will do all that’s needed to win aid. Previously, the loonie had slipped against its US counterpart, shredding all technical levels, weakening to its lowest level against the buck in three-months as renewed fears that Greece’s debt problems were out of control spurred a flight to safety. The CAD’s health is heavily linked to its southern economy because of the close trading relationship between the two countries.

On the crosses the currency has performed relatively well, boosted by this month’s employment numbers. Expect the Canadian dollar to be subjected to the pull of either risk or risk aversion trading strategies. If oil prices continue to soften Canadian bulls can expect to see better buying opportunities (0.9779).

The AUD previously had been trading poorly as a deadlock on aid for Greece dampened risk and demand for higher yielding assets. Now it’s the RBA thats putting the currency under pressure. Last nights board minutes for June reaffirm a noncommittal Central Bank. The market pricing for rate hikes over the next year has fallen 7bp to-6bp.

Governor Stevens and company cited growing concerns in Europe, downside surprises in US data and deterioration in non-mining related industries as giving the board enough reason to remain on hold until further notice. The minutes were also less explicit than RBA Governor Stevens’ speech last week on emphasizing upcoming data like the CPI report. The market is pricing a no hike in August unless inflation and employment surprised on the upside and the situation in Greece clears up sufficiently for a powerful rebound in risk appetite. Global data needs to improve before we can embrace any rate hike policy thinking.

Despite some of this negativity, Aussie yields are still the highest in the G10 and always look attractive even when the currency trades sideways. The expected mix of trade surpluses and rising capital inflows should provide support for the currency on these much deeper pullbacks for the time being (1.0565).

Crude is higher in the O/N session ($94.39 +$1.13c). Oil prices yesterday slumped to a four-month low on the back of weaker economic outlook and a European debt crisis will eventually curb fuel consumption. Analyst’s note, that from its peak this year, crude is off +20%. The technicals see strong support only appearing at around $87. This morning, with equities in the black, the commodity has been able to gain some traction.

Prices are not been influenced by bearish weekly inventory data, but, rather by the negative economic news. With NY and Philly manufacturing contracting and European debt crisis deepening is expected to reduce economic growth and eventually fuel demand.

Last week’s EIA report showed that oil inventories fell -3.41m barrels to +365.6m. Stockpiles at Cushing were down -1.14m barrels at +37.76m (NYMEX delivery point). On the flip-side, gas stocks rose +573m barrels to +215.07m, below market expectations of a +1m barrel gain. A market surprise was distillates (heating oil and diesel) posting a dip of-105k barrels to +140.82m (-5.2%). The refinery utilization rate fell -1.1% to +86.1% of capacity, compared with analysts’ forecasts for a slight increase of +0.3%.

Big picture, the market believes that the US has ample crude stocks, allowing WTI prices to remain in check, while the Brent market continues to price in lost production of preferred sweet crude from Libya. Economic headlines are more important to the market right now than inventory levels.

Gold ended last week better supported as currency volatility has boosted demand for the precious metal as an alternative. Earlier in the week investors were required to sell the yellow metal to cover losses in other assert classes as margin calls increased. Last week, the metal dropped -0.3% and this after falling -0.9% the previous week. Year-to-date, the commodity has climbed +7.3%.

Big picture, the yellow metal remains in demand on speculation that borrowing costs in the US will remain low after economic data signaled that the recovery may be faltering and on the back of Bernanke’s comments that further stimulus is required. The Euro-carnage will continue to support gold buying.

Strong buying recommendations from Goldman and Morgan Stanley have also been good enough reason to drag the commodity higher. The yellow metal is being used as a store-of-value and trades like a currency.

The metals bull-run is far from over with speculators continuing to look to buy commodities on these pullbacks ($1,544 +$2.20c). With the potentially dollar creeping higher, there may be better levels to own the commodity.

The Nikkei closed at 9,459 up+105. The DAX index in Europe was at 7,210 up+60; the FTSE (UK) currently is 5,738 up+45. The early call for the open of key US indices is higher. The US 10-year eased 2bp yesterday (2.96%) and is little changed in the O/N session.

Treasuries advanced last week, completing FI’s longest rally in 25-years on speculation that Greece will struggle to avoid the Euro-zones first sovereign-debt default. So far this week, treasuries have erased some of their weekend gains after comments from EU and IMF officials eased concern that Greece’s debt crisis is worsening, reducing the demand for surety assets.

US reports last week unexpectedly showed manufacturing in the Philadelphia and New York regions contracted has also put the bears on the back foot ahead of the FOMC meeting this week. Policy makers are expected to leave the accommodative language unchanged and is not expected to do new round of debt purchases under its so-called quantitative easing program. Bernanke’s post meeting communiqué tomorrow afternoon will enlighten the market of their intentions.

His comments earlier this month continues to provide fodder for the bulls to want to own longer dated product. The reality, record monetary stimulus is still needed to support US economic recovery. With the Fed expected to remain on hold for a considerable time is creating a new paradigm of longer term lower interest rates. Investors continue to reduce their bets on an increase in the Fed’s overnight lending rate. Dealers remain better buyers on pullbacks.

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