Trichet remains on the offense

Martin Luther King Day in the US will make the market feel like ‘sleepy hollow’. Technically, there is nothing to get excited about. Fundamentally nothing has changed. Politically, the same issues as last week. The greenback remains range bound, the EUR questionable, as Trichet and policy makers continue to ask the harder questions of vulnerable Euro-members. If anything, the dollar’s stronger momentum has been put on hold for another 12-hour.

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

On Friday, Trichet reiterated that he will not change the rules. The collateral requirements for any country will not be ignored. This obviously will put pressure on the PIIGS, with immediate focus on Greece. Moody’s comment that Greece will face a ‘slow death’ implies that they will not be retaining their rating’s any time soon. The EUR’s strength is dependant on ‘the political will of the Greek government to implement the deep fiscal tightening’ and improving the transparency of its public finances. Does Europe believe they have contained the situation? There are certain other governments that warrant questioning about the handling of their finances.

The USD$ is currently lower against the EUR +0.10%, GBP +0.58%, CHF +0.22% and higher against the JPY -0.28%. The commodity currencies are stronger this morning, CAD +0.28% and AUD +0.22%. On Friday, the loonie retreated from its 3-month high as its greatest supporters, oil and the greenback, reversed roles. Commodity and equity prices plummeted as the greenback rallied vs. the EUR aided by an increase in risk aversion trading strategies. This reduced the appeal of higher-yielding currencies. Historically, when the US dollar caught a cold, the loonie suffered from pneumonia. It was because of its proximity and strong economic ties with its southern brethren. That correlation has long ceased, stronger Canadian fundamentals and the world’s appetite for the country’s rich commodity sources has the loonie encroaching on parity in the near future. Over 50% of total export revenue is from raw materials. The general malaise of the ‘big dollar’ of course adds fuel to the fire. The BOC has its rate announcement tomorrow. The market will expect rates to remain on hold (+0.25%). Governor Carney and fellow policy aids have been vocal and adamant that rates will ‘stay low’ until after June or until inflation becomes an issue. At the same time they have expressed the concerns on the strength of their currency and what it could do to future economic growth. The Governor has a tough call as they cannot manipulate rates. That will only worsen the situation. We should expect them again to try and talk down some of its strength. Technically, the currency has come too far too fast. There are decent ‘size’ speculators willing to sell the loonie on dollar weakness. However, all things being equal, any glimmer of growth will have the loonie trading above parity sooner than we think.

The AUD has had a ‘see-saw’ of a night, initially falling from its three week highs on risk aversion, but found traction by sessions end on the back of local bourses advancing. This encouraged investors demand for higher yielding assets. Recent stronger fundamentals have traders increasing their bets that the RBA will keep raising interest rates. The economy is now well into a recovery phase and adds pressure on Governor Stevens to increase the O/N borrowing cost to 4% for a fourth straight meeting next month (0.9261).

Crude is higher in the O/N session ($78.36 up +36c). Friday we saw crude oil falling to a three-week low as the dollar gained vs. the EUR, curbing demand for commodities as an alternative investment. Last week was the first losing week since early Dec. for the black-stuff. A bearish weekly EIA report supported by the earlier API findings had legitimate sellers queuing to sell on any rallies all week. The reports revealed rising US distillate inventories, despite the severe northern hemisphere winter. Crude inventories rose +3.7m barrels to +331m barrels last week vs. an anticipated climb of +1.5m. Gas fared no better, its supplies advanced +3.79m barrels, or +1.7%, to +223.5m. Analysts again underestimated the levels, as they expected only a rise of + 1.7 million barrels. Finally, distillate fuel inventories increased by +1.35m barrels to +160.4m, compared with an estimated drop of -1.3m barrels. Fundamentally, the combined distillate number remains a strong sell indicator. The commodity has fallen just under -5% since China announced increasing its Bank reserve requirements and this after a +15% gain over the illiquid holiday trading season. Global fundamentals reinforce the ‘demand destruction theory’. Stalling UK and German economies has investors nervous about riskier trading positions.

On Friday, the yellow metal lost its immediate luster as a stronger dollar reduced the attractiveness of commodities as an alternative investment. However, traders believe there is a strong demand for the commodity on deeper pull backs with analysts anticipating the greenback again will renew its pressure to the downside this week ($1,136).

The Nikkei closed at 10,855 down -127. The DAX index in Europe was at 5,900 up +24; the FTSE (UK) currently is 5,484 up +29. The US markets are closed due to Martin Luther King Day. The US 10-year eased 7bp on Friday (3.67%) and is little changed in the O/N session. Last week it post its biggest gain since Nov. as retail sales surprisingly declined and consumer prices rose less than forecasted. The uneasiness of sustainable growth has managed to boost demand for FI product during last week’s US $84b note and bond sale auctions. Trichet’s comment about the ‘unclear’ future of European economic growth has also added to global uncertainty and has given risk aversion trading strategies a boost.

Content is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Business Information & Services, Inc. or any of its affiliates, subsidiaries, officers or directors. If you would like to reproduce or redistribute any of the content found on MarketPulse, an award winning forex, commodities and global indices analysis and news site service produced by OANDA Business Information & Services, Inc., please access the RSS feed or contact us at info@marketpulse.com. Visit https://www.marketpulse.com/ to find out more about the beat of the global markets. © 2023 OANDA Business Information & Services Inc.