EURO condemned and not just to a tight trading range

We were so close to changing the record after Friday’s US data. However, again we are doomed to listen to the same issues driving Capital Markets this morning. Chinese Premier Wen said he ‘opposes countries pointing fingers at each other and even forcing a country to appreciate its currency’. The US should be ‘reassuring investors about the safety of dollar assets’ as China keeps the Yuan ‘basically stable and maintain a moderately loose monetary policy and a proactive fiscal stance’. There is speculation that China will be tightening its own monetary stance. An EU’s finance ministers meeting has raised market hopes that they will agree on a way to provide help to Greece. Worst case scenario, expect them to ‘reiterate their support for Greece and highlight the positive momentum in Greece’s fiscal consolidation’.

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

Fridays’ US data provided a mixed message. Headline US Sales numbers were strong, however, both the revisions and the UoM sentiment print rear-ended all positive thinking. Despite this, other factors are dominating the markets and condemning us once again to this dreary trading range.
Not for the first time, rating agency’s rhetoric state that the US and UK are moving closer to losing their AAA debt ratings. Moody’s said the two nations must balance, bringing down their debt burdens, while not damaging growth. For instance, the US is projected to spend more on debt servicing this year than any other sovereign, except the U.K. That will be +7% of revenue, climbing to +11% in two years. Financing costs above +10% push countries out of the AAA band, and into a ‘debt reversibility band’. Raise the taxes, cut the spending!

The USD$ is higher against the EUR -0.30%, GBP -0.29%, CHF -0.26% and weaker against the JPY +0.04%. The commodity currencies are weaker this morning, CAD -0.01% and AUD -0.54%. The loonie is ‘piggy-backing’ on parity after Friday strong Canadian employment numbers (+21k). Traders are now betting that the BOC will be hiking sooner rather than later. Last week’s surprisingly strong fundamental data will potentially put ‘upward’ pressure on core-inflation. Firstly, there was a rise in new house prices (+0.4%), and secondly, a faster than expected pace of industrial capacity’ (70.9% vs. +70%). This is strong proof that Canada is moving away from an emergency rate setting (+0.25%). Trader’s opinions vary on the timing of a hike, consensus is probably July. However, both June and Sept. cannot be ignored. The BOC will certainly have its work cut out. All along they have been vocal on a stronger loonie effect on sustainable growth. Surely, with the currency flirting with parity, its value is doing a hiking job? Despite the trend remaining your friend. The market should be expecting better levels to own the domestic currency after last night’s currency moves. Record IMM long growth currency positions and softer commodity prices should be put a temporary ‘spoke in the wheel’.

Rating agencies questioning the stability of various sovereign debt coupled with trader speculation that China may want to implement monetary tightening measures has pressurized higher yielding growth currencies in the O/N session like the AUD. The currency managed to retreat from its two-month high. Demand for the Australian currency has also lost traction on concerns that the global economy has not recovered enough to let RBA to raise interest rates again. Of late, robust Chinese export numbers have had investors demanding higher yielding growth currencies. 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%. The market expects the RBA to hike with a ‘gradual approach’. Continue to expect better buying on deeper pull backs (0.9130).

Crude is lower in the O/N session ($81.10 down -27c). Crude managed to give up some of last weeks gains on Friday as a report showed that confidence among US consumers unexpectedly dropped this month. At one point, oil fell just under 2%. Speculation that China may need to implement various exit strategies after recording the highest inflation rates in 16-month tried earlier in the week to pressurize prices. However, last week’s EIA reports supported the ‘bull’ story. The weekly report showed a decline in supplies of gas and distillate fuels. Gas stocks dropped -2.96m barrels to +229m vs. an expected ‘little change’ scenario. Distillate supplies (heating oil and diesel) decreased -2.22m barrels to +149.6m. It was expected that stockpiles were to fall by only -1m barrels. On the flip side, crude inventories rose +1.43m barrels to +343m vs. an expected climb of +2m barrels. There was even an OPEC report stating that member states will need to produce more oil than previously estimated. It’s expected that the members need to be pumping +28.94m barrels a day to satisfy this years global demand. That’s an increase of +190k barrels a day over last year’s projections. OPEC meets later this week to decide production quotas. Already member representatives say that ‘no new decision’ about production levels is expected at the meeting as ‘projected demand levels are still much less than OPEC’s current production’. This scenario will increase stockpiles. A belief that the economic situation will not get much worse should support commodities on deeper pull-backs.

All last week the ‘yellow metal’ struggled. It managed to print new weekly lows again on Friday as the dollar tries to maintain its buoyancy vs. the EUR, thus, reducing the demand for the metal as an alternative asset. Speculation of tightening monetary policies in China has heaped pressure on the commodity. Currently, it’s all about the performance of the dollar, any signs of weakness and we will have buyers happily entering the market. Until then, the bulls are the unlucky investors. Close to current levels, EU sovereign debt concerns have had investors seeking some sort of portfolio surety back in Feb. Will we see the same interest at these lower levels ($1,105) or have all the buyers fled?

The Nikkei closed at 10,751 up +3. The DAX index in Europe was at 5,941 down -3; the FTSE (UK) currently is 5,617 down -8. The early call for the open of key US indices is lower. The US 10-year eased 2bp on Friday (3.71%) and is little changed in the O/N session. Prices remained close to home as mixed readings on ‘consumer’ data raised doubts over the pace over the economic recovery ahead of this weeks Fed policy meeting. Initially, a stronger than expected US Sales print had the FI asset class under pressure, however, weaker consumer sentiment reclaimed all the initial losses and then-some. The short end of the curve has been better bid despite the plethora of product last week. Rumors of financial aid for Greece could see yields back up, and narrow the 2/10’s spread. The longer end of the curve is been aided by Fed rhetoric stating that ‘low interest rates are likely to be needed for some time, as high unemployment lingers and inflation stays below target’.

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