US and China to control ‘their’ EURO

The round-table internal bickering officially began yesterday. It’s not surprising that it was the EU members verses the independent ECB, and not amongst themselves. Sarkozy had already bowed to Merkel’s desires. It was Trichet who was heading for a collision with European political leaders. He favors a European solution, not outsiders, ‘if the IMF or any other authority exercises any responsibility instead of the Euro-group, this would clearly be very, very bad’. After some arm twisting, the EU members have convinced Trichet to endorse the plan, toning down his opposition to the IMF. Under a French-German accord, each euro-region country would provide non-subsidized loans to Greece. Europe would provide the largest percentage of loans and the IMF the rest, but only when ‘Greece runs out of options’. What about Portugal’s options? What of Italy’s, Ireland’s and Spain’s options? Leaders should not be influenced by their own domestic political survival, but rather on a solution for all involved rather than concentrating on an isolated member. This ‘new agreed’ plan is managing to ease concerns that ‘the nation’s debt crisis will spread and derail the global recovery’. How long will this last? All of a sudden, The European decision making process has gone ‘Global’.

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 ‘whippy’ trading range.

Finally, US jobless claims seem to be back on target to achieve that psychological sub +400k print. Yesterday, initial jobless claims (+442k vs. +457k) were better than expected for both the current and revisions which happened to be greatly influenced by the adverse weather conditions that we have witnessed thus far this year. Analysts note that we are again encroaching on the Dec. and early Jan. low prints before the backlog of pre-holiday claims. Extended (+139k) and emergency claims (+5.56m) also fell by -16k and -330k respectively. It’s worth noting that these figures are not seasonally adjusted, unlike both the initial and continuing prints (+4.64m), due to their short history. They tend to lag initial claims by two-weeks and continuing claims by one-week.

It was only a matter of time. Trichet said his policy makers will leave emergency collateral rules in place into 2011, a reversal of his stance in Jan. when he said the ECB would not change its collateral policy ‘for the sake of any particular country’. If he had reversed his policy back to the pre-crisis rules, any downgrade by Moody’s and Co., would have meant that financial institutions could not use Greek government bonds when borrowing from the ECB.

The USD$ is lower against the EUR +0.510%, GBP +0.05%, CHF +0.33 % and JPY +0.06%. The commodity currencies are stronger this morning, CAD +0.31% and AUD +0.22%. The loonie is going no where fast, despite higher commodity prices and a Governor signaling that he is open to increasing interest rates as soon as June, as inflation and growth outpace their ‘own’ forecasts. The currency is constantly outperforming many of the G7 members. All week the loonie has hung in tough, this time last week the currency was piggy-backing parity. The CAD continues to remain a good news story with stronger fundamentals continually trying to push the loonie higher. Its equities and commodities that have temporarily stalled this one directional over saturated play. A healthy purge of weak long CAD positions has the loonie bulls adding to their positions. To date the USD rallies have been shallow and continued to be met with strong resistance. We will however experience ‘one wild and crazy’ trading sessions where technicals and fundamentals do not make sense. Despite the trend remaining your friend, the market should be looking for better levels to own the domestic currency.

For a second consecutive day, the AUD found some momentum in the O/N session after experiencing its biggest drop in two-months earlier this week. Again, RBA rhetoric provided the largest support, reiterating that the benchmark borrowing costs need to climb toward ‘normal levels’ to contain inflation. The policy member’s comments reinforce the fact that the Australian ‘is in a strong position economically and there continues to be inflationary price movements’. Another variable supporting the currency has been China, it has aided the currency to advance on speculation they may allow a revaluation of the Yuan, helping to curb rising price pressures and ensure long-term growth. The current AUD direction, like all growth currencies, depends on European factors. Now that the Greek deficit woes seemed to be curtailed by EU and IMF involvement, investors risk appetite should help to push commodity currencies higher. Expectations for low interest rates in the US and Japan will fuel risk appetite. The market expects the RBA to hike with a ‘gradual approach’. Continue to expect better buying on deeper pull backs (0.9062).

Crude is higher in the O/N session ($80.92 up +39c). Crude prices are little changed, despite commodities getting a shot in the arm. Prices have remained close to home after the EIA report reveled a bigger than forecasted increase in inventories. Earlier this week we witnessed crude stocks increasing four-fold, rising +7.25m barrels to +351.3m w/w. The market was only expecting an increase of +1.65m barrels. Compounding the net effect, imports of the ‘black-stuff’ gained +12% to +9.4m barrels last week, the highest print in 6-months. On the flip side, gas stocks fell -2.72m barrels to +224.6m vs. an estimated drop of only -1.5m barrels. Not to be outdone, distillate fuel (heating oil and diesel) declined -2.42m barrels to +145.7m. A decrease of -985k barrels was forecasted. The four-week US demand average was +19.36m barrels a day, up +3.6% y/y, while gas consumption averaged +8.95m barrels, up +1.2%. Finally, refineries are operating at +81.1% of capacity, up +0.6% w/w. On the face of it, there is plenty of spare capacity available for when demand picks up. There is heightening concerns for sustainable global growth, especially with Europe remaining under the microscope. Technically the market remains optimistic, while fundamentally weak demand has us not so. A strong greenback is commodities biggest opponent.

After struggling all week, gold managed to find some traction and tentatively advance as the EUR firmed vs. the dollar. Over the last four-trading sessions the yellow metal managed to fall to a six-week low as the EUR plummeted -1.6% vs. the greenback. It seems that a stronger buck has curbed demand for the ‘yellow metal’ as an alternative investment vehicle. All week the commodity has found it difficult to find or maintain any traction and has been curtailed to a tight volatile trading range. Fundamentally it’s expected that the commodity will find support as investors seek an alternative to an ‘on going weakening’ of the EUR and low interest rates. However, the market is seeing little evidence of that demand, perhaps further weakness needs to be witnessed before that scenario plays out. What about the IMF? Will they require selling gold to finance a Greek bailout? The commodities highs are getting lower and suggest that further weakness is warranted in the short term. Year-to-date, support remains at $1,075-80, but looks vulnerable. The dollar’s direction remains the strongest indicator to wanting the metal or not ($1,098).

The Nikkei closed at 10,996 up +167. The DAX index in Europe was at 6,110 down -22; the FTSE (UK) currently is 5,705 down -23. The early call for the open of key US indices is higher. The US 10-year backed up 5bp yesterday (3.85%) and is little changed in the O/N session. All this week’s supply and the fear for sovereign debt have been able to push momentum towards higher yields along the curve. Yesterday’s 7-year auction was poorly received. Yields on the 7-year note came in at +3.374%, above the +3.33% yield on the WI’s, technically the government was made to pay up to offload product. Bid-to-cover was 2.61, below the 2.98 Feb print and under the four-auction average of 2.83. Indirect bidders took down 42% of supply, better than the 40.3% last month, but well below the four-auction average of 49.7%. Again, yesterday’s issues were all about ‘uncertainty and liquidity, rather than levels’.

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