Look East for Dollar direction.

Greece forced the EU’s hand and they folded. Like a Cbank, lender of ‘last resort’, they are there. The Greeks get to issue their bond knowing that their backs are covered, somewhat. Now, we will get to see how warm the water is. They will be using the EU promise of an emergency fund as a ‘psychological crutch’ for the market. A confidence trick which S&P’s decided that it’s rating of Greek government debt would remain unaffected, despite a deal. Throughout all of this fiasco, a European confidence index of executive and consumer sentiment rose to 97.7, the highest print in almost two-years. Record long dollar positions have caused heightened volatility, specifically in illiquid times zones. Do not be surprised to see this continue, as the one directional lemming trade has become so ‘over-crowded’. This change of positioning, the upcoming Easter holidays and the US employment report this Friday (expectations are for a strong non-farm payroll number plus a Greek problem ‘solved’) are likely to trigger a ‘nervous’ consolidation. Expect further S/L squeezes that we witnessed on the Asian open to remain a strong possibility.

The US$ is mixed in the O/N trading session. Currently it is lower against 10 of the 16 most actively traded currencies in a ‘volatile and illiquid’ trading range.

The final US GDP print was revised lower on Friday and at the same time prices continue their upward trend. Prices are accelerating, with both headline and core-PCE revised higher once again, supporting other price reports that ‘pipeline pressure are beginning to mount’. Real-GDP growth was revised down from the previous estimate of +5.9% to +5.6%, mainly reflecting downward adjustments to residential construction and consumption. Real-PCE is now growing at an annual rate of +1.6% vs. the previous estimate of +1.7% and the original report in Jan. of a +2.0% rise. Real-final sales are now reported to have grown +1.7% and real final sales to domestic purchasers to have risen +1.4%, as expected and both down from the previous estimates. With the magnitude and composition of the revisions largely as expected, the data is expected to have no obvious implications for 1st Q growth, which analysts expect to see slowing to a +2-3%. Finally, the quarterly PCE price indexes were revised higher, with the all-items index now up +2.5% and the core measure up +1.8%, vs. gains of +2.3% and +1.6% in Feb.

The USD$ is lower against the EUR +0.13%, GBP +0.37% and higher against CHF -0.06 % and JPY -0.40%. The commodity currencies are stronger this morning, CAD +0.26% and AUD +0.87%. Last week the loonie happened to record its first weekly loss in a month. Perhaps, this is good news for the ‘longer’ term bulls. All week, we expected the one directional, oversaturated CAD trade to give up some ground. A healthy purge to relieve the weaker CAD long’s of their positions. This came in the form of the EUR finally finding some traction vs. the greenback on the back of the German-French, EU endorsed solution for Greece. Despite the loonie conceding its largest loss in over a month vs. its southern partner on Friday and an extension in the O/N session, the currency continues to outperform many of the G7 currencies. Governor Carney again has reiterated that rates will remain on hold through June. The loonie is hanging in tough, two weeks ago it was piggy-backing parity. The CAD continues to remain a good news story with stronger fundamentals. To date the USD rallies have been shallow and are met with strong resistance. Look east to Europe for direction and preferably buy CAD on dollar rallies.

The AUD found some positive momentum in the O/N session, first time in four-days, before the anticipated ‘stronger’ retail sales report on Wed. Stronger fundamentals is adding to speculation that the RBA will increase borrowing costs again next month after Governor Stevens’ comments yesterday. Futures traders are pricing in a 50% chance of a 25bp rate increase (4.00%) when the RBA next meet on April 6th to contain inflation. The RBA rhetoric is providing the 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’. Continue to expect better buying on deeper pull backs (0.9133).

Crude is higher in the O/N session ($80.63 up +17c). Crude prices on Friday did not stray far from home. The commodity prices remain questionable after last week’s EIA report showing a bigger than forecasted increase in inventories. The EUR has clawed its way higher on ‘the’ EU Greek deficit solution. However, crude is managing to maintain its price fragility. As we all know, a strong dollar curbs investor’s enthusiasm to own commodities. Last week, crude stocks increased four-fold, rising +7.25m barrels. 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, the highest print in 6-months. On the flip side, gas stocks fell -2.72m 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 is somewhat optimistic, while fundamentally, weak demand has us not so. A strong greenback remains the commodities biggest opponent. Capital markets anticipate another build of inventories this week which should provide some further resistance to prices.

Gold prices remain contained in a tight trading range, albeit somewhat volatile. The dollar continues to cause havoc with gold technical’s and fundamentals. The surging buck, or weaker EUR, until Friday, has curbed demand for the ‘yellow metal’ as an alternative investment vehicle. On macro term, ‘the underlying problems of the heavily indebted euro zone economies are overshadowing everything at the moment and weighing heavily on the single currency’. Fundamentally it’s expected that the commodity will find some traction 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 appearing just yet. 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. The dollar’s direction remains the strongest indicator to wanting the metal or not ($1,111).

The Nikkei closed at 10,986 down -10. The DAX index in Europe was at 6,157 up +38; the FTSE (UK) currently is 5,722 up +20. The early call for the open of key US indices is higher. The US 10-year backed up 1bp on Friday (3.87%) and is little changed in the O/N session. Treasury prices had a rough go of it last week with supply managing to push yields to a record three month high. A lower than average demand for $118b’ worth of product raised concern that investor interest is declining as the US deficit climbs to a record. Are we in the midst of a failed US auction? Is China quietly protesting their displeasure at foreign involvement in their ‘own’ valuing of the currency? Technically and fundamentally, supply and the realization that there are more issues to come are starting to continuously weigh on Treasuries. The US marketable debt has risen to a record $7.4t, as the Obama administration borrows to sustain the US economic expansion.

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