EURO going nowhere fast

With the US and UK holiday weekend, illiquid trading and month end-rebalancing has dominated this jaded market, who is acclimatizing itself to a Spanish credit downgrade and the potential of France to follow. The French budget minister admitted that it would be a ‘stretch’ for France to keep its AAA rating without some tough budget decisions, while German finance minister hinted at further tax hikes to address its deficit. With many of the EU countries trying to implement ‘austerity measures’ does not bode well for growth prospects in the region. The futures reports continue to show that record EUR shorts remain in place while commodity currency positions have been aggressively reduced over the past week. The market will try and focus on NFP for most of this week, however, surprises and rumors and not fundamentals are expected to remain the ‘new norm’.

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

US data on Friday was a ‘hit and a miss’ for most of the reports. Because of the month end re-balancing requirements, they managed to have a limited direct impact on Capital Markets. US consumer’s data actually disappointed. Spending was unexpectedly flat last month (0.0% vs. +0.6%) in nominal dollar terms, as the real volume terms adjusted for price swings. The print was on the heels of two consecutive months of healthy gains. Perhaps the high base effect led to the flat monthly print. Digging deeper, the headline price deflator for consumer expenditure showed no change last month. It seems that pricing powers remain absent in the US consumer sector as core-consumer prices (ex-food and energy) were only up +0.1% for a second consecutive month. In reality, retailers are dependant on volume, as margins remain tight because of the weak purchasing power effect going on. It was non-durables that mostly dragged the headline print down as durable items managed to hang in. Personal income rose (+0.4% m/m) on the back of wages and salaries improving and on government social insurance packages continuing to contribute. Digging deeper, private industry wages and salaries managed to advance (+0.5%). However, it was the dividend income print that accounted for most of the headline gain, especially after three months of declines. Combining the other sub-sectors with the net government social insurance effect managed to give us a stronger disposable income print, the strongest print in three months. Now if we combined the plus income side with the flat spending rate then we have a US savings rate jumping to +3.6% and well off the recent lows of +0.8%. Optimistically, we should be looking at increased consumption down the road.

Other data saw the US Michigan Consumer Sentiment index rise to 73.6 vs. 72.2 this month. Stronger evidence that the consumer, who accounts for 70% of the US economy, will help strengthen the recovery. Thus far, it seems that the European woes are having a limited effect on confidence. The US job growth that we have witnessed this year seems to be boosting consumer spending and allowing the recovery to broaden and become more sustainable. Capital markets expect another strong NFP print this Friday.

The USD$ is lower against the EUR +0.41%, GBP +0.57%, CHF +0.26% and higher against JPY -0.65%. The commodity currencies are stronger this morning, CAD +0.26% and AUD +0.54%. This is a big week for the loonie, BOC and Governor Carney. Will they be the first of the G7 members to break ranks and hike rates tomorrow? The CAD has aggressively backed up from its six-month lows printed earlier last week as concern eased that Europe’s debt turmoil will worsen. On a macro level, Canada’s economy is now growing strongly, driven by both domestic and US demand. With policy makers concerned about a potential bubble occurring in the housing market and a rising core-inflation only supports the case for normalizing rates. Will the BOC prefer to be cautious and wait until its July meeting to hike, because of the market turmoil? Currently, the futures market is pricing in an 85% chance that Carney will pull the trigger. On the other hand, if there is no hike, the market should expect some ‘hawkish’ rhetoric from policy makers. If this uncertain environment continues then the market will want to unwind some of the interest premium already priced into the currency, but, if commodities remain true, then intraday traders will be happy buyers of the currency on ‘any’ upticks.

The AUD rose in the O/N session, paring its biggest monthly drop in 12-months as Asian equities extended a global rally, boosting demand for higher-yielding growth assets. The AUD’s new found support has managed to print a one week high, as advancing regional bourses is convincing investors that ‘down under’ can withstand the pressures from a European debt fallout. Up until now, the currency had been heading for its worst performing month in nearly two-years as investors shied away from growth currencies. Plummeting equity markets in the region and potential war rhetoric from North Korea had pushed the currency lower against nearly all its major trading partners. So far this month the AUD has managed to slide -6.1%. AUD has also found favor vs. JPY, as investors sold the JPY against most of its trading partners after the SDP left a three-way coalition government over the weekend. Expect AUD gains to be limited as the market believes the RBA will remain on hold tomorrow (4.5%), as higher rates have slashed retail sales and mortgages. Speculators are better buyer on pull backs as longer term support levels remain intact (0.8574).

Crude is little changed in the O/N session ($74.45 up +48c). Crude prices happened to give up their earlier gains on Friday and ended the day little changed entering the long weekend. With reports showing that consumer spending stalled this month, a Spanish downgrade and heightened tensions in Korea are all ingredients that effect global growth and by default oil prices. Over the past three trading sessions oil has appreciated +5.5%, the most in nine month. On the flip side, the black stuff has fallen -16.5% from its month high print on May 3. Last week’s weekly EIA report had helped the ‘brief’ rallying equity market to drag crude prices away from the oversold lows on European fiscal issues. A report released from the US Energy Department showed that the total fuel demand gained +0.6% to +19.7m barrels a day and with stronger US data has the bulls breathing a sigh of relief. The weekly EIA report revealed a +2.5m barrel increase in oil inventories vs. an expected +100k gain. On the flip side, gas stocks fell -200k barrels vs. an expected no change. Distillate inventories (including heating oil and diesel), fell -300k vs. an expected increase of the same amount. Interestingly, stocks at Cushing fell -300k barrels, the first loss in two months. Refinery utilization was down -0.1% to 87.8% of capacity, matching forecasts. Finally fundamentals are starting to provide a difference to commodity prices and not just the dollar pricing. Lets see what these downgrades in Europe happen to shake out.

Gold again traded under pressure on Friday, falling the most in a week as investors raised cash to cover ‘this month’s slump in other markets’. With continued currency concerns and a market that on ‘pins and needles’ will probably boost a case for owning gold. Longer term investors have been using the commodity as a ‘currency of last resort’ in addition to their EUR denominated assets. The technical bulls believe that $1,400 is a possible one-year target. For now, the market is a better buyer on deeper pull backs ($1,2165).

The Nikkei closed at 9,768 up +6. The DAX index in Europe was at 5,969 up +23; the FTSE (UK) currently is 5,188 down -7 (closed). The early call for the open of key US indices is higher (closed). The US 10-year eased 6bp on Friday (3.29%) and is little changed in the O/N session. Treasury yield continue to fall this month, pushing the benchmark 10’s to its lowest print in 18-months on speculation that the EU efforts to contain Europe’s debt crisis will slow the global economic recovery. Again, the 2/10’s spread happened to narrow (+252bp) as equities continued their ‘plunging’ on Friday and with a stagnant consumer price report (see above) may shift the trading philosophy from inflation to deflation. Now that the market has absorbed all of last weeks issue’s with ease and that rates have backed up aggressively from the lows (+3.08%), dealers expect 10-year support at 3.35% to hold.

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