A EUR trend not correction

Equities have been the ‘flavor du jour’ of asset classes. Stronger US housing and vehicle data has influenced the investor to end the miserable six week slump witnessed in global bourses. Are they capable of have multiple winning days this week? The weekly US claims and employment data may vindicate this rally. With the Nikkei recording it best one day gain in six months (more PM’s should resign) has also provided a bid tone to commodity prices and growth currencies. Perhaps over analyzing European debt concerns, the market neglected somewhat, the fact that some economies are actually recovering. Investors will be hoping that NFP will back up their actions. Currently, consensus is looking for a +500-600k print tomorrow. The trend remains the market friend and not a correction. Analysts anticipate that the over weighted speculative short EUR position will not be truly challenged until we are north of 1.2700.

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 ‘whippy’ trading range.

Currency market reaction from US Pending home sales data yesterday was rather tame at announcement, however equities liked it. The index rose +6.0%, beating market expectations and followed a positive revision for Mar. (+7.1% vs. +5.3%). On the flip side, plunging mortgage applications is strong evidence that the future prints are expected to soften in the short term on the back of government assistance expiring. Analysts do not expect the decline in 30-year fixed mortgage yields over the past month to be significant enough to offset the impact of withdrawing the stimulus. There are two reasons that paint an ugly picture again for the US housing market. Firstly, the extent to which housing incentives have brought forward demand is a reason why the market can expect some renewed downward movement. Secondly, there is a mystique around the shadow housing inventories. Banks face increasing pressure to conform for capital adequacy and liquidity reasons and by default this should bring forth their own sidelined supplies. These two reasons again could lead to house prices easing again in the future.

April’s drop in Euro-Zone retail sales (-1.2%) confirms the weakness of the consumer sector even before fiscal tightening has really kicked in. Despite Germany this week revealing a +1% increase, most of offset came noticeably from Spain and periphery members. The monthly sales data are volatile, and not a strong indicator for total household spending. However, that been said, it gives us a spending pattern idea and an insight into the consumer psyche. With regional wage growth dropping, higher unemployment and aggressive fiscal tightening is sure to be a ‘drag on household disposable incomes’ going forward.

The USD$ is lower against the EUR +0.40%, GBP +0.22%, CHF +0.18% and higher against JPY -0.40%. The commodity currencies are stronger this morning, CAD +0.16% and AUD +0.91%. The BOC raised its key overnight rate by +0.25% earlier this week, making Canada the first G7 country to see a rate hike. Their actions have kept markets guessing on its next move. The tone of the statement suggests that this is not necessarily the ‘first step on a long march towards a normalization of interest rates’. This is probably the best move for Governor Carney under current market uncertainties, and signals a fairly ‘neutral bias’ that keeps the BOC’s options open going forward. The loonie has found some bids, as the market is seen using the CAD as a safer way to play an economic recovery in the US with linkage to commodities and less banking or fiscal noise to be concerned about. We are back to risk on and off again and commodity prices dominating the loonies short term direction. One should expect the currency to be well contained ahead of the North American employment numbers tomorrow. The market remains biased to owning the CAD on a ‘big’ dollar rally.

The AUD impressively rallied for a second consecutive day as stronger data out of the US again revived demand for higher yielding growth assets. Also helping the currency’s cause was their own trade data surprisingly recording a surplus (+0.13b vs. -2.0b) with exports increasing +11%. Asian bourses chipped in providing an AUD bid after climbing to a six-month high on the back of strong US housing data yesterday. Some investors are beginning to bet that the RBA will resume raising rates in the coming months after pausing earlier this week and this despite policy makers have signaled that it may keep borrowing costs steady in the coming months as it assesses the impact of the most aggressive rate hike amongst the G20 members. So far it seems that the crisis in Europe has not had a material impact on the Australian economy. Depending on equities and commodities, some investors are looking to buy AUD on pull backs, most are content to see today’s claims and tomorrows NFP headline (0.8499).

Crude is stronger in the O/N session ($73.91 up +105c). Crude prices have whipped around on the positive and negative side in a tight range despite equities rallying after US pending home sales topped economists’ estimates. This week’s three losing trading sessions have been a product of contrasting Chinese PMI numbers and US ISM data encouraging speculators to seek value. The fear is that China’s economy is about to stall has become a thorn in the side for the bulls. Weaker European data is showing that European growth is questionable and US data last week revealed that consumer spending stalled last month. Last week’s EIA report had helped the market to drag crude prices away from the initial oversold lows on European fiscal issues. Today, because of the holiday shortened week, we get to see the weekly inventory reports. Last week, the EIA report revealed a +2.5m barrel increase in stocks 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. Fundamentals are starting to provide a difference to commodity prices and not just the dollar pricing. Technicals are showing that the market is currently overbought short term. Sellers remain on upticks as the market becomes apprehensive about tomorrows NFP report.

Because of gold rallying to a two week high and North American bourses in the black had speculators booking some profits yesterday. All week the ‘yellow metal’ had been in demand as an alternative to the EUR. But, after the O/N session move in global equities into the black, there is a natural demand for commodities. The threat to global growth from Europe’s debt crisis and plummeting global bourses had increased the demand for the commodity as a haven on pull backs. With continued currency concerns is only boosting a case for owning the yellow metal. Europeans are content in using the commodity as some sort of hedge against their European holdings, believing that the EUR will just keep on going lower. GSNY has a month-end target print of 1.1700. Also lending support is India, who’s gold import numbers have been stronger than the markets been calculating (+$6.9b vs. +0.71b, y/y) and surpassing China as the world’s largest user of the commodity. For now, the market is a better buyer on deeper pull backs ($1,224).

The Nikkei closed at 9,914 up +310. The DAX index in Europe was at 6,101 up +120; the FTSE (UK) currently is 5,258 up +106. The early call for the open of key US indices is higher. The US 10-year backed up 5bp yesterday (3.31%) and another 6bp in the O/N session (3.38%). Over all, treasury yields remain under pressure, and contained in a 10bp range ahead of NFP this Friday. Despite stronger US Home sales data paring their initial rally yesterday morning, it’s expected that the EU efforts to contain Europe’s debt crisis and slow the global economic recovery will have investors wanting to own some of the asset class on deeper pull backs. Today we get the 3’s, 10’s and long-bond funding schedule for next week. Do not be surprised to see dealers making room for product backed by the overall strong US data. For now, yield support remains intact and dealers are better buyers of debt on pull backs as long as 3.40% in ten’s hold. Tomorrow’s NFP may change their minds.

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