EUR squeeze not policy induced running flat

It feels like an old fashion short squeeze. Yes, we did see the EUR advance in early May from a low of 1.2529 to a temporary high of 1.3109, albeit short lived. It was a detailed bail-out package induced spike. The ‘World Cup’ squeeze has not been policy or spread induced, just plain old s/l and option related gains. Short squeezes eventually run out of steam and this morning’s daily rumor of Spanish credit lines being put in place, not new, has managed to push the EUR lower and redirect focus back to debt crisis issues. Many believe that the ongoing asset allocation shift away from the Euro-zone has further to go and by the end of the 3rd Q we will witness fresh EUR lows. This is very much a possibility, even sooner perhaps, as this EUR squeeze seems to be running on ‘near’ empty.

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

US data yesterday was mixed and the dollar received a thumb’s down from capital markets. The Empire State June business conditions index increased to 19.57 from 19.11 last month. The print is stable and stability is good for the market. The upward trajectory signals that factories are weathering the turmoil in financial markets and driving the economic recovery. Technically, the US has seen no signs of a spillover from Europe thus far. Economists are expecting the manufacturing sector to ‘boost the US economy and in the process increase hiring’. Even though the need to restock inventories may be less pressing in the coming months, household spending and exports will be expected to fuel production. All being equal, that’s the utopia scenario, however, digging deeper into the report, the employment index weakened (supporting this months overall NFP print), retreating to12.35 from 22.37, m/m. The workweek index jumped to 8.64 from last month’s flat reading, which suggests that employers are choosing to work their employees longer rather than hire new staff. Year-to-date factories have added +126k new workers to payrolls, last month alone they added +29k to the payroll for a fifth consecutive gain. Manufactures make up +12% of the US economy.

The TICS report on foreign capital flow revealed net buying of $83b in long term US securities in April (backward looking). Market reaction can only be muted on this release, despite the previous month’s print of a revised $140.5b. It’s worth noting that the final numbers exclude transactions that do not occur on the open market.

Finally, a surprise to the market was yesterday’s US Homebuilders Confidence plummeting (17 vs. 22). It has returned back to last winters levels before the temporary home buyers’ tax incentives. Analysts believe that the details suggest that worse is yet to come. The headline pint is also seasonally adjusted. The traffic through ‘model’ homes slipped this month, which seems to support the declining mortgage purchase applications theory. This will eventually have a direct impact on new home sales and housing starts numbers. All of the sub-components that make up the index experienced declines (present sales conditions, sales expectations etc).

The USD$ is higher against the EUR -0.48%, GBP -0.30%, CHF -0.10% and JPY -0.33%. The commodity currencies are weaker this morning, CAD -0.36% and AUD -0.36%. Canadian data did not aid the loonie in its rise yesterday per se, that was left to the EUR directly. The manufacturing sales print (+0.2% vs. +1.4%, m/m) is expected to be a drag on April’s GDP. In retrospect, the details are the exact opposite to the export numbers recorded last week. Dollar sales climbed while the volume of manufacturing shipments fell. A lower volume will translate into a negative impact on GDP. How much of an impact? The market believes that there is sufficient underlying strength to negate the drag. This should not influence Governor Carney. Other data showed that Canadian productivity advanced less than expected (+0.7% vs. +1.2%). What will the World Cup do to Global productivity numbers? In Canada, the productivity slow down was due to a large gain in hours (+1.1% vs. +0.4% in the 4th Q), a plus for incomes and a negative for profits. That being said, the loonie remains somewhat coveted. Investors and dealers are quietly increasing their bets that economic growth will eventually fuel demand for commodities. The CAD is holding its own after the BOC’s rate hike and somewhat muted and directionless communiqué earlier this month. It remains the world’s second best performer (+13.0%) vs. its southern neighbor after the JPY. Using the loonie as a safer way to play an economic recovery in the US with linkage to commodities and less banking or fiscal noise has speculators better buyers of the currency on dollar rallies.

The AUD retreated from one month highs in the O/N session after regional equities pared gains after a strong start. Earlier this week, comments from the RBA, who said that Europe’s debt crisis would ‘inevitably weigh’ on global growth, is fueling speculation that the Cbank may keep rates unchanged until at least the end of the year. It seems that that ‘previous rate rises has given them flexibility to leave borrowing costs unchanged at this month’s meeting’. With Asian bourses back peddling from its highs on concerns that the world economy may falter is affecting growth currencies. Last week, stronger domestic fundamentals aided the currency. Employment data added +26.9k new jobs vs. an expected +20k. It was the third consecutive month of job gains, emphasizing the RBA’s call that that economic growth will accelerate this year. This pushed dealers into increasing their bets that Governor Stevens will resume the country’s most aggressive round of monetary tightening. So far, it seems that the crisis in Europe has not had a material impact on the Australian economy. Let’s see how the Spanish rumors play out this morning. Technically, the market continues to want to buy AUD on dips (0.8625).

Crude is lower in the O/N session ($76.72 down -22c). Crude prices happened to record an intraday month high print yesterday as the EUR remained somewhat stoic in its advance coupled with speculation that the weekly inventory reports will show a build up in demand today. This morning’s EIA report is anticipated to reveal the third consecutive drawdown on stocks. The market again seems to be embracing fundamentals. Equities and a weaker dollar have been pulling a jaded commodity market higher. Overall it’s a ‘sentiment-driven rally driven by bargain-hunting by investors’. Positive global expansion reports have aided this asset class over the past five-trading sessions. Last week’s EIA report has also contributed to the underlying bid to the market. The report revealed that oil inventories fell for a second straight week, easing worries about excessive domestic supply. Crude stocks fell -1.8m barrels, more than double the streets estimate of a -700k decline. It’s worth noting that the decline in inventory was not accompanied by a clear decline in demand. The US demand was at +19.376m bpd, down -3.2%, or 645k barrels w/w. On the flipside, gas inventories were expected to fall -400k bpd were little changed, down by just -8k barrels, to +218.9m. Distillates stocks (including diesel and heating oil) increased by +1.8m barrels, about six times the expected increase. Refineries lifted operations relative to capacity to 89.1% from 87.5% last week (the highest rate in two years). It’s all about demand and as long as there is a perception of stronger demand then pull back is to be bought.

Gold has been one of the most difficult of asset classes to trade of late. Even with global bourses advancing, there is an appetite for the commodity. Technically the ‘yellow metal’ is trading with a greater consideration of its safe heaven status. Pull backs are being supported by doubts of sustainable global growth and by the technicals indicators showing that the metal wants to test higher. The metal remains well sought after as commodity prices are finding it difficult to break down, which is, by default, technically encouraging individuals to want to own it for hedging purposes. It’s worth noting that the ‘yellow metal’ has outperformed equities, FI and other commodities this year because of the European Sovereign debt crisis. Gold has gained +12% as the EUR plunged -14%. Generally, it has become the benefactor when all other currencies fail. Year-to-date, Europeans have been content in using the commodity as a hedge against their European holdings, believing that the EUR has not bottomed out just yet. For now, buyers are waiting in the wings to purchase product on pull backs ($1,237 +300c).

The Nikkei closed at 10,067 up +179. The DAX index in Europe was at 6,185 up +11; the FTSE (UK) currently is 5,228 up +11. The early call for the open of key US indices is lower. The US 10-year backed up 4bp yesterday (3.29%) and is little changed in the O/N session. Lack of new evidence affecting growth had the FI market trading under pressure. Speculation that the global economy will weather the Europe’s sovereign-debt crisis is questioning the demand for the safest assets. It seems that investors are ‘gradually shifting attention back to economic fundamentals, which are signaling continued improvement’. Will this pressurize Treasuries? The benchmarks 10’s sit close to strong yield resistance levels. Some investors do not get the sense that the ‘US economy’s momentum is being built upon, at least according to what the Fed is looking at’ should provide some sort of bid on deeper pullbacks. Various analysts foresee 10’s ending the second quarter at 3.45%. The flipside to this scenario is that the record-low inflation and prolonged unemployment worries means that the Fed will hold off on raising interest well into next year. For now risk-on has been dominating intraday action. The 10-year yield resistance is now at 3.30-32%.

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