Can the EUR survive?

European leaders rejected the pleas from a collective Eastern Europe for a bail out this weekend, but decided to hear a case by case basis. Also, GM’s European units will have to look towards their own national government for help. Similar to the US, the worst economic crisis in 50-years is devastating Eastern Europe and putting the financial institutions in Ireland under severe threat. Mainland Europe is being squeezed by its most Eastern and Western members. Can the European Union survive? Can the fledgling EUR currency exist with such diverse cultures domestically under threat? Eastern Europe worries about covert protectionism, they fear for their survival, while the West believes help needs to be channeled through international agencies like the IMF. All this has the ingredients for a summer of discontent where cultural and social unrest rears its ugly head.

The US$ is stronger in the O/N trading session. Currently it is higher against 14 of the 16 most actively traded currencies, in another ‘whippy’ trading range.

A record negative US GDP number on Friday continues to drive investors towards risk aversion trading strategies and this morning is no different. Currently there is not a shred of optimism that points to anything changing in the short term. Even the Oracle of Omaha believes this year is a shambles, but, we will recover, he does not know when but eventually as our capital system requires that. But, have not all the rules changed? I read a piece the morning where option investors are paying double the insurance premiums for equity losses in the US until 2011. This suggests another 2-year’s of a bear market; the ‘common man’ does not seem to be buying into policy maker’s time scale. Nothing is too big to fail, that includes CITI and AIG, the latter is expected to get another $30b in new capital and have debts to the US forgiven in the firm’s 3rd-bailout. Next we will realize that the Auto maker’s sales numbers will be so low that it will finally convince policy makers that it’s near to impossible to save this industry. Europe is even telling them to go home!

The US$ currently is higher against the EUR -0.53%, GBP -0.77%, CHF -0.41% and lower against JPY +0.46%. The commodity currencies are weaker this morning, CAD -0.32% and AUD -0.50%. The loonie like most of the G7 currencies was not capable in escaping the advance of the USD$ on Friday. The CAD$ managed to print a new monthly low capping off a volatile week for the commodity currency where it retreated just under 2% vs. its largest trading partner down south. Risk aversion trading strategies favored the ‘buck’ and a rapidly deteriorating Canadian economy does not help the loonies’ plight in the medium term. Month end fixing requirements saw a natural demand for USD to balance certain portfolios. Do not be surprised to see a temporary pull back early this week which should provide favorable opportunities to shorten the CAD once again. Dismal Canadian fundamental provide further proof for Governor Carney at the BOC to justify slashing rates another 50 bps tomorrow (1%). All we need is to see a consistent rally in stocks to get investors interested in ‘risk trades’ once again. For now look to buy USD on pull backs.

The AUD along with the neighboring NZD remains under pressure like most other commodity based currencies vs. the greenback as equity markets remain under pressure. It also fell after three of the nation’s four biggest banks had their ratings outlook cut to negative by Moody’s as the economy slows and bad debts grew. It seems to be a familiar global theme nowadays. For now, look for better levels to sell the higher yielding currencies (0.6350).

Crude is lower O/N ($43.48 down -128c). The fear of a deeper recession managed to halt the 3-day advance of crude on Friday and continues with a vengeance this morning. The disappointing GDP numbers (-6.2%, 4th Q 2008) provides further evidence that the US economy is contracting faster than originally anticipated. Couple this with the strength of the greenback of late; it has reduced the appeal of commodities as an alternative investment. The USD$ managed to print a 3-year high against six of its major trading partners on Friday. The black-stuff peaked at a 1-month high after last weeks EIA report showed that US gas inventories fell as demand strengthened and refineries cut operating rates. Inventories plummeted – 3.32m barrels to +215.3m last week. More importantly consumption averaged +9m barrels a day over the last month, that’s up +1.7% y/y. Refineries operated at 81.4% of capacity, down -0.9% w/w. Analysts also noted that many refineries had been shutting units for maintenance as demand slackened. Historically oil companies often shut refinery units for maintenance in the first 2-months of the year as attention shifts away from heating oil and before gas use rises. The market is now trying to anticipate the future outcome of the scheduled OPEC meeting on Mar. 15th. Last year they cut production 3-times and already this year they cut output -3.8% to +25.3m barrels a day in Feb. The market wonders if they will make additional cuts at these levels. However, it’s expected that commodity market will come under greater downward pressure as we become exposed to more bad economic news, further evidence of plentiful supply and spare production capacity. The issue with OPEC is that the have to maintain a fine balancing act, if economies start to grow, they cannot be in a situation where they could stifle any potential growth with their cut in production quotas (they represent 40% of global supply). Gold remains on the back foot and managed to record its first losing week in three as the strength of the greenback eroded the appeal of the ‘yellow metal’ as an alternative investment ($954). But, these levels certainly provide a good opportunity to own a safer heaven asset.

The Nikkei closed 7,280 down -288. The DAX index in Europe was at 3,749 down -94; the FTSE (UK) currently is 3,701 down -128. The early call for the open of key US indices is lower. The 10-year Treasury yields backed up another 2bp on Friday (3.01%) and have eased 4bp in the O/N session (2.97%). Investors continue to speculate that the US government will need to accelerate the pace of its borrowing to revive their faltering economy. Last week we witnessed an historical $94b of new government issues. Expect the supply conundrum to weigh heavily further out the curve for the medium term as the amount of spending earmarked from Washington will only push the FI prices much lower!

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