EURO Black Friday for the peripheries

It is difficult to have a strong conviction in a thin market, movements tend to be over exaggerated with a heard mentality, unless you are winning of course. Bundesbank President Weber did his bit yesterday, and tried to drag the EUR higher, stating that the currency was not in danger, Spain was highly unlikely to need Euro-zone aid and that the EFSF may always be increased. It must be difficult to contradict you boss, especially when she is Chancellor. The rules state that the Bundesbank and the ECB should be impartial and independent. Who has more clout, Merkel, Weber or Trichet? Who are they kidding, it’s the PBOC. It’s anticipated ‘meaning measures’ to assist peripheral markets may be announced this weekend. So what? It’s the political opposition to such measures that is the currency’s problem.

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

Just when we thought we could end the week on a quieter note. Black Friday is turning into a Black Friday for the Euro periphery countries. The EUR again has succumbed to heavy selling this morning as reports suggest that the ECB and other Euro members are pressuring Portugal to apply for financial assistance. Not helping the situation is the periphery bond spreads ballooning to new record highs. It seems by pressurizing the Portuguese government, the ECB and countries in the currency union aim to avoid a bailout of Spain. The market has no confidence in papering over the cracks.

On a side note, it is interesting that the market is not talking more about the Chinese and Russian officials agreeing to use their own currencies in bilateral trading instead of the dollar. The dollar, the ‘world’s’ reserve currency, had been used by both countries until now in most of their bilateral trade.

The USD$ is higher against the EUR -0.83%, GBP -0.49%, CHF -0.14% and JPY -0.30%. The commodity currencies are weaker this morning, CAD -1.00% and AUD -1.63%. The loonie was about to win the gold medal for being the best performer this week amongst the majors after encroaching on its eight month highs yesterday, achieved on speculation that Governor Carney will have to step up to the plate sooner rather than later to tighten monetary policy as growth accelerates. In a holiday shortened trading week in North America, the loonies move tend to be exaggerated as Canadian Banks only have themselves to deal amongst. Earlier this week, the currency had been subjected to the flight to quality trading activity and the demand for the traditional historical reserve currencies, the dollar and yen. After yesterday’s parity trading tease we are back to reality and embracing risk-aversion strategies again. Data this week showing that inflation accelerated last month and retail sales rose in September temporarily teased the market as we waited for new contagion fears. Investors and dealers believe that the inflation headline print warrants bringing the BOC back to the table, at least in the first quarter of next year. Even the Russians who continue to add the loonie to their reserves will get better levels to increase their position on European concerns.

China again has entered the fray and being Australia’s largest trading partner, any threat of tightening monetary policy tends to affect Australasian currencies. The AUD has fallen against all its trading partners after the PBOC said earlier this week that it will strengthen liquidity management and ‘normalize’ monetary conditions, damping demand for higher-yielding currencies. With China concentrating on containing strong inflation rather than boosting growth will affect commodity sensitive currencies. Comments O/N by Governor Stevens from the RBA has extended the currency’s weekly decline. He said the nation’s interest rate setting is appropriate for the ‘period ahead. Coupled with softer investment in new plant and equipment data has speculators selling the currency on rallies short term. As the leading commodity currency, the AUD is highly vulnerable to any Chinese monetary actions (0.9648).

Crude is lower in the O/N session ($83.17 -69c). Crude rallied aggressively before the holiday period as a modest rise in weekly inventories calmed worries about a much larger increase. Crude inventories rose by +1m barrels and despite expectations that stocks would decline, the increase remains slight compared to the massive decrease the previous week. It’s the steady drop over the past two months for total inventories of crude and fuel products that has created this bid to the market. Refineries are increasing runs in response to good margins. Utilization rate increased by +1.5% to 85.5% of total refining capacity, another sign that demand was improving. Gas inventories rose by +1.9m barrels, while stockpiles of distillate (heating oil and diesel), fell by-500k barrels. Analysts had expected gas stocks to fall by-900k and distillates to fall by-1.5m barrels. Technically, crude has bounced off handsomely from the psychological $80 barrel all on fundamentals despite the Euro-zones contagion fears. It’s certainly an impressive response despite the stronger dollar index.

The overweighed one-directional lemming trade, gold, is holding its own despite risk-aversion softening. On Tuesday, the yellow metal rose the most in two weeks, on demand for a haven in the midst of Europe’s sovereign-debt crisis and escalating tensions in Korea. Investors have tentatively shred risk and are seeking flight to quality assets on pullbacks. All week, despite the plummeting EUR and a dollar in demand, the commodity has held its own. Investors, for most of this year, have been using the commodity as a hedge against inflation and store of value. Speculators expect the Euro-zones debt concerns to eventually provide stronger support on pullbacks, anticipating that Capital Markets may shift their focus toward other Euro-zone debt issues. Year-to-date, the metal is up + 21.8% and is poised to record its 10th consecutive annual gain ($1,367 -$7.20c).

The Nikkei closed at 10,039 down-40. The DAX index in Europe was at 6,818 down-62; the FTSE (UK) currently is 5,636 down-62. The early call for the open of key US indices is lower. The US 10-years backed up 14bp on Wednesday (2.90%) and eased 2bp in the O/N session (2.88%). Treasuries plummeted before Thanksgiving, wiping out most of the gains posted over the past couple of trading sessions, as the refuge appeal declined and reports showing US economy is gradually strengthening reduced the demand of the $29 billion seven-year issue. The bid-to-cover ratio, 2.63, was the lowest since March. However, Contagion fears dominate this morning early session and the flight to quality resumes.

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