EUR is no winner

International headlines state that Ireland ‘wins’, that Greece ‘wins’. Having a $113b lifeline, somewhat forced upon you, at a rate yet to be agreed on, is a win? In reality nobody wins in this Euro debacle, we are all paying the piper and that’s the problem. Bond holders can breath for a while, ‘no haircut’ is required until 2013, something Merkel finds difficult to digest. Seeing how the EU is currently functioning on the ‘fly’, much will happen between now and then. The market is desperately trying to digest the Irish bailout in a positive fashion. However, rumors of a weaker Italian auction, contagion spreading and risk aversion requirements on Korean tension will again pressurize the EUR in North America.

The US$ is mixed in the O/N trading session. Currently, it is higher against 10 of the 16 most actively traded currencies in a ‘volatile’ trading range.

European equity markets are trying to give us the relief rally expected after the Irish bailout announcement on the weekend. However, it looks fleeting and North America will probably respond in the same tepid fashion. There is an overall perception that further support measures across the EU as a whole are in the process of being formulated. Will this restore Capital Markets confidence? Will things get worse? For that, we have to watch the periphery spreads. After the weekend announcement we should be witnessing some compressing to the bund. Market sentiment, this morning, does not seem to expect that Ireland’s bailout will ‘quell expectations that Portugal and perhaps even Spain will require assistance’.

The USD$ is higher against the EUR -0.04% and JPY -0.02% and lower against GBP +0.05% and CHF +0.13%. The commodity currencies are stronger this morning, CAD +0.12% and AUD +0.19%. The loonie is always sensitive to global risk sentiment and it was not surprising to see the currency cap last week on the losing side. The market will remain concerned that European contagion fears and Korean tension will promote risk aversion trading strategies despite the positive sympathy reaction to Ireland’s $113b ‘aid package’ O/N. For a fleeting moment last week, the CAD threatened to penetrate through its eight month high, achieved on speculation that Governor Carney will have to step up to the plate sooner rather than later to tighten monetary policy. As noted earlier, in a holiday shortened trading week, the loonies moves tend to be exaggerated. Having said that, data this month shows that inflation is accelerating and retail sales is on the rise. Also aiding the currency is the Russian reserve requirements. It’s believed that the CBR have been adding the currency to their diversified portfolio of late. This morning we will see how investors wish to deal with contagion and event risk. Dollar buyers lie below.

China has entered the fray and being Australia’s largest trading partner, any threat of tightening monetary policy tends to affect Australasian currencies. The AUD remains under threat and trades near a two month low outright on concern that Korean military action will escalate. Fundamental data last night showed that business earnings also dropped last quarter (-1.5%), providing further pressure for the currency. The AUD is not only a commodity currency, it is also an Asian currency. The PBOC have indicated 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 last week by Governor Stevens from the RBA have certainly capped any currency rally medium term. He said the nation’s interest rate setting is appropriate for the ‘period ahead. As the leading commodity currency, the AUD is highly vulnerable to any Chinese monetary actions and risk aversion strategies (0.9648).

Crude is higher in the O/N session ($84.65 +89c). Crude ended last week in the red on concerns that the Irish debt crisis will eventually spread to other periphery countries in mainland Europe, hampering economic growth and diminishing fuel demand. Analysts expect some pressure this morning as investors digest the worries about China tightening too much too quickly, and risk aversion due to the situation in Korea. The black stuff had rallied aggressively on the weekly inventory release, as a modest rise in stocks 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 managed to drag prices away from the psychological $80 a barrel. Refineries have been increasing their 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. Technically, crude has bounced off handsomely from its monthly lows, all on fundamentals despite the Euro-zones contagion fears. It’s certainly an impressive response despite the stronger dollar index. Let’s see what event risk have in store for us at the beginning of this week or maybe we will all become weather experts as the cold spell begins.

The ‘yellow metal’ came under pressure last week as demand in China is anticipated to slow and the dollar’s rally reduced the appeal of the commodity as an alternative investment. Later today, China is expected to increase margins on commodity trading, a move to curb speculation and dampen inflation. This is expected to reduce excessive speculation, and put further pressure on the market in the short term. Until now, these pullbacks have been somewhat supported on demand for a haven in the midst of Europe’s sovereign-debt crisis and escalating tensions in Korea. Investors have shred risk and have been seeking flight to quality assets on pullbacks. 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 metal 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 + 22.8% and is poised to record its 10th consecutive annual gain ($1,368 +$3.80c).

The Nikkei closed at 10,126 up+86. The DAX index in Europe was at 6,875 up+26; the FTSE (UK) currently is 5,715 up+47. The early call for the open of key US indices is higher. The US 10-years eased 3bp on Friday (2.87%) and is little changed in the O/N session. Treasuries solidified a second consecutive monthly loss as stronger-than-forecasted economic data and confidence the Fed’s $600b Treasury purchase program will fuel more growth, has reduced the demand for Government debt, temporarily at least. Last week’s US jobless claims contributed to the weakness in the market and this Friday’s NFP release is expected to reveal a much stronger headline print despite the unemployment rate to remain on hold at +9.6%. It’s believed that mounting tensions in Korea and renewed concerns about a European sovereign debt crisis spreading again back to mainland Europe should provide some support on this pullback. Dealers anticipate that US 10-year yields will fall again before year end and are willing buyers at these levels medium term.

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