EUR dancing to the same tune

Ongoing uncertainty means that the EUR remains a sell on upticks and the hope for a sustained rally soon seem to be fading. Market reaction to the Irish bailout and to the ‘watered down proposals on a permanent crisis mechanism has heightened the possibility of default risk in Europe’. Euro-zone periphery spreads continue to widen and tomorrows Portuguese and Spanish auctions could be adding fuel to the fire. The Chinese State Council comments last night pressurized the Shanghai Composite Index, heading for its first monthly loss in five months. They indicated that they would revise penalties to crack down on price violation even further. The market seems to be interpreting it as an imminent December rate hike.

The US$ is mixed in the O/N trading session. Currently, it is higher against 11 of the 16 most actively traded currencies in another ‘volatile’ trading range.

This morning’s Euro-zone unemployment rate inched higher to +10.1% in October from a revised +10% in September. There was little change to the larger core member economies, heightening the growing divergence between the weaker peripheries and stronger Northern economies. It’s worth noting that Ireland’s unemployment rate was unchanged at +14.1%, similar to that of Spain’s at +20.7%. Germany and France happened to print +6.7% and +9.8% respectively. In the wider 27-member Euro-zone, unemployment was unchanged at +9.6%, with the number of unemployed rising marginally (+84k to +23.1m).

The USD$ is higher against the EUR -0.79% and GBP -0.23% and lower against JPY +0.37% and CHF +0.15%. The commodity currencies are weaker this morning, CAD -0.21% and AUD -0.44%. This morning the loonie has managed to print a two month high vs. the EUR as an Irish bailout package fails to ease concern that the European debt crisis will spread. Outright against the dollar the loonie has underperformed as risk aversion trading strategies favor owning the greenback. The market will remain concerned that European contagion fears and Korean tension will promote further flight to quality. 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 data this month shows that inflation is accelerating and retail sales is on the rise. Also aiding the currency in the background is the Russian reserve requirements. It’s believed that the CBR have been adding the currency to their diversified portfolio of late. For now event risk continues to dominate the proceedings.

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 and that the European debt crisis will spread, curbing demand for higher-yielding assets. Softer fundamental data of late has investors reducing their risk exposure. 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 (0.9598).

Crude is lower in the O/N session ($85.35 -35c). Crude prices ended up being little changed during yesterday’s session after printing a two week high on the belief that an Irish bailout would stop contagion fears. Last week the commodity ended 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 to build on the back of China tightening too much too quickly, and risk aversion strategies due to the situation in Korea. The black stuff had rallied aggressively on last weeks EIA 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. Now we can all become weather experts as the cold European snap continues to take a firm grip.

The ‘yellow metal’ was 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. Those reasons continue to hold true this week. China is expected to increase margins on commodity trading, a move to curb speculation and dampen inflation. This is likely to reduce excessive speculation, and put further pressure on the market in the short term. Technical analysts anticipate that with a head and shoulders pattern emerging, the commodity may fall another $50 over the coming week. 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, 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. Year-to-date, the metal is up + 22.8% and is poised to record its 10th consecutive annual gain ($1,368 +$3.80c). If the price action is finding it difficult to rise, the likelihood of a stronger retreat short-term increases.

The Nikkei closed at 9,937 down-189. The DAX index in Europe was at 6,721 up+23; the FTSE (UK) currently is 5,550 down-7. The early call for the open of key US indices is lower. The US 10-years eased 7bp yesterday (2.80%) and another 3bp in the O/N session (2.77%). Treasury prices have rallied for a second consecutive day on concerns that the newly formulated rescue plan for Ireland will fail to contain Europe’s sovereign-debt crisis, increasing demand for the safety of US debt. Aiding prices is the Fed’s action of buying treasuries to pump part of their $600m back into the US economy to keep yields low. Capital Markets continue to ask what’s next? Can investors expect the ECB to continue to be the backstop? It’s believed that mounting tensions in Korea will provide further support on pullbacks. Dealers anticipate that the US 10-year yields will make an assault on 2.50% before year end and remain willing buyers on any back ups.

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