EURO shorts lose their mojo

We are back and already the weak EUR shorts resolve is being tested in the O/N session. With little data of significance in the US this morning, one should expect the market to sit on its hands until the release of the FOMC minutes this afternoon. What can we expect? The FOMC statement featured no significant upgrade of economic conditions despite the strong data that Capital Markets has been using to apply their risk-on trading strategies of late. Some analysts expect the committee to provide insight into their reluctance to acknowledge the firmer tone of US data. Maybe if they did it would jeopardize their QE2 exploits? For the rest of the week the market foresees further evidence of improvement in US cyclical data, inline with what we have observed in the last few weeks of 2010. NFP and non-manufacturing ISM, both out on Friday, are expected to shine providing an opportunity to short the contagion plagued Euro-zone again.

The US$ is weaker in the O/N trading session. Currently, it is lower against 9 of the 16 most actively traded currencies in a ‘whippy’ O/N session.

With most of the trading regions observing yesterday as a holiday few managed to witness the US ISM manufacturing piggybacking expectations (57). The result is consistent with solid and ongoing growth in the sector. With US equities embracing the report, analysts note that the risks of the report are to the upside. Digging deeper, demand-sensitive indicators improved. New-orders advanced to a seven-month high of 60.9 last month with order backlogs improving to a four-month high of 47.0. The ISM inventory index slowed to 51.8 from 56.7 in November. Reading between the lines, when orders rise faster than inventories, it indicates increasing factory production. Somewhat disappointing was the employment index weakening (55.7 vs. 57.5 m/m) ahead of this week’s NFP release. The market will be expected to be focusing on last weeks claims for guidance now that it has broken the psychological +400k print (+388k). The price index is up mostly on commodities. A weaker dollar is definitely supporting the export base (54.5 vs. 57), however, a weaker greenback at the same time creates a bid to the commodity pricing model and by default the prices index (72.5 vs. 69.5 m/m). Currently, rising commodity prices is having little effect on inflation as the pricing power in the broader economy remains weak.

The USD$ is lower against the EUR +0.36%, GBP +0.85% and higher against CHF -0.91% and JPY -0.48%. The commodity currencies are mixed this morning, CAD +0.01% and AUD -0.66%. The loonie is again taking flight on the back of its largest trading partners expected ‘re-acceleration in activity. Yesterday’s US PMI data reinforces many analysts views that the US economy is beginning the year in upward momentum and reason enough for short term chartists to be eying 0.9750 in the first quarter. December’s year end sell off has been supported by rising oil prices as well as increased front-end interest rate spread support for CAD. This week’s Canadian Ivey PMI (Thursday) and employment data (Friday) is expected to surprise to the upside, coupled with Euro peripheral stress should further support Canadian government debt as an alternative to the dollar and the EUR. On the flip side, Governor Carney continues to highlights the dangers of a persistently strong domestic currency. For now, the market remains better sellers of dollar rallies (0.9946).

The AUD fell for a second day after reports over the weekend signaled that growth is slowing in China, damping export prospects from Australia. Aussie data overnight also came in softer. Factory output contracted in December for the fourth consecutive month (46.3 vs. 47.6) pressurizing the currency against all its major trading partners. Last year the currency rose +14% against the dollar, driving down the cost of imports and eroding exporters’ competitiveness. The currency is expected to remain under pressure as reports of further flooding in the state of Queensland over the next two days. This natural disaster will have an impact on commodity prices and by default a supporter of commodity sensitive currencies. The currency has been trading under pressure outright as US Treasury yields climb, narrowing the yield advantage of assets down-under. The market is running into offers again at 1.0150-60 (1.0100).

Crude is higher in the O/N session ($91.63 +8c). Oil is piggybacking its 27-month high on speculation that the US economy will sustain an economic recovery well into this year and potentially boosting consumption by the world’s largest crude user, China. This week the market expects a fifth consecutive seasonal decline in inventories. Technically, it’s not showing a tighter supply or demand balance, it’s the result of refinery shenanigans to avoid tax, something they do at this time of year. Last week’s EIA report showed that crude inventories decreased by -1.3m barrels. At +340.7m barrels analysts note that current stocks are above the upper limit of the average range for this time of year. There was a similar scenario with gas inventories, they increased +2.4m and remain in the upper half of their range. OPEC believes that supply and demand are ‘in balance,’ and expect demand growth will slow as the global economy struggles to recover, amid ample supplies. Technically, expect the market to meet resistance all the way up to the psychological $100 limit as there is far more oil in storage, more fuel capacity and more idle oil wells to break this market rally in theory.

Gold prices have taken a breather as global bourses advance, temporarily eroding the appeal of the precious metal as an alternative asset. Overall, the commodity remains better bid on speculation that currency volatility will boost demand for a safe heaven investment. The commodity last year completed its tenth annual advance with bullion rallying +30%, it’s largest rally in three years. The yellow metal continues to garner ‘physical’ interest on pull backs despite China hiking interest rates by +25bp on Christmas Day. Even though the one direction trade feels overdone, investors continue to hold gold as a hedge against long-term inflation. The Euro-zone contagion issues continue to put a floor on metal prices on demand for a haven. Technical analysts believe that gold will outshine other precious metal in 2011 and peak somewhere above $1,600 in 2012.

The Nikkei closed at 10,398 up+169. The DAX index in Europe was at 6,996 up+7; the +FTSE (UK) currently is 6,008 up+109. The early call for the open of key US indices is higher. The US 10-year backed up 6bp yesterday (3.36%) and is little changed in the O/N session. Treasuries are feeling the pressure, a couple of days after the biggest monthly decline in twelve months, on the back of US manufacturing data growing in December at the fastest pace in seven-months. Construction spending increasing the previous month is also not helping prices. Again with liquidity an issue, as the civilized world took a bank holiday, the Fed’s buyback yesterday was strong and caused the debt market to limit their losses on the day. One should expect debt prices to remain under pressure from the markets perception of stronger economic US growth and not the rising budget deficit dissuading investing. Today’s focus will be this afternoons FOMC minutes release.

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