Market apathy favors EUR for now

It appears that very little is making sense, but, there is something for everyone in these market moves. The soft side of the EUR is still higher, the bears will attest to that as they hold their breath every time we breach 1.3600. Currently, the market seems to be ignoring Euro-periphery issues. Investors seem more comfortable buying EUR’s on Suez rumors, rather than dollars, because the risk is that the US will be dragged into the Middle-East situation. Do we need EUR’s for the G20 and weekend insurance? Maybe. The most logical reason for not wanting the dollar, despite the US inflation components edging higher, is the belief that an ambivalent Fed is falling behind the curve. The lack of confidence in the US administration’s ability to deal with its issues has investors questioning buying the dollar. If that was truly the case, would we not be buying gold? China’s RRR hike this morning, despite being another G20 goodwill gesture, is not a surprise, there is more to come.

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 ‘whippy’ O/N session.

Yesterday’s broadly stronger US data did little to influence new dollar buyers. The market was more focused with geopolitical concerns and ‘boat’ watching. The strong rise in US inflation data was mostly driven by gas prices. Despite a higher weekly claims report, the positive downward trend is expected to support a firmer February NFP print. The bullish Philly print on headline and the details suggests that ISM itself has yet to peak.

US inflation (+0.4%) is still being bullied by gas prices. Strip transportation (+0.23%) and the gas component out of the report, and we have inflation going nowhere in the US economy (+0.2%). Analysts note that it’s not generalized inflation, but, price shock being ‘expressed mostly by commodities, forced upon households with weaker incomes via higher food and energy prices’. The danger, it will continue to risk crowding out discretionary spending on other elements of the CPI basket’. The market would require a much stronger trickle down effect for the hawks to to be shouting louder. 

Thee US jobless claims headline (+410k) happened to give back some of the previous week’s gains. Initial jobless claims increased by +25k. Apart from last week’s +385k print, it is the second lowest level seen this year. Recent reports have been rather volatile, hovering between +385k to +457k since November. Claims have retreated in three of the past six-weeks. The less volatile four-week moving average moved a touch higher to +417.8k and remains supportive of a firmer NFP report for this month. Digging deeper, continuing claims (+1k to +3.9m) and extended benefits (+42k to +873k) climbed higher, however, a deep downward correction in the emergency benefits (-127k to +3.63m) category provided a strong offset.

The Philly Fed print blew everyone out of the water (35.9 vs. 19.3). This is strong proof that ISM may not have peaked. The strength can be attributed to a surge in shipments and higher prices. The gain in shipments is on the back of a solid quarter of new-orders. The unfilled order back log is also climbing, which when combined with strong new orders, suggests a brighter future for shipments. Analysts note that inventories remain lean as sales occur mostly out of current production. This is an ideal situation for growth to expand even further. Digging deeper, eight of the nine subcomponents are moving further into expansion territory. The employment scenario remains robust. Companies continue to boost hiring and the average workweek improved +2.2pts to +12.8, the strongest reading in three months. On the price front, price pressures continued to increase for the sixth consecutive month. It’s worth noting that with a tame CPI reading the pass through pricing effect is yet to be felt. It must be hurting the producer’s margins? The six-month forward index saw its second-straight month of moderation and the biggest slowdown was registered in capital expenditure intentions.

The USD$ is higher against the EUR -0.40%, CHF -0.40% and JPY -0.20% and lower against GBP +0.10. The commodity currencies are weaker this morning, CAD -0.06% and AUD -0.22%. Canadian data yesterday was again pro-loonie. Wholesale trade (+0.8%) is expected to add to December’s GDP print. To date, net exports and trade should provide an unexpectedly strong contribution to GDP, while housing starts, hours worked and manufacturing sales will act as a drag. It is the fifth-consecutive month of gains and came with a significant price effect. In price-adjusted volume terms, trade posted strong results, up +1.2%. This is the print that will contribute positively to GDP. The data and stronger commodity prices briefly pushed the CAD to a three year high yesterday. Big picture, healthier risk appetite, stronger commodity prices, the North American phenomena are all contributing to investors wanting to acquire the CAD on dollar rallies. Stronger domestic fundamentals has helped push the loonie higher against most of its major trading partners on speculation that Governor Carney will hike borrowing costs quicker than other Cbank. Parity and premium, the new reality, is becoming well adjusted too by investors, consumers and manufactures. This morning Chinese RRR hike and Canada’s CPI number may provide better opportunities again to own the CAD (0.9850).

The AUD is heading for a weekly gain on speculation that Bernanke is expected to reiterate that the pace of the US recovery is too slow to require tighter monetary policy. Some of her gains will obviously be tempered by China hiking Banks required reserve requirement another +50bps this morning. Already the AUD has strengthened to a nine month high vs. JPY with investors betting that the AUD will maintain its yield advantage amid global growth. RBA member comments has also giving the currency a leg up. Philip Lowe stated that ‘global commodity prices are likely to remain elevated for an extended period and tighter monetary policy in the region may be needed’. Chinese inflation data saw CPI rising less than expected (4.9% vs. 5.3%) earlier this week. This has boosted the demand for higher-yielding assets. Also aiding the currency was the RBA minutes from this month’s meeting stating that a ‘slightly restrictive’ policy stance was appropriate as a resources boom boosts incomes. The minutes offered no new real news, but stated clearly that the medium-term outlook for the Australian economy remains robust. Policy is ‘appropriate’ in ‘restrictive’ territory, and is dependent on the consumer when rates will rise again. With risk appetite on the up and Chinese CPI less than expected has investors wanting to acquire the carry trade again (1.0102).

Crude is little changed in the O/N session ($85.53c-53c). Crude prices are gathering support from various corners of the globe. Fear that supply disruption is on the horizon in the Middle-East continues to provide support on pullbacks. This week’s EIA report showed a smaller than expected increase in weekly stocks. Inventories rose +900k barrels vs. a market expectation of a rise of +2.8m. Gas fared no better, inventories increased by +200m barrels. Analysts had been expecting an increase of +1.7m. The supplies of distillates (heating oil and diesel) happened to decrease by -3.1m barrels vs. an expected decline of -1.1m. On the face of it, the report was bullish. Concerns about the Middle East and production problems in the North Sea are boosting Brent relative to WTI. Lower-than-feared Chinese inflation tentatively supported oil prices earlier this week. Even the value of the Yuan is lending a helping hand, especially after reaching a 17-year high vs. the dollar making it much cheaper for them to acquire ‘their’ coveted commodities. It is the fear of a sudden reduction in supply from the Middle-East that will support commodities longer term.

Gold futures have climbed to the highest level in a month as rising consumer prices is boosting the demand for the precious metal as a hedge against inflation. Despite the market not witnessing the same level of speculative fund and ETF participation that occurred throughout December, the commodity is receiving support from Chinese’s inflation, which accelerated the most in at least six years, and on UK consumer prices rising the most in more than two years. US inflation numbers also edged higher yesterday. The commodity that every investor hated last month continues to find support on deeper pullbacks. This is because the Middle-East remains the unknown variable. The yellow metal is being used as a store of value. Has the commodity peaked or is it simply a short-term correction? Gold continues to attract technical buyers after rallying above its 20-day moving average. On deeper pullbacks, the metal should remain better bid on speculation that currency volatility will boost demand for a safe heaven investment once the Euro contagion fears raise its ugly head again over the coming weeks during the Euro-periphery refunding season ($1,386 +$1.10c)

The Nikkei closed at 10,842 up+6. The DAX index in Europe was at 7,390 down-28; the FTSE (UK) currently is 6,058 down-28. The early call for the open of key US indices is lower. The US 10-year eased 5bp yesterday (3.57%) and is little changed in the O/N session. Geopolitical pressures pushed treasuries higher yesterday despite the uptick in US inflation numbers. Even the softer weekly claims headline print convinced traders that any improvement in the US labor market is going to take time. The treasury announced that they will issue $99b new product next week (2’s, 5’s and 7’s). Expect the short end to provide some concession and allow dealers to take down the issues comfortably.

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