EURO Crapshoot

Figuring out the direction of the EUR has been a crap shoot this week. The market is short and the longer we stay here political rhetoric and innuendos seem to want to squeeze more of the weak shorts out of the game. The currency continues to outperform any bad news, downgrades, periphery Prime Ministers resigning, delaying of EFSF objectives or the irate Irish.

Even this mornings German ifo print, seeing its first drop in over a year (111.1), has had little affect on the currency. As long as the US maintains it’s accommodating policy and stock markets keep rising, the dollar will remain under pressure. Trichet does not need to constantly beat the higher rate drum, we hear you.

Now we wait for the Euro-summit press conference. It’s expected to come short of delivering a ‘grand bargain’. It also seems unlikely that there will be agreement on EFSF support for Portugal given the failure to pass additional austerity measures. Do not get caught in the middle or become deafened by the noise!

The US$ is stronger in the O/N trading session. Currently, it is higher against 13 of the 16 most actively traded currencies in ‘whippy’ session.

US durable goods orders unexpectedly plummeted last month (-0.9% vs. market expectations of +1.5%). For a sector that has been driving the US economy to date, it is worrisome. Should we be cutting our expectations for US growth?

On the plus side, despite it being a volatile number, this year’s overall trend remains positive (+7.6%, y/y). Digging deeper, core-orders excluding the volatile transportation sector, fell -0.6%. Analysts note that orders for commercial aircraft jumped +26.7%, even this gain was unable to push the headline into positive territory. The barometer for business spending, new-orders for non-defense capital goods, fell -1.3% and is certainly not comforting.

There are a plethora of reasons why the business investment indicator has come under pressure of late. There is weakness in the US housing and labor markets, growing fiscal uncertainty and heightened geopolitical event risks to deal with. A bright spot was inventories climbing +0.9% and unfilled orders, a sign of future demand increasing to +0.4%.

We should be relieved that US weekly claims continue to hold below that psychological +400k watermark (+382k vs. +387k). The headline print inched a tad lower, down-5k, to levels last seen in the pre-Lehman crash. Five out of the last seven-weeks have now achieved a sub +400k print.

Analysts note that since peaking two-years ago, claims have moderated by nearly 42%. This is a substantial gain and perhaps it’s proof that a strong pickup in hiring activity has begun?  Digging deeper, two of the three subcategories experienced contractions, continuing (+3.71m down-2k) and extended (-98.2k). The total number of claimants in all programs dropped +187k to +8.766m, a -22.5% decline year-over-year. 

The USD is higher against the EUR -0.10%, GBP -0.29%, CHF -0.66% and JPY -0.27%. The commodity currencies are mixed this morning, CAD -0.02% and AUD +0.12%.

The loonie only knows one direction when global risk sentiment increases and commodity prices remain elevated, and that’s higher outright. The prospects that Portugal could get a bailout is boosting confidence in the Euro-economic outlook, fueling demand for higher-yielding assets. How long will this last?

The market continue to focus on the global ‘big picture’ and somewhat ignoring, for now, all three opposition parties rejecting Prime Minister Harpers Budget earlier in the week. Today we could see the Conservative Government lose a no-confidence vote in parliament which will lead to the announcement of a general election.

Weaker Canadian data this week has done little to tarnish the currency’s value. Big picture, support for the currency continues to come from commodities and increased risk tolerance. On the face of it, the recent negative moves are oblivious to domestic fundamentals. Appetite for risk is sensitive to this week’s outcome of the Euro-summit.

Dollar rallies provide an opportunity to want to own some of the commodity and growth sensitive currency that is supported by stronger fundamentals and a sound fiscal position for the longer term (0.9753).

The AUD is heading for a winning week, advancing as global equities see black and a measure of price volatility declined, boosting demand for higher-yielding assets. The currency is approaching its strongest level outright (1.0258) since it was freely floated in 1983.

The currency is supported by investors pricing out the possibility of a rate cut and pricing in the chance of a rate hike again next month. The probability of a reduction in Australia’s benchmark interest rate on April 5 is 13%, down from as much as 34% last week.

Appetite for growth and commodity sensitive currencies depends on the new found stamina of risk tolerance by investors. Do not be surprised if due to weaker data this morning that some of the recent optimism will be quickly curtailed (1.0238).

Crude is lower in the O/N session ($105.40 -0.20c). Big picture, oil prices remain volatile, with ‘continued’ momentum behind prices on the back of Middle-East tensions. Any uncertainty adds a premium. Libya has seen its +1.3m barrels a day of oil exports cut off due to the month long rebellion and Western sanctions.

Market participants continue to worry how long the disruption will last and it’s this, along with contagion fears in the region that is providing a bid, extending the commodity’s winning streak to seven-days. Libya, Yemen and now Syrian events this week are making it increasingly unlikely that investors will see a ‘swift normalization’ of crude-oil production in the region near term.

Crude has been able to hold on to its gains despite the weekly EIA inventories reporting the expected supply increases. Stocks of crude rose +2.1m barrels last week, right on estimates. Unlike gas, whose stockpiles declined -5.3m barrels. The market had been expecting a drawdown of only-2m. Distillates (heating oil and diesel) were flat for the week. Analysts had anticipated a decline of -1.5m barrels.

On deeper pull backs the Middle East and North African situation will continue to dominate.

We did it! Gold managed to surge to new record high yesterday. There are a couple of reasons pushing the yellow metal into uncharted territory. Unrest in Libya and the Middle-East coupled with Europe’s lingering periphery debt crisis is boosting the demand for the precious metal as an alternative investment. Fear of war will always provide a premium. With so much global uncertainty it’s difficult to find a reason not to own the precious metal.

The commodity’s bull-run is far from over with investors continuing to look to buy the metal on dips. These price pullbacks are viewed as favorable opportunities for investors to continue to diversify into safe-haven assets and push for those new record highs.

Even hawkish global rhetoric has managed to support higher commodity prices. With the commodity being used as a store of value, the asset class is expected to remain better bid on deep pullbacks ($1,433 -$1.40c).

The Nikkei closed at 9,536 up+101. The DAX index in Europe was at 6,953 up+20; the FTSE (UK) currently is 5,892 up+12. The early call for the open of key US indices is higher. The US 10-year backed up 5bp yesterday (3.39%) and is little changed in the O/N session.

Treasuries have again come under pressure, pushing the benchmark 10-year note yield to a weekly high, on speculation that the need for EU bailouts may end with Portugal. Global equities trading in the black is also reducing the demand for safety.

The US government announced that it will offer a total of $99b two’s, five’s and seven-year notes next week. Dealers should find it easy to make room along the curve to absorb the product. A surprisingly weaker US durable goods print was able to pare some of FI losses. However, with investors embracing risk again, 10-year notes are capable of revisiting 3.45% short term. Let’s see what the last day of the EU summit brings us.

Investors can expect geopolitical and event risk in the Middle-East and North Africa to continue to support FI on much deeper pull back.

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