EURO oblivious to Irish Stress Test

No one seems to be fazed by the crisis in Portugal or the Irish stress tests. After this mornings Eurozone’s flash inflation print (+2.6%), more than ever, the market expects the ECB to start the rate normalization process on April 7. In reality, the EUR bulls have two further events to overcome before the ECB meeting, this morning Irish stress test announcement and tomorrows NFP.

The Irish central bank will release the results of the ‘test’ later this morning. If the capital requirements were to suggest the need for further official assistance, more than the already earmarked 35b EUR’s in the EFSF negotiations, should be EUR negative. However, month-end and quarter-end shenanigans tend to distort asset prices and muddy the waters. Traders will try to keep their wits about them and navigate the illiquid markets keeping it close to home if there is a payroll surprise.

The US$ is weaker in the O/N trading session. Currently, it is lower against 13 of the 16 most actively traded currencies in an ‘orderly’ session.

Yesterday’s ADP print (+201k) offered few surprises and will not be boosting analysts forecasts for tomorrows NFP. This months release is consistent with the general view that the pace of improvement in the jobs market is little changed month over month and looks to be in line for an NFP consensus of +191k. A distortion in the ADP print would only have heightened suspicion and require analysts to question the strength of the correlation between the two reports again.

Digging deeper, it was no surprise that the service sector led the way, posting a rise of +164k jobs. This is a whopping 82% of the overall job growth. The goods producing sector added +37k jobs, dominated by manufacturing sector. 

The USD is weaker against the EUR +0.62%, GBP +0.42%, CHF +0.31% and JPY +0.13%. The commodity currencies are stronger this morning, CAD +0.13% and AUD +0.13%.

The loonie only knows one direction when global risk sentiment increases and commodity prices remain elevated, and that’s higher outright. Despite a Canadian government being toppled last week, the ‘hawkish’ tone coming from Governor Carney about how the elevation in commodity prices generally leads to higher interest rates continues to give the loonie its bid tone as traders happily sell Yen against CAD, pushing that pair towards a yearly high.

There is a general feeling that the recent CAD move may be over extended and requires a pull back. However, in the wings there is further interest to buy the loonie as ‘carry’ trades again become in vogue. Also aiding the currency’s appreciation is merger and acquisition flow buying by US based investment houses.

Investors should expect the Federal political uncertainty to have a limited affect on the Canadian dollars strength. The currency will be supported in the long term by its fundamentals, a sound financial system and a strong job environment.

Dealers will take their cue from this morning’s Canadian GDP print, the only important release of the week. In the short term, any dollar rallies and the CAD will be bought. Expect the market to try to keep it close to their chest until tomorrow’s US employment release (0.9700).

It’s quarter end and the AUD is heading for a third consecutive gain outright and against the yen, boosted by last nights retail sales beating analysts expectations (+0.5% versus +0.4%).

The AUD has strengthened +0.9% versus the dollar in the quarter ending today and +3% against the yen. The currency again managed to touch a record high, post 1983 float, after the RBA said loans provided by banks and finance companies climbed last month. The currency pared some of these gains after another report showed home building approvals unexpectedly declined last month (-7.4%) as a flooding and a cyclone hurt the housing market.

The currency has been 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. Further appreciation depends on investor’s interpretation of global future interest rates as the carry trade becomes in vogue again (1.0353).

Crude is little changed in the O/N session ($105.24 +60c). Crude prices initially retreated after a strong weekly EIA reporting inventory at Cushing has now reached record highs. Also aiding the fall was fuel demand plummeting to its lowest level in four-months.

Crude stocks climbed +2.95m barrels to +355.7m last week. The market had forecasted a rise of only +1.5m barrels. At the other end of the pendulum, fuel demand fell to its lowest level since November with gas softening -2.3% to +8.87m barrels a day. That is -2.1% less than a year ago. Perhaps higher prices are beginning to hurt the consumer? No matter, the market is well supplied. Gas inventories were down -2.7m barrels, while distillate (heating oil and diesel) were up +710k barrels.

Expect the market to remain skeptical about how soon things could return to normal in North Africa if NATO and the rebels get the upper-hand in Libya. Damage to the Libyan facilities remains unknown. Libya has seen its oil exports cut off due to the month long rebellion and Western sanctions. Market participants continue to worry about contagion.

Recent events will make it unlikely that investors will see a ‘swift normalization’ of crude-oil production in the region. On any pull backs the Middle East and North African situation will continue to dominate in the event risk category.

Gold has found renewed support on the back of European debt fears and the ongoing crisis in Libya is boosting the appeal of the commodity as an alternative investment. Geopolitical reasons continue to provide support on these pull backs, justify consumers wanting to own some of the asset in their own portfolios.

Despite prices gaining 28% in the last year, the commodity is down -0.3% this quarter. The prospect of a sustainable economic recovery will crowd out some of this over subscribed trade. After reaching record highs last week commodities are finding it difficult to create any follow through, despite the geopolitical and event factors. However, with so much global uncertainty it’s difficult to find a reason not to own some of the commodity in your portfolio.

The metals bull-run is far from over with investors continuing to look to buy the commodity 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. With the metal being used as a store of value, the asset class is expected to remain better bid ($1,430 up+$5).

The Nikkei closed at 9,755 up +46. The DAX index in Europe was at 7,069 up+12; the FTSE (UK) currently is 5,957 up+9. The early call for the open of key US indices is higher. The US 10-year eased 4bp yesterday (3.46%) and is little changed in the O/N session.

Treasuries are little changed after the ADP report came in slightly weaker than expected. Elevated yield this week on the back of hawkish Fed members have been high enough to entice some investors back into the fixed-income market.

The last of this week’s $99b issues, the $29b 7-year auction also tailed, 1.75bp stopping at 2.895%, similar to the two previous soft auction this week. Non-dealers took 58% of the issue, and the auction had a 2.79 bid-to-cover ration, compared to an average cover of 2.88.

Investors can expect geopolitical and event risks to continue to support FI on much deeper pull back. The whole FI landscape could change after tomorrow’s payroll report.

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