80 Billion Euro Irish Bailout Package?

Here we go again. Rumors that the Dubai Group, a conglomerate owned by Dubai’s ruler, missed an interest payment last month, coupled with a medley report on further Greek deficit concerns, sandwiched between doubts about Ireland’s ability to repay its debts is dictating the EUR’s direction. Theses reasons have overshadowed the G20’s attempt to ease currency tensions and secure commitment to more balanced global growth. The corralling of world leaders into one room is only strengthening the lack of confidence in risk positions. Accountability, flexibility, and the lack of multilateral agreements are making Bernanke’s QE2 ‘slight of hand’ release difficult to achieve its objectives. Do not expect the Fed to be fully committed to the buyback if the economy improves. The sudden reversal of the EUR from its lows is on the back of rumors that an Irish bailout is a done deal with a figure of 80b being mouthed.

The US$ is stronger in the O/N trading session. Currently it is higher against 12 of the 16 most actively traded currencies in a ‘volatile’ trading range.

It’s always difficult to come in cold to a new trading day after a mid week holiday. The O/N price action tends to cater for two trading sessions. With no data yesterday the market again focused on rumors, innuendo and the ‘talking heads‘ at the G20. This mornings Euro Industrial production fell in Sept by the largest margin in 16-months, on a broad based slowdown (down -0.9% on the month). Proof is in the pudding, states struggling with excessive deficits and credit downgrades is dampening the Euro-zone as a whole. Be on the lookout for a surprising Irish rescue package!

The USD$ is higher against the EUR -0.26%, GBP -0.73% and lower against CHF +0.17% and JPY +0.50%. The commodity currencies are weaker this morning, CAD -0.92% and AUD -1.11%. The loonie has temporarily failed on its lack of follow through parity and weakened vs. its largest trading partner on heightened risk aversion sentiment. With commodity and equity prices paring some of their weekly gains as China’s inflation numbers suggest a tighter monetary policy by the PBOC is directly affecting growth sensitive currencies. Softer trade numbers this week is strong proof that Canada cannot fundamentally rely on foreign demand to buffer the slowdown in domestic activity. For a commodity supportive currency, the loonie has only appreciated +1.5%, y/d, underperforming other growth currencies. The market is back to embracing the event risk factor and with Euro-peripheral debt problems expect investors to continue to cash in on their profitable long CAD positions, especially after last nights move.

The AUD dollar took a beating from all corners last night. A plethora of factors have helped push the currency aggressively back below parity again. Risk aversion was evident on the back of rumors that South Korea implementing further capital controls next week and on China’s pending rate hike. The slump in commodities and the general strength of the dollar has impeded the advance of growth sensitive currencies. Some softer jobs numbers this week seems to have justified the unwinding of profitable positions. The Aussie unemployment rate jumped to +5.4% from +5.1%, a six-month high as job seekers swelled to a record, easing concern that a labor shortage will drive up wages. This week’s sudden jump in risk aversion over European periphery debt issues and a larger than expected Chinese monthly trade balance has again reduce the risk appetite of investors. The Chinese surplus is the second biggest this year. With Chinese authorities demanding higher bank reserves, again will restrict the flow of ‘hot’ money, indirectly and negatively affecting regional bourses and growth currencies. Market players are viewing corrective rebounds as fresh selling opportunities short term (0.9909).

Crude is lower in the O/N session ($85.80 -$2). Oil prices have been unable to sustain two-year highs as global bourses found it difficult to maintain positive traction and on fears that China may attempt to rein in inflation by raising interest rates and curb the commodity demand. The market continues to question the fundamental strength of other economies once the Chinese’s variable is erased from the global growth equation. The commodity found strength this week on the back of disappointing weekly inventory numbers. The report showed an unexpected decrease in stock as imports declined and refineries bolstered fuel production. The supplies of weekly crude fell -3.27m barrels to +364.9m. The market had anticipated inventories to climb +1.5m barrels. Aiding prices was the inventories of gas and distillate fuel (heating oil and diesel) posting bigger-than-projected declines. Gas stocks dropped -1.9m barrels, while distillates fell -5m barrels. Total oil and fuel inventories are now at their lowest levels in six-months after retreating in four of the last five weeks. Refineries operated at 82.4% of capacity, up +0.6%, w/w. Crude-oil imports tumbled -5.7% to +8.09m a day, the lowest level in eleven months. The ‘big’ dollars value will continue to influence prices despite fundamentals.

Gold prices fell this morning as speculation that China may raise interest rates and a strengthening dollar curbed demand for bullion. However, European debt concerns should continue to boost demand on these pullbacks. The commodity again will be used for a protection of wealth and a hedge against faster inflation in China. There have been times this week that the one directional play felt so overdone and every time this has occurred, global fundamentals provide a reason to own it. The dollar’s strength has tried to erode the metal’s appeal as an alternative asset this week, but in vain. The metal has advanced and fallen on speculation that European governments may struggle to pay debt. That argument depends on what direction the big dollar decides to take. With Capital Markets shifting their focus toward sovereign debt issues and away from QE2 debates will continue to provide strong support for this asset class on medium term pull backs. Year-to-date, the metal is up + 26.3% and is poised to record its 10th consecutive annual gain. Precious metals have outperformed global equities and treasuries as Cbanks try to maintain their low interest rates to boost economic growth. Any pullback will continue to be bought. For most of this year speculators have sought an alternative investment strategy to the historical reserve currency and have been using the commodity as a proxy for a ‘third reservable currency’ ($1,389 -$19).

The Nikkei closed at 9,861 up +31. The DAX index in Europe was at 6,722 up +2; the FTSE (UK) currently is 5,814 -2. The early call for the open of key US indices is higher. The US 10-years backed up 3bp yesterday (2.65%) and are little changed in the O/N session. Dealers had been leaning on treasuries all week, making the US government pay up for liquidity. Now that all the auctions have been taken down, not as successful as expected, the market has been chipping away at the higher yields, buying product on event risk and reduction of risk exposure.

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