A EURO short is born

Technical analysts will tell you that with the EUR breaching its four-month high this morning, long term Fibonacci levels are capable of being reached (2008 high 1.4315).

For that to occur, the market has much fat to chew. The currency is supported by a hawkish ECB that views higher commodity prices as inflationary. Year-to-date, the EUR has rallied +9% against the dollar and the Fed’s deflationary oil stance.

Now that Moody’s has entered the fray, the focus shifts back to the Euro-periphery funding requirements. EUR shorts have being squeezed out many times this month, but the bears should feel comfortable with the Moody’s multi-notch cut weeks before EU leaders are set to decide on new bailout measures, especially with the German resistance to the proposals.

The US$ is weaker in the O/N trading session. Currently, it is lower against 11 of the 16 actively traded currencies in a ‘subdued’ O/N session ahead.

Historically, the Monday after NFP tends to be the quietest trading day of the month. This morning, one gets the feeling we will get to experience ‘the move’ that did not happen on Friday.

With Moody’s preemptive move on Greek debt, citing the rising risk of default, has the market again focusing on Portuguese and Spanish bonds. On the run up to the weekend EU Summit, investors will be looking for evidence that policy makers are making good on reaching the ‘grand bargain’ they have promised for later in the month. Markets are likely to be increasingly sensitive to any indications of discord or difficulty in reaching consensus. Portugal auctions up to EUR1b in 2-year bonds on Wednesday, and this will be a key test of the sovereign’s ability to continue to tap markets at reasonable yields. Euro-sovereign financial stress issues will put the EUR under pressure after its two month rally against the dollar.

The USD$ is lower against the EUR +0.28%, GBP +0.35% and JPY +0.28% and higher against CHF -0.27%. The commodity currencies are stronger this morning, CAD +0.25% and AUD +0.25%.

The loonie is hanging tough despite Governor Carny’s views on an elevated currency price. The support comes mainly from the commodity sector, now that oil, its largest export , is trading at three-year highs. Last week, the BoC held rates steady at +1%. The event risk was that the Governor would try to talk down the currency’s rise. The operative word is he ‘tried’. In their communiqué, the BoC expressed its concern about the strength of the loonie ‘the export sector continues to face considerable challenges from the effects of the persistent strength in the Canadian dollar and Canada’s poor relative productivity performance’. The new reality is a Canadian dollar at or close to parity as the economy adjusts to this paradigm.

The market has preferred been long this currency for both risk averse and commodity supporting reasons. Governor Carney is in no rush to raise interest rates, stressing as before that ‘any further reduction in monetary policy stimulus would need to be considered carefully’. If the Bank really was contemplating an early rate hike, would we not expect the forward looking guidance to be altered? The currency rise remains orderly. Dollar rallies provide an opportunity to want to own some of the commodity and growth sensitive currency (0.9707).

Data out down-under was weaker than expected last night. Australian job adverts growth fell to +1.2%, m/m, last month from an upwardly revised +3.0% in January. Analysts do note that the correlation between adverts and jobs growth has been weak, but the release suggests that employment may be taking a breather.

The currency has fallen to a six-week low vs. the EUR on fear that Trichet and Co. will raise interest rates faster than the RBA this year. However, Australian fundamentals continue to support a higher policy rate environment, and a currency appreciating medium term. The futures market is pricing in further modest tightening starting in third quarter as the data strengthens and the threat to inflation rises along with commodity prices and higher wage growth. Commodity prices continue to provide support on pull backs.

Crude is higher again in the O/N session ($105.95 +$1.53c). Crude prices this morning have advanced to the highest levels in two and half years on speculation that the turmoil in Libya will spread to other energy exporters in NA and the ME, affecting global supplies. The black-stuff rallied +6.7% last week.

Prices remain elevated despite the Saudis offering to make up for supplies lost. Contagion fears continue to price in a substantial risk premium. ‘The IEA’s chief economist said that ‘higher oil prices pose a danger for a global economic recovery’ and at $110 a barrel the world is concerned.

Last week’s EIA report again has provided some support for the US crude market on pull backs. The report showed a smaller-than-expected increase in supplies. Crude inventories fell by-364k barrels to +346.4m vs. an expected increase of +750k. Even worse was the gas inventory headline declining, stocks plummeted -3.59m barrels to +234.7m, greatly exceeding market expectations for a-400k draw. Inventories at Cushing rose by +1.13m barrels to a record +38.57m.

This rise is partly responsible for the wide discount of WTI to Brent crude in recent weeks. Distillate stocks (heating oil and gas) fell-751k barrels to +159.1m, less than analyst expectations for a decline of -1.2m barrels. Refinery utilization rose +1.5% to 80.9% of capacity. The Oil market is beginning to show signs of ‘demand destruction’ as high prices erode consumption. With supply the number one concern, the commodity will remain bid because of the contagion concerns.

Gold remains in demand as mounting tensions in Libya continues to boost the appeal of the precious metal as an investment haven. The yellow metal continues to be supported by geopolitical factors and inflation threats. Prices have rallied more than +7% this month, as investors grown increasingly uneasy that the crisis could spread.

Even hawkish global rhetoric has managed to give the yellow metal a leg up in March. Consumer prices are also boosting the demand for the precious metal as a hedge against global inflation. Recent data reveals that Chinese’s inflation has accelerated the most in six years, and UK consumer prices the most in two years. Even US data is showing that their inflation numbers are edging higher. Last week’s European PPI accelerated more than forecasted in January. China is supporting the commodity’s outright, purchases in the country climbed to 200 metric-tons in the first two months of this year. With the commodity being used as a store of value the asset class is expected to remain better bid on deep pullbacks, at least until there is peace ($1,439 +$11.10).

The Nikkei closed at 10,505 down-189. The DAX index in Europe was at 7,184 up+5; the FTSE (UK) currently is 6,005 up+15. The early call for the open of key US indices is higher. The US 10-year eased 4bp on Friday (3.50%) and has backed up 4bp in the o/n session (3.54%).

Last week, treasury prices fell, with 10-year notes halting a three-week rally, as signs of faster job growth and more inflation added to speculation the economic recovery is building momentum, damping demand for fixed-income assets. The tens/TIPS spread is at +253bps. Geopolitical and event risk in the Middle-East continues to limit FI losses despite the stronger economic data. Product remains better bid on these pull backs.

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