Bring back the EUR conviction or the Eureka light bulb

What happened to the well received German and Portuguese debt auctions? Were they not supposed to instill ‘positive confidence’ into this market? Subdued interest, backed up by-illiquid pockets has the forex enthusiast’s seeking hibernation this mid-Aug. We go around in circles when we have no data to play with. That’s because we lack conviction. Today, at least we get something to chew on and probably moan about, but, will it have us testing new found ranges? It probably won’t, but let’s hope so. For dealers it seems to be containment with minimum fuss until the Eureka light bulb glows again.

The US$ is mixed in the O/N trading session. Currently it is higher against 11 of the 16 most actively traded currencies in a somewhat summer ‘subdued’ trading range.

With the EUR testing session lows, there is chatter that the currency is losing its momentum to the topside, what else can one say? And that through the 1.2785 all bets are off. Remarkably, the currency is swaying on such little volume. In the big picture, the impact of the ‘fiscal adjustment in Europe is real and will be felt for years’ should hinder the EUR’s climb. Its highs are beginning to be dragged lower and lower. Now, with the belief that the Euro-zones economic recovery is waning should dampen further the demand for the single currency. Sellers are beginning to line up top-side. Maybe today’s data will bring some much needed volatility.

The USD$ is higher against the EUR -0.51%, GBP -0.50% and JPY -0.34% and lower against the CHF +0.06%. The commodity currencies are weaker this morning, CAD -0.08% and AUD -0.25%. The loonie is a funny animal, or perhaps I should say, the dealers are a breed apart. It seems that the forex spot market is pricing in the BHP Billiton/Potash deal and the herd is following them. Equities and commodity prices would have you wanting to lighten your CAD long load, not in this case, dollar rallies are been sold and dealers are content to keep the currency in the limelight until they get the green light to ‘execute’ any such deal. This is in contrast to other growth and commodity sensitive currencies paring most of this weeks gain. Stronger manufacturing shipments data this week (+0.1% and +0.7% in real-terms) is also providing some distant support. Fundamentally, Canada remains somewhat of a safer heaven globally. However, their economy cannot be immune to a US slowdown. It happens to be its largest trading partner with 70% of all exports heading south. Sloppy trading and lack of interest because of the summer doldrums has meant that many have missed the buying boat opportunity that they had hoped to witness on the last ‘risk aversion’ go-around. BHP Billiton hostile bid takeover of Potash in Canada will keep the loonie firm, no debt involved. Perhaps parity is on the cards again, aided by Carneys ‘normalizing’ rates next month.

There has been quite a bit of AUD/CAD cross selling, front running M&A speculation that has pinned down the AUD for the time being. Over the past 2-trading sessions the AUD came under pressure vs. the JPY on speculation that the BOJ are not ready to intervene on behalf of their currency, thus dampening the demand for some of the higher-yielding assets. Government data has also happened to put a lid on the recent rally. Reports, earlier this week, showed that skilled vacancies declined this month and wage growth slowed in the 2nd Q. Net result traders are adding to their bets that the RBA will leave interest rates unchanged for the next 12-months. Interest rate differential continue to play a big part of the currency’s attractiveness. No currency is immune to this ‘questionable growth’ environment. Risk aversion will likely force the bull’s hand this week, capping rallies, as equities find it difficult to maintain traction at the moment. In reality with the outlook for both the US and Chinese economies becoming uncertain, growth-sensitive currencies like the AUD, CAD and KIWI, are unlikely to continue to draw strong buying interest from speculators (0.9002). Follow the Asian bourses for guidance or wait and see what China’s diversification plan is made off. Perhaps the outcome of the Aussi election will push the currency to test new highs by weekend.

Crude is higher in the O/N session ($75.81 up +39c). Crude prices continue to trade near their one month low as mixed global bourses have ignited concerns that the recovery will not be strong enough to revive fuel demand. Even yesterday’s weekly EIA report provided fodder for the ‘bears’, aided by some ‘dubious’ hefty predictions for increased supplies in various categories for the week. Oil stockpiles declined -0.8m bpd vs. a market expectation of a -1m barrel print. Inventories fell to +354.2m barrels w/w. Not to be left out, gas stocks dropped -39k barrels to +223.3m. On the flip side, distillate supplies (heating and diesel) climbed +1.07m barrels to +174.2m. With this bearish report successfully penetrating the $75 support opens up the way to test the $72 surroundings. Prices have also gravitated towards these lows on the back of data showing that economic growth in both China and the US is slowing. The demand for oil products also fell, as gas demand hit a 2-month low, while demand for distillates is close to its lowest level in 10-months. The report re-confirms the IEA conclusion earlier this month that ‘oil demand could take a substantial hit should economic growth continue to falter’. It’s no wonder that the market continues to pressurize commodity prices. Speculators remain better sellers on up-ticks in the short term.

Gold prices are little changed in the O/N session, managing to pare some of the yesterday’s earlier declines as weaker global equities boosted investor support for various safer heaven assets. With a lack of meaningful direction in the dollar, gold prices remain in the ‘relative pause mode’ or tight trading range. Big picture, the market continues to require safer assets at the expense of equities and other commodities. With a genuine fear for global growth, by default, is boosting the demand for the metal as a protector of wealth in the grand scheme of things. Year-to-date the metal has risen +11.5%. With treasury yields expected to remain low for sometime and with the Fed announcement last week of their intentions to buy bonds, could promote a quickening inflation rate, which would promote pushing commodity prices higher. For most of this year, we have witnessed a gold rally on the back of a weaker EUR ($1,231 +50c). The dollar strength is under scrutiny and the historical negative correlation is not holding true at the moment. It’s about preserving wealth that is driving metal commodity prices big picture.

The Nikkei closed at 9,362 up +122. The DAX index in Europe was at 6,171 down -15; the FTSE (UK) currently is 5,294 down -8. The early call for the open of key US indices is lower. The US 10-year eased 3bp yesterday (2.59%) and has backed up 5bp in the O/N session (2.64%). Treasuries prices had rallied Wednesday, clawing back all of the previous day losses as equities came under renewed pressure. Also providing support was St. Louis Fed Bullard stating that the Fed may need to purchase more bonds if inflation happens to remain low. Investors are still concerned on the strength of the recovery. If the Fed does expand its balance sheet then the curve should flatten to analysts medium term projections of +200bp 2’s/10’s. The market seems content in owning longer dated product on these deeper pull backs. Perhaps this morning Philly Fed will cause another manufacturing stir!

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