Dollar stops here after EUR s/l hunting?

The world is watching the dollar’s inability to attract the traditional geopolitical safe haven bid. The situation in the Middle East has so far has seen funds being repatriated back to home currencies, like GBP and EUR, as opposed to moves into the dollar sanctuary.

The risk on risk off strategies and perfect correlation has disappeared from the market, now it’s about safe heaven plays, rate expectations and Central Bank policies. Apart from the obvious, and that being interest rates, the market seems to be scraping the proverbial barrel to find excuses to want to sell the ‘mighty buck’. Reasons like the looming shutdown of the US Government next week. Fear of a worsening situation in North Africa shall work to the US detriment. Reality, US cut of working relation with Libya years ago. Europe has stronger ties with the country. The region gets a good portion of its oil and oil products from Libya, just ask Berlusconi. Higher interest rates, sure, but higher commodity prices will kill whatever growth we have managed to eek out over the last 12-month. Until the market is capable of penetrating the top of the EUR’s range (1.3850) it’s safer not to be caught short dollars.

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

A stronger headline print in US existing home sales did little for the dollar or equities yesterday. The market continues to suffer from the ‘geopolitical and monetary policy hangover’. Home sales unexpectedly rose last month (+5.36m vs. +5.22m), though a drop in the median price, close to a nine year low, is strong proof that the market continues to search for a bottom. The share of sales represented by foreclosures and other distressed properties climbed to a 12-month high. It’s worth noting that the December sales print was revised down to +5.22m from an initial estimate of +5.28m. Analysts expect that with a job growth pick up this year, more individuals ‘will be able to consider buying a home, helping to stabilize housing’. Big picture, the US housing industry continues to struggle to gain traction after the lapse of a government homebuyers’ tax credit last year. Considering the weak macroeconomic conditions, shadow inventories and tight mortgage availability, one can only be cautious in the expectations of the US housing sector.

The USD$ is lower against the EUR +0.34%, CHF +0.87% and JPY +0.84% and higher against GBP -0.06%. The commodity currencies are stronger this morning, CAD +0.62% and AUD +0.41%. Yesterday, the loonie eased the most in seven-weeks, as escalating violence in Libya reduced the demand for assets related to global economic growth. Risk aversion and not commodities has been dominating the CAD’s value. Currencies linked to raw materials usually weaken after ‘major crude supply shocks’. In the O/N session, the currency reversed most of yesterday losses, as higher commodity prices eventually started to ‘pitch in’. Even some of the weak dollar longs aided the currency’s rise. Earlier this week, Canadian data dealt a blow to next Monday’s GDP print. Headline retail sales fell -0.2% in December. The only positives that are lining up for this month are coming through net trade and wholesale trade. All other influences upon December GDP growth over the prior month are negative and that include real manufacturing shipments, housing starts, and hours worked. Are we setting ourselves up for a negative print for December GDP over November? The implosion of commodity prices due to geopolitical pressures will eventually support and push the loonie even higher only if US economy growth holds firm. For the moment, investors continue to look for better levels to own the CAD (0.9931).

The AUD has advanced for a second consecutive day vs. the dollar after reports showed business investment climbed (+1.3%) to a record in the fourth final last year and an index of leading indicators increased (+0.7%) in December. Business spending was in line with RBA Governor Stevens’ comments earlier this week and supportive of higher yields and structurally higher AUD currency. The data has encouraged traders to add to bets that the RBA will boost interest rates over the next 12-months. The currency, aided by commodity prices, is having very little follow-through on a risk-aversion trade and continues to squeeze the weak short positions. Despite geopolitical uncertainties, the demand for higher yielding growth currencies on pullbacks remains steadfast (1.0071).

Crude is higher in the O/N session ($101.26 +3.16c). Crude prices remain elevated on Middle-East geopolitical concerns. Fear that supply disruption is on the horizon continues to provide support on pullbacks. Even Brent prices have eclipsed their two-year high and are dealing backwardation on the futures curve. ‘While there’s a risk of contagion, of this spreading to Iran or Saudi Arabia, the market is going to see prices elevated from these levels’. The IEA’s chief economist said that ‘higher oil prices pose a danger for a global economic recovery and industrialized countries stand ready to release oil from stockpiles to meet Middle-East supply disruptions’. Last week’s EIA report showed a smaller than expected increase in weekly stocks. Inventories rose +900k barrels vs. a market expectation of a rise of +2.8m. Gas fared no better, inventories increased by +200m barrels. Analysts had been expecting an increase of +1.7m. The supplies of distillates (heating oil and diesel) happened to decrease by -3.1m barrels vs. an expected decline of -1.1m. On the face of it, the report was bullish. Concerns about the Middle-East and production problems in the North Sea are boosting Brent relative to WTI and pushing the spread to a record premium. With supply the number one concern, the commodity will remain bid because of the contagion risk in the Middle-East.

Like most commodities, gold is heading for its longest rally in six-months, as mounting tensions in North Africa and the Middle East boost demand for a ‘safe haven’. The commodity continues to be supported by geopolitical factors, inflation threats, and from a return of investment. Prices have risen nearly +7% this month, as protests in favor of democratic reform in North Africa turned bloody. Investors have grown increasingly uneasy that the crisis could spread. Even hawkish global rhetoric has managed to give the yellow metal a leg up in February. Consumer prices are also boosting the demand for the precious metal as a hedge against global inflation. Last week, the market witnessed Chinese’s inflation accelerating 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. The commodity that every investor hated last month is very much in demand and is being used as a store of value. The asset class is expected to remain better bid on speculation that currency volatility will boost demand for a safe heaven investment once the Euro contagion fears raise its ugly head again over the coming weeks during the Euro-periphery refunding season and Irish elections later this week ($1,415.60 +$1.60c).

The Nikkei closed at 10,452 down-126. The DAX index in Europe was at 7,120 down-74; the FTSE (UK) currently is 5,893 down-29. The early call for the open of key US indices is lower. The US 10-year eased 5bp yesterday (3.43%) and is little changed in the O/N session. Geopolitical pressures continue to support treasuries despite the uptick in US inflation numbers last week. The US Treasury auctioned $35b 5-year notes yesterday, a portion of the $99b of new product earmarked for this week (today-$29b 7-years). The 5-year issue came at 2.19% and a 3bp tail. There was a 2.69 bid-to-cover ratio, compared to a 2.81six-auction average. Indirect took 34.2%, down from 45% last month. Direct bidders took 7.7%, the smallest takedown in 12-months. Despite the supply, risk aversion appetite dominates all asset classes.

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