Buy Bye EURO

Capital Markets expected the ECB to give us ‘shock and awe’ with QE during the press conference yesterday. Oh please. We are generally in shock with most of their decisions and yesterday they did not disappoint. Policy makers retained the unlimited amounts on the three month tenders and followed through with some coordinated actions during the session. They bought some periphery debt and the BIS took some EUR’s. It’s now down to how long they intend to keep their ‘foot on the gas’. They are bound to disappoint, that’s their pattern. Despite data this morning showing that Europe’s retail sales increased more than economists forecasted, it’s the NFP print that is expected to drag the EUR higher squeezing out the bears. Investors anticipate an eleventh consecutive monthly gain, a strong employment reading, with the headline and private sector payrolls at +150k and +170k respectively. Consensus has the unemployment rate remaining unchanged. Disappointment and Capital Markets shift their focus back to contagion risk as their primary motivator to sell EUR’s.

The US$ is weaker in the O/N trading session. Currently, it is lower against 14 of the 16 most actively traded currencies in a ‘subdued’ trading range ahead of employment.

Despite US weekly jobless claims rising last week, the improving trend remains intact. After retreating for the last two months, initial claims inched up +26k to +436k, returning to the early November levels. Analysts remain confident with the overall downward trend as a one week blip cannot be of concern just yet. With the perception of an improving job market should lead to claims trading lower over the coming weeks. Obviously the markets short term objective remains that psychological sub +400k benchmark. It would be consistent with further acceleration NFP gains. The less volatile four-week moving average currently sits at its lowest level in two years. It’s also worth noting that last week’s Thanksgiving holiday and although seasonal adjustment factors were applied, there still may have been some seasonal distortion. Digging deeper, all benefits categories climbed higher. The continuing claims data (+4.27m) lags behind initial claims by one week, and the extended (+0.955k) and emergency programs (+3.94m) lag another week behind that. Also aiding risk appetite somewhat yesterday was US pending home sales aggressively jumping +10.4% to 89.3 in October. The market was expecting a decline of -1.5%. The index remains -20.5% below it’s equivalent October 2009 level when first time buyers were racing to claim a tax credit.

Trichet and his fellow policy makers are at least consistent as they never make it easy for Capital Markets. We all expected the easy solution of a significant increase in the bond purchase numbers. Yesterday the ECB bought Portuguese and Irish debt, tightening the spreads aggressively. If these purchases slow down in this environment, spreads will balloon again quickly. Trichet’s refusal to be clear and his continued stress on the responsibilities of countries to repair their fiscal accounts goes some ways in convincing the market that they will not be embarking on a more aggressive bond purchase program any time soon. The EUR bears will like that. In the communiqué yesterday, the ECB seems to have turned slightly dovish as they shift their inflation bias from ‘risks to the upside to balanced inflation’. Trichet was also more cautious on growth, coupled with their inflation views should provide pressure on the front end of the curve and put further pressure on the EUR even if perceptions of credit risk abate.

The USD$ is lower against the EUR +0.34%, GBP +0.41%, CHF +0.14% and JPY +0.32%. The commodity currencies are stronger this morning, CAD +0.02% and AUD +0.43%. The loonie has been the leader of the pack amongst the major’s and is threatening parity again as stronger risk appetite boosted stocks and commodities and reduced the demand for havens such as the dollar. The degree of strength of the CAD is at odds to what has been happening elsewhere and that tends to lead to speculation of customer flow execution. The CBR has been vocal of late about acquiring more of the growth sensitive currency to add to they asset mix of reserves. This morning we have North American employment reports to deal with. The market expects Canadian unemployment to remain unchanged at +7.9% and the creation of +17.9k new jobs. Unless the numbers come in out of left field, investors will want to wait for the NFP release before doing anything of substance. The loonie is highly sensitive to the attitude towards risk and it is this that has trumped weaker GDP data earlier this week. The softer release calls into question Governor Carney actions of late. For the time being, the loonies demand remains a function of investors risk desire.

In the last two trading session the AUD has managed to stem the bleeding and will end up by having a winning week. It is set for its biggest weekly jump in a month after its biggest two day advance in months. With risk appetite pushing commodities and global equities higher, growth and interest sensitive currencies always benefit. The currency has run into some negative domestic fundamentals earlier this week that have certainly slowed down its rise. Retail sales unexpectedly declined in October (-1.1%) and imports slumped to the lowest level in nine-months (-3%), providing stronger proof for Governor Stevens to keep the overnight cash rate target unchanged next week at its last meeting for 2010. Tighter monetary policy by the RBA over the last year has encouraged a +7.8% gain in the currency vs. the dollar and the second best performer among the 16 major currencies. Futures traders are now pushing the risks of the timing of the next RBA hike even further out. Demand for Australia’s currency has also been dampened on signs that a Chinese economy accelerating too rapidly will warrant that the PBOC will take more steps to slow it down. The Chinese have indicated that they will strengthen liquidity management and ‘normalize’ monetary conditions, damping demand for higher-yielding currencies. With them concentrating on containing strong inflation rather than boosting growth will affect commodity sensitive currencies longer term. As the leading commodity currency, the AUD is highly vulnerable to any Chinese monetary actions and risk aversion strategies (0.9821). It now up to NFP this morning.

Crude is lower in the O/N session ($87.83 -17c). Crude prices have held their gains despite the weekly EIA report showing a surprise increase in inventories, as investors instead focused on improving data for the broader US economy. Oil inventories rose +1.1m barrels last week vs. an expected decline of -1.1m. Gas stockpiles rose -600k barrels compared to expectations for no change, while stocks of distillates (heating oil and gas) fell by -200k barrels, analysts had expected a -1.1-million-barrel drop. Demand for oil and fuel products has fallen to the lowest level since mid-October. The increase follows two consecutive months of mostly steady declines after levels reached 27-year highs in September. The market continues to look past the increases and is focusing on the improving economic data in the US and China, as well as a weakening dollar. Also aiding prices is Goldman predicting that a second stage recovery in oil markets will occur next year ahead of oil prices trading above $100 in 2012. The rally is certainly an impressive response despite the stronger dollar index of late. Next stop, investors will become weather experts as European deals with an unseasonable cold snap.

Gold has risen for a fifth consecutive day as the dollar weakens, boosting the appeal of the precious metal and commodities as alternative investments. The commodity remains supported by the persistent concerns over Euro-zone debt levels. Debt contagion has driven investors into the third ‘reservable’ currency as they seek a store of value. Despite the fear that China could tighten their monetary policy even further next month, a move to curb speculation and dampen inflation, global demand remains robust. Even though the one direction lemming trade seems to be overdone, investors continue to hold gold as a hedge against currency debasement and long-term inflation. The Euro-zone backdrop puts a floor on gold prices as these pullbacks have been somewhat supported on demand for a haven in the midst of Europe’s sovereign-debt crisis. Year-to-date, the metal is up + 23.8% and is poised to record its 10th consecutive annual gain ($1,393 +$4.00c). Even a higher dollar has been unable to push the commodity’s price lower. This would suggest that Gold is probably the primary reserve ‘currency’.

The Nikkei closed at 10,178 up+10. The DAX index in Europe was at 6,968 up+11; the FTSE (UK) currently is 5,778 up+11. The early call for the open of key US indices is higher. The US 10-year eased 2bp yesterday (2.98%) and is little changed in the O/N session. Treasuries happened to pare their earlier losses after yields traded above 3% for the first time in four months and the Fed bought the benchmark security as part of their scheduled debt purchases. The earlier losses came on the back of stronger US pending home sales data and on speculation of today’s pending NFP. European issues continue to give this market support on pullbacks. Bernanke has to be displeased with the rapid rise in longer term rates. This morning employment report will set today’s tone.

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