Buy or Bye PIIGS Paper?

The ECB has been aggressive in buying bonds issued by high debt periphery governments in the secondary market this week, amid growing worries about a debt crisis spreading. The rally call has been made, Japan and China have committed their support for European bonds, orally at least. The Japanese Finance Minster Noda is committing to buying more than 20% of the EFSF bonds to help boost confidence in the scheme. For the currency bulls, his government will use its Euro assets to purchase the bonds, implying no net EUR buying and no support for the currency. It remains unclear whether the market will be able to absorb all of theses problematic Euro-zone issues. Not sure how Belgium fits with the PIIGS, but investors are losing their appetite.

The US$ is stronger the O/N trading session. Currently, it is higher against 14 of the 16 most actively traded currencies in another ‘whippy’ O/N session.

The cost of insuring against default on European sovereign debt is climbing to new records amid concern Portugal is next in line for a bailout. Germany and France is pushing aggressively for the Iberian member to tap the EU/IMF fund. European banks have so much periphery product on their books that a successful run on any economy will create a financial Euro crisis making the US debacle pale in comparison. It’s because of this that forex traders will become knowledgeable FI traders by day’s end.

The USD$ is higher against the EUR -0.19%, GBP -0.33%, CHF -0.27% and JPY -0.52% . The commodity currencies are mixed this morning, CAD +0.08% and AUD -1.22%. The loonie has rallied despite a poor showing from the Canadian Building permits release (-11.2%), a report which is considered white noise, happened to be offset by a general healthy Business Outlook Survey from the BoC. Canadian businesses remain largely upbeat about their future sales as they trade off CAD pressures against easing credit conditions. It’s encouraging that the survey has held up to further appreciation of the loonie dollar over recent months. Digging deeper, business activity remains firm. However, expectations for sales volumes remain modest for 2011, with some exceptions, mostly in commodity related activity. The expectations for M&A activity remain positive. The strength of the CAD is being fueled by its cross play, especially vs. the EUR which saw the loonie advancing +4% last week as sovereign debt concerns again take hold. Dealers are pricing in a rate hike by the BOC at the beginning of the second quarter. The currency is amongst the best-performing currencies this month, as both crude and Canadian assets remain in demand for safer heaven concerns. Stronger data down south reinforces many analysts’ views that the US economy is beginning the year in upward momentum and reason enough for short term chartists to be eying 0.9750 CAD in the first-quarter. Investors continue to look for better levels to own the currency.

Australian data last night revealed that the November trade surplus narrowed in November on the back of coal exports dropping (+$1.93b vs. +$2.56b). Analysts expect it to narrow further short term as rising floodwaters close mines and ruin crops. The currency happened to print a new three-week low vs. the dollar in the O/N session, fueled by investor concerns that new flash flooding hitting Queensland will persuade Governor Stevens to delay or cut back any planned policy tightening. The futures market is lowering the odds of multiple hikes over the next 18-months after news of further flash flooding is now affecting suburbs of Brisbane. Other data last night showed that the Australian job remains somewhat solid with job adverts rising +2% last month which supports a a solid employment report this Thursday. Policy member’s statements last week believe that the government’s stimulus measures will pressurize Governor Stevens to hike rates (4.75%) and that the flood in Queensland ‘may exacerbate already constrained supply conditions and lead to inflationary pressures’. These are good reasons supporting the currency on deeper pullbacks as investors seek to cross the currency vs. the EUR. Last year the currency rose +14% against the dollar which drove down the cost of imports and eroding exporters’ competitiveness. It’s all down to the employment numbers. Short term offers appear on rallies (0.9838).

Crude is lower in the O/N session ($89.07 -18c). Crude prices got a boost from the Alaska pipeline closure yesterday. The system carries +15% of US output and experts are unsure when production would return to normal. Excluding this from the equation and we have a commodity that would be testing new short term lows rather than an asset class squeezing the weak short positions. Last week’s EIA inventory report revealed that oil stocks fell -4.16m barrels, three times more than expected. At +335.3m barrels, inventories are above the upper limit of the average range for this time of year. Gas inventories increased by +3.3m barrels and are in the upper half of the average range, while distillates increased by +1.1m barrels. Again, there are too many hurdles to overcome ahead of the psychological $100 barrier crude. Technically, the market is not showing a tighter supply or demand balance. OPEC believes that supply and demand are ‘in balance,’ and expect demand growth will slow as the global economy struggles to recover, amid ample supplies. The market expects to meet price resistance above $90 as there is far more oil in storage, more fuel capacity and more idle oil wells to limit a stronger market rally in theory. The Trans-Alaskan closure will continue to squeeze the market until production clarity reemerges.

Gold prices have stopped the bleeding, and rallied from its biggest weekly drop in six-months last week, as concerns that the European peripheral sovereign-debt crisis may worsen, is boosting the demand for a haven again. For most of this year the commodity has fallen foul on speculation that a sustainable global economic recovery would curb demand for the precious metal, especially as the dollar grinds higher. True to form, the commodity remains better bid on speculation that currency volatility will boost demand for a safe heaven investment as the Euro contagion fears raise its ugly head. The commodity last year completed its tenth annual advance with bullion rallying +30%, it’s largest rally in three years. Even though the one direction trade feels overdone, investors continue to hold gold as a hedge against long-term inflation and have some strong technical support levels to breach before the markets witnesses a mass exodus. The Euro-zone contagion issues continue to put a floor on metal prices on demand for a haven. Technical analysts believe that gold ($1,379.30 +$5.20c) will outshine other precious metal in 2011 and peak somewhere above $1,600 in 2012.

The Nikkei closed at 10,510 down-30. The DAX index in Europe was at 6,868 up+11; the +FTSE (UK) currently is 6,008 up+52. The early call for the open of key US indices is higher. The US 10-year eased 3bp yesterday (3.29%) and is little changed in the O/N session. Treasuries price remain elevated, pushing two-year yields down to a four-week low on concern that Portugal will suffer the same fate as Greece and Ireland in seeking a bailout from the EU/IMF fund. The peripheral sovereign debt issues have increased the appetite for the relative safety of US debt. The US Treasury Department will auction a total of $66b of new supply this week, starting with $32b 3-years today, $21b-10’s tomorrow and $13b long-bonds on Thursday.

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