China does not help the EURO

Investors are looking for signs that global growth is bottoming. Disappointing Chinese loan data (552b vs. 740b) released last night will do little to support risk appetite. The weaker than expected release for May points to slower Chinese growth over the next several months.

The market will now have to shift its attention back towards US data and hope that it will show some form of stabilization, if not, it will generate significant further loss of risk appreciation.

Investors cannot rely on Europe, it remains exposed to headline risk as markets continue to look for clarity on Greek support plans, particularly any ‘indication on the planned structure for private sector participation’.

In reality, EU policymakers seem incapable of crafting a solution that meets German demands for private involvement ‘which is sufficiently voluntary to avoid triggering formal declarations of default’. A plan needs to be in place by June 24 to prevent the IMF from withholding the next installment of the Greek bailout. A solution will be created, expect it to be another political white wash remedy.

The US$ is mixed in the O/N trading session. Currently, it is higher against 10 of the 16 most actively traded currencies in a ‘subdued’ session.

The dollar is higher against the EUR -0.04% and JPY -0.06% and lower against GBP +0.17% and CHF +0.18%. The commodity currencies are stronger this morning, CAD +0.26% and AUD +0.13%.

The loonie is at the mercy of its largest trading partner. The CAD remains under pressure, matching its longest losing streak in nearly four-years versus its southern partner, on speculation a slowing recovery for the country’s biggest trade partner is curtailing demand. On the crosses the currency has performed relatively well, boosted by Friday’s employment numbers. The economy was able to add another +22.3k new jobs and push the unemployment rate down to its lowest level in two-years (7.4%).

The currency has also been under pressure from weaker commodity prices and investors paring back some of their riskier growth trading strategies. For most of last week, growth and risk sensitive currencies have been trading under pressure as global growth becomes more of a concern.

The CAD is trading close to its yearly lows due to its strong trade association and proximity to the US. Earlier this month, the BoC kept their key interest rate unchanged (+1%) and said they will raise it ‘eventually’ as the economy recovers. The Canadian bulls who read the BoC’s communiqué as being hawkish should be happy that they have been getting better levels to own the currency.

The loonie is being subjected to the pull of either risk or risk aversion trading strategies. Most strategists are waiting for this morning’s employment report before committing to longer term trading positions. Investors continue to look for better levels to own the loonie for now (0.9770).

In the O/N session the AUD gave up some of it’s O/N gains as falling Asian stocks dampened demands for higher yield. Last week, the markets reacted negatively to the much lower-than-expected Australian employment report (+7.8k) by pushing the Aussie dollar to a ten-day low. Rate dealers have cut their pricing for RBA rate hikes over the next year by 10bp. The report has severely reduced the chance of a July RBA rate hike and allows the currency to trade in a modest range until investors can get more clarity about Governor Stevens’s interest rate outlook.

Aussie yields are still the highest in the G10 and always look attractive. The expected mix of trade surpluses and rising capital inflows should provide support for the currency on these much deeper pullbacks for the time being (1.0559).

Crude is lower in the O/N session ($98.67 -0.62c). Oil prices fell on Friday for a number of reasons, first, on news that the Saudis were offering more oil to Asian and second there was additional pressure from a stronger dollar and weak global bourses. Before the Saudi announcement, oil had been well supported after OPEC failed to make a deal to raise supplies in Vienna last week. With no extra supply, it provides for a tight market. Saudi Arabia seems to be going alone.

Last week’s EIA report showed that oil inventories decreased by -4.8m barrels. At +369m barrels, crude oil inventories are above the upper limit of the average range for this time of year. On the flip side and negating the bullish headline, gas inventories increased by +2.2m barrels and are in the upper limit of the average range. Distillate fuel inventories increased by +0.8m barrels last week and are in the upper limit of the average range for this time of year. Refineries operated at +87.2% of their operable capacity.

The US is obviously concerned about the effect of oil prices on the economy and is expected to use all avenues at its disposal to deal with it. Do not expect the bid tone to be maintained in the medium term because of the pressures on global growth.

The market expects gold to rally this week on the back of the dollar losing some of its bid momentum. Dollar weakness tends to lift gold prices, as it makes dollar-priced assets cheaper for other currency holders and boosts the precious metal’s appeal as an alternative investment. The commodity came under pressure as the dollar rallied on Friday and on rumors that the IMF was also raising cash.

Year-to-date, the commodity is up +7.2% in 2011 after climbing the past 10-years. Big picture, the yellow metal remains in demand on speculation that borrowing costs in the US will remain low after economic data signaled that the recovery may be faltering and on the back of Bernanke’s comments that further stimulus is required.

Strong buying recommendations from Goldman and Morgan Stanley have also been good enough reason to drag the commodity higher this month. The yellow metal is being used as a store-of-value and trades like a currency.

The metals bull-run is far from over with speculators continuing to look to buy gold on deeper pullbacks ($1,529 -0.10c).

The Nikkei closed at 9,448 down-66. The DAX index in Europe was at 7,076 up+8; the FTSE (UK) currently is 5,783 up+18. The early call for the open of key US indices is higher. The US 10-year eased 2bp on Friday (2.97%) and is little changed in the O/N session.

Last week completed the longest winning stretch in the FI market in three-years as bond values appreciated for a ninth consecutive week. Bernanke’s comments earlier this month continues to provide fodder for the bulls to push longer dated yields to new yearly lows. The reality, record monetary stimulus is still needed to support US economic recovery. It seems that market consensus has us believing that there’s going to be another dip in economic growth and that will require a QE3 package.

US debt has advanced as economic pessimism discourages demand for higher-yielding assets. With investors nervous about economic growth going forward, their appetite for risk aversion trading strategies has increased. With the Fed expected to remain on hold for a considerable time, is creating this new paradigm of further lower interest rates.

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