Dollar Bashing Favors EUR for Now

If you gave the EUR its head where would it go? Prior to this morning we had been witnessing an intraday carbon-copy trading range, one that gyrated around the psychological 1.3000 handle. It seemed to be a level no one wanted to get involved in. However, renewed fears of a double-dip recession in the US has pushed the dollar lower and finally helped the EUR to establish itself above the 1.3000 mark this morning. Expect upward momentum from here to be limited ahead of tomorrows 2nd Q US GDP figures. Yesterdays US data has knocked consumer confidence again, pushing treasury yields lower and losing investor support for the ‘buck’. Lack of further data this morning should limit the EUR gains unless investors all of a sudden become technically bullish at the top!

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

Yesterday’s durable goods data in the US only provided more pain for the dollar bulls. Factories posted accelerating declines last month, the second consecutive month of declines, following 6-months of gains. The headline new orders fell -1%, m/m, and the biggest dip in 12-months, while the core-new orders fared no better, ex-transport it fell -0.6%. Digging deeper, the transportation sub-categories was the culprit, retreating -2.4% over the past 3-months, led by commercial aircrafts. Analysts note, that a stronger motor vehicle print (+2.5%) was able to offset some of the negativity. Market consensus was looking for a positive print in the core-durable category (+0.4%). However, declines in computers (-1.9%), machinery (-0.7%) and primary metals (-2.0%) pushed the headline print into the red. Analysts note that looking at the 3-month moving average has core-orders very much trading sideways. Than been said, various reports like leading indicators and business surveys suggest that orders are expected to recover and strengthen in the medium term.
An interesting note and a proxy for business sentiment is the booking print for non-defense, ex-transport capital goods increasing +0.6%, m/m. Finally, with the inventory to sales ratio languishing in the mid 1.55 range is calming fears that inventories are running ahead of shipments.

There were no marked surprises in yesterday’s beige book. The Fed collectively reaffirmed that the recovery, while still moving forward, ‘is progressing at a slower pace than earlier in the year’. The report recorded improvements in the service industries, an increase in tourism, an expansion of manufacturing and progress in labor markets. Capital markets were probably taken back by the ‘lack’ of emphasis on stress, supported by the recent discouraging economic data. There were no suggestions of further deterioration. Last week, Bernanke said policy makers ‘expect continued moderate growth, a gradual decline in the unemployment rate and subdued inflation over the next several years’. What can we take away from the report? The US economy is in a ‘very slow recovery mode and in some districts it got even slower’.

The USD$ is lower against the EUR +0.32%, GBP +0.22%, CHF +0.20% and JPY +0.14%. The commodity currencies are stronger this morning, CAD +0.45% and AUD +0.88%. The CAD by day’s end yesterday weakened vs. its southern neighbor as equities and crude happened to reverse its earlier advances which have temporarily reduced the appeal of higher-yielding currencies. This morning’s market has given up on that trading concept. The loonie certainly has support in its corner. For most of this week the CAD has performed better on the back of stronger commodity and equity prices. Last week the BOC tightened rates 25bp. The interest rate differential scenario seems to be getting the biggest support for now, despite it being a ‘dovish hike’. Governor Carney stated that there was no pre-ordained path for interest rates in Canada. According to his dovish communiqué ‘the global economic recovery is proceeding, but, is not yet self-sustaining’. The 25bp hike last week will ‘leave considerable monetary stimulus in place’, with both the core and total inflation to advance at about a +2% annual rate through 2012 (within their target zone). Some will argue that with signs of a significant slowdown underway in the US, it’s possible that the BOC may be persuaded to move back to the sidelines on the Sept. go-around. Carney has given himself the latitude to step back and assess global growth for the 3rd Q. Medium term momentum points to a stronger loonie, but, that all depends on whether the big dollar is coveted for risk aversion trading strategies again. Currently, some M&A GBP/CAD activity is temporarily underpinning the currency.

In the O/N session, the RBNZ hiked rates by +25bps, albeit with a more dovish statement than expected. The hike was fully priced into the market. The RBNZ noted that while it will continue to remove accommodative policy conditions, the ‘pace and extent of further increases is likely to be more moderate than was projected in the June Statement’. Overall, there is still a sign of concerns that the world economy is in a fragile recovery phase. The Kiwi has been under pressure since and falling against all its major trading partners. Unlike the AUD which has grinded higher as investor’s technical risk attitude increases. Earlier this week and after a surprisingly weaker than expected CPI headline print (+0.6% vs. +1%), the currency happened to fall as the future traders priced out an RBA tightening next week. This does not rule out the possibility that Governor Stevens will not hike further in the calendar year. Since then the currency has rallied after regional bourses advanced. Recently, policy makers stated that they are ‘reinstating their view that domestic growth will be about trend’ and are ‘not alarmed by the global demand backdrop’. In retrospect, policy makers remain ‘very upbeat’. Because of equities actions, the market is a cautious buyer on pullbacks, wary that the recent strong rally technically may be overdone (0.9026).

Crude is higher in the O/N session ($77.17 up +18c). Crude prices fell for a third day on signs that a slowing economic recovery in the US will limit fuel consumption in the world’s second-largest energy user. China is now the newly crowned number one consumer. Yesterday’s weekly EIA report happened to add to the commodity’s bearish sentiment. The inventory data stumped all market expectations with its surprising increase. The headline print had stocks increasing +7.3m barrels vs. a market expectation of +1.7m. Couple this with last weeks +3.1m gain and we have a market flushed with the ‘black-stuff’. Despite global demand slowly improving it’s currently have little effect on supplies. Somewhat of a surprise was the lower than expected fuel inventory gains. Gas stockpiles rose by +100k barrels, below expectations for a build of +500k, while distillate fuels advanced by +900k barrels. Analysts had been expecting an increase of +2.1m barrels. The refinery utilization rate also happened to fall to 90.6%, below the expected 91%. The build in inventories even with some weather related production shut downs continue to paint a bearish fundamental picture for the energy sector. Of late, the commodity has been trading in a tight $5 range and failing to break out on the top side last week coupled with this week’s stock report will have traders reluctant to buy the dip short term. The ‘historical’ US summer driving season is over, coupled with a lack of tropical activity in the Gulf are ingredients for justifiable weaker energy prices.

It took its time. The technical support levels for gold gave in (the 100-day moving average $1,181) earlier this week. Once through, the market aggressively dumped some of their weaker long positions. Yesterday, the commodity fell to its lowest price point in 3-months, as the rally in global equities this week has eroded demand for the precious metal as an alternative investment. Some investors have been caught wanting higher risk and seeking higher returns, and owning gold is currently not the answer. With the EUR continuing to stabilize against most of its trading partners has accelerated the selling of this asset class. Bigger picture, technically, the bullish sentiment had been on hiatus with profit taking testing the medium term support levels. Fundamentally, in the short term the metal will find it difficult to rally as this is the ‘slowest’ season for physical demand. Technical analysts are trying with might to convince the market that these levels provided a good buying opportunity. The current problem is that the market has built in a large insurance premium over the past few months and with some market stability nervous investors will want to lighten their positions even more. Year-to-date, the commodity has gained +5.8% and is in danger of further losses ($1,169 +$7).

The Nikkei closed at 9,696 down -57. The DAX index in Europe was at 6,214 up +36; the FTSE (UK) currently is 5,353 up +34. The early call for the open of key US indices is higher. The US 10-year eased 5bp yesterday (3.00%) and is little changed in the O/N session. As to be expected, dealers will use any excuse to cheapen up the curve ahead of an auction to absorb product. This week the market is taking down $104b’s worth of product. With the benign 2-years already completed, yesterday’s $37b 5’s was better received, perhaps on the belief that the beige book was to report, as expected, that the US economy is weakening, reinforcing expectations for the Fed to keep interest rates at a record low. The bid-to-cover ratio was 3.06 vs. the four auction average of 2.65. Notes were sold at 1.796% and below the 1.806% WI’s. Indirect bids took down 47% vs. the 41% four auction average. Direct bidders took 11%. The market will now have to brace itself for the last of this week’s auction, $29b of 7’s. Demand is there if equities underperform.

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