EU fear of liquidity crunch exaggerated dollar falls

This week after the G20, the BIS argued that extremely low real rates have altered investment decisions, and is postponing the recognition of losses, increased risk-taking, as investors search for yield and encouraged high levels of borrowing. This is collectively an argument for the second coming of the ‘double-dip’ recession occurring. It’s agreed that various asset classes are facing their financial abyss, however, snippets of good news is providing us with ‘hope’ ahead of employment figures in the US this week. This morning, the EUR has received a shot in the arm as the ECB lent banks, below forecast, EUR131b LTRO at 1%. The market had been expecting EUR250b ahead of banks repaying EUR442b in 12-month funds tomorrow. Fears of a liquidity crunch seem exaggerated. However, certain individual banks might suffer and we shall soon see which ones under the EU stress tests.

The US$ is stronger in the O/N trading session. Currently it is higher against 11 of the 16 most actively traded currencies in a ‘whippy’ trading range.

Yesterday’s released data is pushing this already fragile market towards ‘their’ specific abyss. The CB consumer confidence index did not fall, but plunged this month (52.9 vs. 62.8-a three-month low). It was a surprise to the market, as the usual pre-empting indicators gave us no heads up of the outcome. In fact the headline print contradicted the mild improvement reported in the UoM survey. Digging deeper, both the current situation and outlook components of the headline index fell roughly 15%. The other sub-sectors did not fare any better. Just in time for this Friday NFP report. The labor market indicators declined by about a point following three consecutive gains. Finally, the inflation expectations index edged down to 5.2% from 5.3%. This is further proof that the Fed can extend their extended period of low rates. Perhaps the plummeting headline is a delayed response to the sharp drop in equity prices in May.

Other data showed that the S&P/Case-Shiller Home Price Index was much stronger than the market had been expecting. Seasonally adjusted, the index broke a two-month losing streak by rising +0.4% in April. It’s worth noting that prices advanced in 17 of the 20 cities followed. However, analyst’s note that the non-seasonal print is now up +3.8%. What will the price structure be like given the recent decline in demand following the tax credit expiration?

The USD$ is lower against the EUR +0.25% and higher against GBP -0.15%, CHF -0.11% and JPY -0.11%. The commodity currencies are stronger this morning, CAD +0.56% and AUD +0.52%. Canadian data yesterday revealed that the IPPI (Industrial Product Price Index) climbed +0.3% m/m in May (more than expected +0.1%) on the back of a weaker loonie making imports more expensive. However, it’s worth noting that the core three-month moving average (ex-food and energy) continues to trade sideways. On the flip side, the RMPI (Raw Materials Price Index) plunged -7.2%, on lower crude oil prices. Similar to all growth currencies, the loonie fell to its lowest level in three weeks as concern over Europe’s fiscal woes and signs of a global slowdown backed up investors and speculators interests away from equities and commodities. With the risk-off trading scenario, the CAD is down -3.4% this quarter, recording its first quarterly decline in a year. On the crosses, CAD is holding its own and in relative terms is seen as a safer way to play a global economic recovery with links to commodities and less banking. Speculators had been betting that Cbanks will up the ante and use the currency as a safe haven destination for capital. Do not be surprised to see the currency trade beyond parity in the coming months as long as the ‘double-dip debate’ does not take hold.

The AUD happened to rally O/N and reduce its first quarterly loss in nearly two-years as regional bourses trimmed some of this weeks ‘plummeting losses’, on speculation that the purge in higher-yielding assets may have been somewhat overdone. Also lending support to the currency was a release of domestic fundamental reports showing that bank lending had increased and that house prices had advanced. However, that been said, there is still an underlying panic in the market and dealers note that ‘the path of least resistance on any disappointing news is to the downside’. Already this week weaker global industrial and confidence data has investors talking of ‘double dips’ which will obviously affect growth and high-yielding currencies. In this quarter alone the AUD has dropped just over -5.5% vs. the greenback. The initial aftermath of the G20 has not materially changed risk attitude. In fact, it seems that the markets have become more ‘jittery’. Earlier this month, comments from the RBA, who said that Europe’s debt crisis would ‘inevitably weigh’ on global growth, had fueled speculation that the Governor Stevens may keep rates unchanged until at least the end of the year. It seems that that ‘previous rate rises has given them flexibility to leave borrowing costs unchanged at next month’s meeting’. To date, the crisis in Europe has not had a material impact on the Australian economy, but, that’s been called into question. European funding fears has technical analysts wanting to sell the currency on rallies and shifting into more risk adverse currencies like JPY and CHF (0.8542).

Crude is higher in the O/N session ($76.21 up +30c). Crude has aggressively fallen from this weeks 2-month high as the dollar rallies vs. the EUR, thus reducing the appeal of commodities as an inflation hedge and alternative investment. After rallying earlier in yesterday’s session on fears that Alex would disrupt production as it moves towards the Gulf of Mexico, prices fell on a much weaker than anticipated US consumer confidence print (see above). Prices have recorded their first quarterly decline in nearly two-years (-9.9%). The commodity ended last week under pressure after the EIA inventory release reported an unexpected gain in supplies. Oil stockpiles rose +2.02m barrels to +365.1m vs. an unexpected fall of -800k barrels. On the flipside, gas supplies fell -762k barrels to +217.6m vs. an expected market decline of -180k barrels. Imports of crude oil climbed +4.3% to +10.1m barrels a day, the highest level in 18-months. The headline print certainly fly’s in the face of the ‘bulls’ way of thinking. Crude stocks remain well above the five-year average level, and are +3.2% above a year ago, the biggest year-on-year surplus in 6-months. Distillate stocks (diesel and heating oil) rose +297k barrels, less than expected as demand dropped to its lowest level in 7-months. Currently there are too many negative variables that support the bear’s short positions. The fear that a double dip is on the cards has the speculators wanting to sell. Direction is dictated by demand and with ample supply and global growth worries has speculators once again wanting to sell on rallies. Today’s weekly stock report is expected to reveal a small drawdown on inventories this morning.

Bigger picture, Gold continues to be a safe heaven attraction. Over the past two-trading sessions the commodity has retreated from its record highs on technical resistance and profit taking, a healthy purge in the recent one directional trade. With the Fed indicating low rates for an extended period of time had questioned the dollar recent strength in recent trading session’s and by default the commodity provided an alternative investment vehicle. Technically, pull-backs have been bought. The commodity’s prices, especially vs. EUR and GBP, should remain strong on speculation that European’s Economic woes will be prolonged. With broader risk appetite under pressure, the market is capable of printing new record highs again and again. The upward bias trend remains intact as the ‘yellow metal’ is trading with a greater consideration of its safe haven status. Year-to-date, the commodity has gained +16%. Generally, it has become the benefactor when all other currencies fail. Thus far, Europeans have been content in using the commodity as a hedge against their European holdings, believing that the EUR has not bottomed out just yet. For now, buyers are waiting in the wings to purchase product on pull backs as equities flounder ($1,242 +30c).

The Nikkei closed at 9,382 down -188. The DAX index in Europe was at 5,971 up +20; the FTSE (UK) currently is 4,933 up +19. The early call for the open of key US indices is lower. The US 10-year eased 6bp yesterday (2.95%) and is little changed in the O/N session. Treasures remain in demand across the US curve at quarter end on fears of a slowing global economic recovery and an ECB lending facility about to expire. Plummeting consumer confidence yesterday only provided support for the ‘bulls’ positions. Also helping the ‘safer’ asset class is this weeks NFP report where many analysts expect a much weaker headline print. The belief that the US economy’s momentum is ‘not’ being built upon should continue to provide a better bid on deeper pullbacks.

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