EU officials throw Greece a small life preserver

Appetite for risk is being fueled by the Fed, BOJ and EU support for Greece. Even Standard and Poor’s has given Greece’s austerity budget cuts their stamp of approval. Before, that ‘sign of approval’ would have been a ‘big’ market mover, but, rating agencies beleaguered reputations do not seem to carry the same weight nowadays. Perhaps, it’s the Goldman Sachs influence! Bernanke’s communiqué is leaning towards being small ‘dovish’ in tone. The reinserting of ‘whatever it takes to stem the crisis’ after three months of absence has the pessimists wondering what do they know that we don’t? That been said, equity markets rallies defy Isaac Newton’s law of gravity. They continue to move on air and hand in hand with the FI class for now, while currency markets remain ‘well contained’.

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

Yesterday’s US housing construction deteriorated further in Feb. offsetting much of the gains witnessed in Jan. The housing construction starts (+575k vs. +611k) remain at the lower end of the range (-70% below its peak of four years ago). The immediate horizon remains bleak, with Mar.’s weaker than expected homebuilders confidence, weak sales and another below par building permits print (+612k vs. +622k) does not bode well for a strong rebound. Expect the Fed to continue to focus on this. Again, its interesting that was no mention of weather distortions. Perhaps, we will be surprised in the next reading. Digging deeper into the reports, both single (-0.6%) and multi-family (-30.3%) starts contributed to the decline in Feb., although condos remain ‘behind’ the decline. Not to be left behind, building permits fell a further -1.6%, m/m, as homebuilders ‘remain on the sidelines until housing demand strengthens’. With both single and multi-family permits down on the month, this marks the second consecutive monthly decline in overall permits. Not the prettiest of pictures just yet.

No surprises from the Fed in hindsight. They pledged to keep O/N funds on hold for an ‘extended period’ and confirmed that emergency measures to prop up the housing market will end as planned later this month. In one statement they were able to paint the whole landscape. While the economy has ‘continued to strengthen’, Bernanke and his fellow policy makers noted that ‘housing starts have been flat at depressed levels’ and ‘employers remain reluctant to add to payrolls’. Recovery remains on track, but struggling at best. The time horizon has now been extended to when policy makers are expected to tighten, later this year perhaps. However, they did manage to make one change of note. They re-inserted ‘one’ sentence that was omitted when they began to withdraw emergency support to capital markets and that’s the Fed’s commitment to do ‘whatever it takes’ to stem the crisis’. It seems a tad more dovish than expected and it suggests that the Fed still sees downside risks, and is not yet comfortable enough with the recovery to fully commit to ending quantitative or credit easing.

As expected, the BOJ announced the expansion of its fixed-rate-fund-supplying operation last night. However it’s interesting that their monetary stance has not become more ‘accommodative’. Reading between the lines of their announcement, they will probably take no further steps unless either USD/JPY or the Nikkei fall significantly or both, thus leaving the currency to trade within a tight range for the time being.

The USD$ is lower against the EUR +0.14%, CHF +0.10 % and higher against GBP -0.08% and JPY -0.25%. The commodity currencies are stronger this morning, CAD +0.04% and AUD +0.19%. Yesterday’s Canadian data gave the St. Patrick’s Day green light to want to ‘own’ some of this saturated long loonie trade. The Canadian manufacturing shipments (+2.4% vs. +1.9%) and labor productivity (+1.4% vs. -0.25) were much stronger than expected. The shipments rose four-times more than anticipated in Jan., with most of the gains in volumes, adding a huge lift to real GDP. The pipeline pressures we are experiencing suggest we could see further growth in Feb. as new-orders continue to rise. Not to be out done, Canadian labor productivity rose by almost double that expected in the 4th Q. and putting the annualized growth rate at +5.6%, q/q (the strongest in 12-years). Technically and fundamentally, the loonie is ‘piggy-backing’ on parity after last week’s surprisingly strong employment numbers (+21k). Traders are now betting that the BOC will be hiking sooner rather than later because of the potential ‘upward’ pressure on core-inflation supported by a faster than expected pace of industrial capacity’ (70.9%). Trader’s opinions vary on the timing of a hike, consensus is probably July. Despite the trend remaining your friend and the Canadian Government throwing its support behind a ‘competitive currency’, the market should be looking for better levels to own the domestic currency, as this lofty heights are a tad rich. There is natural CAD resistance to be expected first time around parity.

Similar to all growth currencies, it seems all the variables are lining up for a stronger AUD. This morning it has managed to print a 2-month high as the price of gold, the nation’s third most valuable commodity export, advanced. With global bourses rallying after Cbank announcements continues to support higher yielding currencies. Expectations for low interest rates in the US and Japan are fueling risk appetite again. In retrospect, the AUD advance has ‘underperformed’ other currencies gains vs. the dollar as traders reflect ‘a paring in expectations for an Apr. interest rate hike following yesterday’s RBA board meeting minutes’. Last week the RBA hiked rates by +25bp to +4%. Governor Stevens said ‘rates should be closer to average’, which policy makers have indicated may be 75bp higher than the current +4%. The market expects the RBA to hike with a ‘gradual approach’. Continue to expect better buying on deeper pull backs (0.9210).

Crude is higher in the O/N session ($82.09 up +39c). Crude began to rise for the first time in three days yesterday, as the dollar weakened, boosting demand for commodities as an alternative investment. Also, aiding the black-stuff is rhetoric by OPEC ministers indicating that they would refrain from increasing production at this morning meeting in Vienna. Iran, the second-biggest producer in the group, wants to keep output unchanged because there is no sign of growing demand. Oil managed to appreciate 2% after the Saudis indicated that oil prices were in the ‘right range’. Fundamentally last week’s EIA reports support the ‘bull’ story. The weekly report showed a decline in supplies of gas and distillate fuels. Gas stocks dropped -2.96m barrels to +229m vs. an expected ‘little change’ scenario. Distillate supplies (heating oil and diesel) decreased -2.22m barrels to +149.6m. On the flip side, crude inventories rose +1.43m barrels to +343m vs. an expected climb of +2m barrels. It’s expected that the members need to be pumping +28.94m barrels a day to satisfy this years global demand. That’s an increase of +190k barrels over last year’s projections. It’s anticipated that today’s inventory report will show a headline print rise of +1.1m barrels. A belief that the economic situation will not get much worse should support commodities on pull-backs.

We had expected the yellow metal to find traction and it has delivered, advancing the most in a month, as a weaker dollar boosted the demand for alternative investments. Technically, yesterday’s levels again provided good support for the bulls despite having a rough go of it so far this month. The interest to own gold may gain as the prospect of credit tightening in China persuades investors to seek a ‘haven in precious metals’. It seems that Europe investors want to continue to buy gold as an alternative to holding the EUR. However, the dollar’s direction remains the strongest indicator to wanting the metal or not ($1,129).

The Nikkei closed at 10,846 up +125. The DAX index in Europe was at 6,000 up +30; the FTSE (UK) currently is 5,638 up +18. The early call for the open of key US indices is higher. The US 10-year eased 6bp yesterday (3.65%) and is little changed in the O/N session. The Fed’s comments and actions managed to push the US yield curve lower and force Treasuries to print new high prices for this month. The Fed reiterated that the recovery will be slow and that rates will remain low for an extended period of time. Their comments certainly have taken some pressure off the front end. They had been pricing in a move sooner rather than later in the year. Before the announcement, Money-market interest rates managed to print a five-month high, as the market had believed that the Fed was laying the groundwork for its own exit strategy. This thought too can be kept on hold. Expect better buying on pull backs in the short term.

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